By Dennis John, January 2020
Paul Kagame, the current president of Rwanda, said that he wants to make it the “Singapore of Africa”. There are three main causes of why Singapore is the business hub of today, but does Rwanda really excel enough to become the next Singapore?
The first of these is the ease of doing business. This is important for an economy, as firms are more likely to increase investment in higher-ranking economies, increasing aggregate demand, and hence economic growth. According to an index by the World Bank which studies 10 indicators related to this topic, Rwanda ranks 38th in the world in this category. Therefore, it is very easy for firms to complete business in the country. It also is the second-highest ranking in all of Africa and ranks above very highly developed economies like the Netherlands and Luxembourg. As a result, there has been a massive boom in foreign direct investment levels within the country, ranging from just USD 10 million in 2005 to USD 293 million in 2017. However, this should be taken with a pinch of salt. Despite ranking 38th in 2020, in 2019, Rwanda was ranked 29th, representing one of the greatest falls in rankings across the whole world and raising questions about the sustainability of the regulation put in place to make Rwanda a business-friendly environment.
The second of these is the political stability in the country. In this category, Rwanda ranks in the 48th percentile, which at first seems average, but when compared with the sub-Saharan average of the 31st percentile, making it a lot more impressive. Firms are likely to invest in economies ranking highly in this category, as there are inherent costs involved with a changing external environment. For example, real economic growth rates in the UK were negative 0.2% in the second quarter of 2019, as a result of the uncertainty surrounding Brexit, which led to a fall in investment and consumption due to animal spirits. However, no one is sure whether Rwanda is very politically stable, as the current government have only been in place for a few years, and it has basically become an authoritarian state. As a result, when Kagame leaves, it is not very clear if Rwanda can stay on the same path or are just doing so out of fear of their leader.
Thirdly, the country should be geographically well-connected with the rest of the world. Rwanda is only 600 miles from the geographical centre of Africa. Furthermore, its national airline, Rwandair, is growing to become one of the bigger airlines on the African continent. The importance of an internationally competitive airline should not be understated. Singapore Airlines is often considered to be one of the best in the world, and Dubai and Doha are unlikely to have become as economically developed as they are today without Emirates and Qatar Airways respectively. However, it is still quite far behind the biggest airlines on the continent, like Ethiopian Airlines and South African Airlines. Furthermore, unlike Singapore and many other highly economically developed countries, Rwanda is landlocked. The lack of access to water means that trade is very hard, and when it occurs, is very inefficient. As a result, firms will have very high costs of production to produce in Rwanda, decreasing the economic growth potential of the country.
These three factors have caused Rwanda to be the third fastest growing economy in the world, with an astonishing rate of 8.6%. So why is there still a question about Rwanda’s economic growth? Firstly, Rwanda experienced a severe genocide in 1994 which killed off between 500,000 to 1 million of its inhabitants. The country could always break out into another civil war at any time, as relations between the ethnic groups are still not peaceful yet. Furthermore, despite the high rates of economic growth, Rwanda is still one of the poorest countries in the world, ranking at 172nd in the world for GDP per capita. As Rwanda currently is an authoritarian state, with strict rules in place, there are questions being raised about the sustainability of this economic growth, with human rights often coming into question. Inequality is a very big problem in Rwanda, and many feel the problem is just being exacerbated through the government using policies which increase the living standards of the rich and middle class and leave behind the rural poor. Rwanda currently has a Gini coefficient of 43.7, which is already above average levels of inequality.
At the end of the day, it depends on what you think is the formula for economic gro
wth. Does it matter how economic growth come about? One thing is for sure, though. If Rwanda can continue to grow at the rate it has been growing at more sustainably, it has every right to stake a proper, justified claim at being the “Singapore of Africa”.
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