Will Rwanda's efforts attract investors?

It seems that every few years rich countries and their development institutions find a new “favourite friend” in Africa.

Like early childhood friendships, these relationships tend not to last. The key to being a “favourite friend” of the World Bank, the International Finance Corporation (IFC), the International Monetary Fund (IMF) and developed countries that control policy in these institutions has been a rapid rate of economic growth and adopting market-friendly reforms that further enhance investment.

Mozambique and, more unlikely, Rwanda have become the “new favourite friends” of the developed world and their development institutions. Both have gone through dreadful internal conflicts and their high growth rates are a direct result, in no small part, of economic recovery from an extremely low base following Rwanda’s genocide in 1994 and the civil war in Mozambique that devastated its economy.

But to ascribe what has happened in both countries as merely a recovery after wars would denigrate the massive efforts of both governments to revitalise their economies and put them on a high growth rate path and be factually misleading.

In Rwanda, President Paul Kagame has been utterly tireless in his efforts to ease the entry and operating cost of business, and the country has seen one bold reform after another. Kagame has shown a remarkable willingness to tackle virtually every holy cow of economic policy, from land reform to free movement of workers from the East African community. These types of reforms are only possible with leaders who are confident about their political position. Kagame is also considered by most observers to be “as straight as an arrow”. He has pursued policies that have resulted in Rwanda’s ranking in the World Bank Doing Business Survey shooting up from a global 143rd place in 2009 to 67th in 2010 as a place to invest.

Kagame has also pursued a policy of strong integration with the East African community customs union, which includes Kenya, Uganda, Tanzania, Rwanda and Burundi and may soon include newly independent South Sudan. It is recognised that, being both small and landlocked, Rwanda’s best hope for the private sector is to trade with its neighbours and, perhaps more optimistically, to develop high-tech services.

The problem is, although the institutional business climate is important, it is the commercial and economic fundamentals that determine investors’ decisions about location. In customs unions such as those of Southern Africa or East Africa, businesses have a choice of many countries in which to invest and supply all the members of the union.

Investors do not come to small, landlocked countries and they tend to avoid countries like Rwanda precisely because the high cost of transport raises the cost of production and makes production unprofitable in comparison to economically dense areas close to ports, such as Gauteng or Nairobi. (It costs as much as $6 500 to ship a full 20 foot container load to Kigali from Mombasa, as opposed to $1 300 to Nairobi.) 

The real question is whether the reforms to the investment regime will be valuable enough to overcome the economic fundamentals that raise the costs of production in an underdeveloped, landlocked country. For the developed countries, the IFC and the World Bank, almost the entire focus of competitiveness policy has been about the institutional environment and not the financial costs and benefits of doing business in a particular location—which every investor considers before making an investment decision.

This approach is now colloquially referred to as the “field of dreams” school of investment, based on the American film in which a maize farmer, in an apparent psychotic dream, is told that if he cuts down his maize field and builds a baseball field in its place, the ghosts of dead baseball players will come to play there. Similarly, the investment and trade policymaker in developing countries, whether large or small, landlocked or island, is told that if he sets up a proper investment climate, the investors, like the allegorical ghosts, will come to invest.

But do they come? The weight of evidence is that the investors generally shun such countries because of high transport and other costs. Nevertheless, if Rwanda fails to attract substantial investment, what is certain is that those in the developed world will not change their investment advice; they will simply say that Rwanda did not provide a sufficiently welcoming environment.

The reason why the advice will not change is because it would mean admitting that some countries, no matter how hard they try, might not benefit from globalisation and that different advice is needed for different types of countries.

This undermines the very foundations of what these institutions believe—that is, in the immortal words of former United States president JF Kennedy—that “the rising tide raises all boats”. Kennedy had clearly never been in a tsunami.

These are the personal views of Professor Roman Grynberg and not necessarily those of the Botswana Institute for Development Policy Analysis where he is employed

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