d. Interest payment as a ratio of export of goods and services (INT/XGS)
2.5 Regional Integration
High production and marketing costs impede private investment in Rwanda. Regional integration could reduce these costs in several ways. As a matter of fact, improving
land and air transportation links across neighboring countries could dramatically
reduce the business costs. Similarly, developing energy resources on a regional basis
could help to boost investment. More interestingly, regional integration leads to harmonize the investment procedures, and the tax and tariff codes as well. All these
are meant to reduce the cost ofdoing business in domestic economy.
Business in Rwanda is conducted in both English and French. Rwanda is a member of several sub-regional economic organizations such as the Economic Community of
Central African States (CEEAC); the Economic Community of the Great Lakes States (CEPGL), the organization for the management and development of the Kagera River
Basin (KRB), and the Common Market of East and Southern African States
(COMESA). Traders import most of their products from neighboring African countries, Europe, and Dubai. However, there is a strong interest within the business community
in establishing contact with American companies and importing American products,
but cargo transportation costs are high.
2.6
Partnerships
The most challenge of Africa, in particular Rwanda, is how to generate rates of
economic growth thatkeeps up with population increase, reduces povertyand helps to cope with world trade and investment. Rwanda needs free access to regional and
industrial markets, in particular in those areas that matter most to production and exports like agricultural infrastructure and products, textiles and clothing, etc. To this effect, Rwanda pertains toa number of partnerships that involve economic growth.
2.6.1 African Growth Opportunity Act (AGOA)
In June 2000, the United States congress passed the African Growth OpportunityAct.
The AGOA is defined as an opportunity given to Sub-Sahara African countries to
freely access the US markets with exports limited to textiles and clothing. 34 SSA
countries including Rwanda were eligible to the act.
Among other benefits, the AGOA eliminated US duties on textile imports from the above eligible countries. The ECA (2002) reports that the preferential tariffs provided bythe act have enormously boosted the textile industry in SSA. As a matter offact, in the first half of2001, US imports from Madagascar accounted for$113 million, a 115%
jump from the first half of 2000. The report suggests also that women were found the most beneficiaries of the textiles boom in the same country, while theywere previously
earning low, unpredictable incomes from rice fields. Further, formal employment has
morethan doubled, boostingtax revenue.
Notwithstanding, the AGOA retains more than a hint of protectionism against the
African exporters. For instance, the act withholds benefits on high-end sweaters, one of the most lucrative textile products, inhibiting about 5,000 potential jobs in Madagascar's textiles industries. In addition, a country does not become eligible for
the act's apparel provisions until the US has determined that its customs system prevents the unlawful transshipment of apparel and textiles products and the use of
counterfreight documents related to the import of such products in the US.
However, up to September 2004, countries with percapita GNP of less than $1,500 in
1998 will be exempt from US duties on apparel manufactured from fabric produced
outside Africa and US. Rwanda falls below this per capita threshold.
2.6.2 New Partnership forAfrica's Development
(NEPAD)
During the year 2001, the African leaders set a framework to fasten growth and development. The NEPAD focuses on Africa ownership of the development process and seeks to reinvigorate the continent through trade and investment. The new
partnership recognizes that private investment needs to be complemented by public
sector in order to enhance competitiveness and create new market opportunities.
Emphasis has been put on expanding infrastructure and communications as well as
upgrading the skills of the labor force.
Aiming at eradication of poverty and achievement of sustainable growth and development, the keyfeatures of NEPAD include the following:
a. Broad ownership of Africa's development agenda on the basis that Africa will develop based on trade investment, aid only serving as a catalyst;
b. Partnership within Africa and between Africa and its partners based on transformed relations and initial accountability;
c. Lowering risks, the cost of doing business for Africans themselves and foreign
investors by way of promoting good governance, developing infrastructure and
human resources;
d. A willingness to subscribe to the principles of peer review, even peer response when that is needed, and above all dissemination and sharing ofthe experience
of the best practice;
e. Effective integration ofAfrican individually small markets, pooling resources and creating regional poles of growth.
2.6.3 EastAfrica Regional TechnicalAssistance Center(AFRITAC)
AFRITAC is the Africa Regional Technical Assistance Centre, and is part of IMF's
Africa Capacity-Building Initiative to "strengthen the capacity of African countries to
formulate and implement their own growth-oriented, poverty-reducing policies, through
the poverty reduction strategy paper process". East AFRITAC was opened in
Dar-es-Salaam in 2002, and will serve six countries, namely: Rwanda, Uganda, Tanzania, Eritrea, Ethiopia, and Kenya.
In line with NEPAD, East AFRITAC highlights the need of policy ownership, which
presupposes independent policies in the areas of development planning, tax policy
and administration, budget and treasury operations, financial sector as well as reliable statistics so essential for good policy formulation. True policy ownership is only possible if one has capacity todevelop, articulate and implement such a policy. Thatis feasible only when institution-capacity building and human resources are developed
and upgraded. And Rwanda needs to follow the track.
2.7 Issue of
Corruption
Rwanda has minimal corruption compared to many other African countries. While corruption is common among mid-level government officials, it is rare in senior government levels. Visitors are not harassed by officials at the airport (Americans do
not need visas to enter Rwanda) or by the local police. The national assembly has
taken an active role in investigating public officials accused of corruption and abuse of
32
office. This led to the resignation of a number of ministers in 1999-2000. The
government expects to adopt in 2001 a code of conduct and rules of disclosure for public
officials.
Despite efforts to curb corruption, customs processing and the Rwanda revenue authority are still bureaucratic and under-the-table payments to customs officials
occurs frequently. However, most companies and international organizations import goods through legal means. But smuggling ofconsumergoods by small traders isvery
common. It would then be helpful to have a local clearing agent, known forits honesty,
to facilitate customs and otherregulatory procedures.
Procedures for acquiring land can be problematic, since the district level officials
distribute land with little oversight or regulatory controls. While there have been a few
instances of corruption at the national tender board, the board has responded favorably to requests by the American embassy to review decisions that appeared to improperly reject an American company.
2.8 Contribution and Limit of Private Investment to
Poverty Reduction
2.8.1 Contribution of Private Investmentto Poverty Alleviation
A General Welfare
The most important factor in shifting poor people out of poverty is access to employment. Insufficient job opportunities are the result of inadequate levels of investment, both domestic and foreign. The ECA (1995) states that low investment makes other forms of poverty alleviation more difficult, because rates of economic growth below the rate of increase in population means that each year more people are added to the rank of the poor.
Domestic and foreign investors are potential sourcesfor both private and public capital formation. Generally poor countries have insufficient domestic resources available to meet their investment needs. Low domestic saving is often attributed to, among other
factors, lower per capita incomes, high and often fluctuating inflation rates, low
export-to GDP ratios and poor international intermediation (ECA, 1995). While there is limited
scope for poor countries to increase domestic savings, any additional increase is unlikelyto be sufficient to meet investment requirements. Private investment is needed
toreduce the gap between desired gross domestic investment and domestic savings.
Private investment has advantages other than consisting a source of funds. While
there is a general consensus that private investment is no panacea, it is widely
believed that it could deliver many ofthe potential benefits, provided that mechanisms
are in place to ensure that these benefits are distributed (ECA, 1995). For foreign investment, the net effect is likely to depend on good domestic records in the host economy including good governance, political and macroeconomic stability, etc (Moran, 1998).
B EconomicGrowth
Economic growth can help in poverty reduction, provided mechanisms exist to facilitate some trickle-down of the benefits of economic growth to the impoverished.
The most important mechanism by which trickle-down occurs is via employment-creating economic growth. In this way, private investment will contribute to alleviating povertywhile it servesas catalyst for economic growth (Gardiner, 2000).
Private investment is expected to contribute to economic growth by providing foreign capital and crowding in additional domestic investment. By promoting forward and backward linkages with the domestic economy, additional employment is indirectly
created and further economic activity stimulated. In addition, private investment may provide access to new overseas markets and may also promote competition and, thereby, enhance productivity (Ramachandran, 2001).
Notwithstanding,
Gardiner (2000) stated that there is a concern that the monopolistic tendencies of foreign subsidiaries may crowd out domestic private investment.However, increased rivalry between domestic and foreign firms could be beneficial in terms of promoting competition, improving efficiency amongst inefficient firms, and
34
ensuring more efficient and productive allocation ofscarce resources. Often, domestic
firms are incapable of successfully competing with foreign firms, which have superior marketing and advertising power, tend to be oligopolistic, and are able to engage in predatory pricing to restrict prospective new comers from gaining access to the market. Nevertheless, Cotton and Ramachandran (2001) concede that crowding out is
the more rare event, and that benefits of foreign direct investment tend to be more
prevalent, especially enhanced competition, improved efficiency and increased
innovation
C Job Creation and TechnologyTransfer
A key spillover for development is local job creation. If private investment serves to multiply job opportunities in the domestic economy, this will help to address unemployment and raise wages, as well as encourage investment in human capital through the transfer of skills and knowledge to the local workforce via both on-job and specialized training. In the case offoreign direct investment for example, Aaron (1999)
indicates that in 1997, it was likely that FDI was directly responsible for 26 millionjobs
in developing countries worldwide. In addition, for every direct job created by FDI, it
was estimated that approximately 1.6 additional jobs were indirectly created.
According to Cotton and Ramachandran (2001), "private investmentappears regularly
to be a key source ofemployment ofwomen in developing countries". If this is indeed the case, the implication for poverty alleviation are important, especially in a country
like Rwanda where women are 54%. Cotton and Ramachandran (2001) showed that the earnings of women are most often allocated to improving their children's health
and nutritional situation, and any increase in women's wages are likely to improve the quality of life in householdswhere women work.
Private investment has been associated with facilitating the transfer of newer, faster
and more productive technology. Productivity may be raised through enhanced worker training, improved management techniques, and the use of more sophisticated and efficient technology. To that extent, private investment is seen as a key spillover to povertyalleviation.
If technical, entrepreneurial and management skills are scarce, the training for local personnel to
fill senior
positions brings about an important diffusion of these skills. One way in which skills may be transferred isjoint ventures: if private firms agree to sharethe equity, human capital is diffused as well as profits being distributed.
D TaxRevenue
Taxation of private subsidiaries raises Government revenues. This in turn can be used to fund various social development programs (Aaron, 1999). On the other hand, where corporate tax rates are particularly high, there may be a case for lowering rates in order to bring them into line with those prevailing elsewhere, so as not to deter private
investment. Whether or not Government budgets gain sufficiently from taxing private
subsidiaries depends on what policies are in place to ensure that tax revenue is collected.
2.8.2 AIDS: a Threatto Private Investment in Rwanda
The problem of AIDS, in addition to being a health issue, is now a major development
constraint for Rwanda. Since the discovery of the first cases of AIDS in Rwanda in 1983, the infection has spread throughout the country. In Rwanda as elsewhere, HIV prevalence is not uniformly distributed, with high ratesamong females between 25 and 34 years of age (20 percent infected), males between 40 to 49 years (18 percent), female prostitutes, people with sexually transmitted diseases, and military personnel.
AIDS is far less prevalent than malaria or measles but its socioeconomic impact is greater. It affects primarily adults in their most economically productive years. AIDS patients occupy about 60 percent of the beds in the pediatric and internal medicine wards in the general hospital in Kigali. The burden of AIDS thus undermines the
provision of medical services for other diseases. AIDS creates large numbers of widows and orphans who become impoverished and burdens to the society. There is
no doubt that AIDS, with its debilitating impact on human resources, has a negative impact on economic growth, further hindering progress toward the attainment of acceptable living standards.
36
Table6:Prevalence of HIV(1997)
Age Male Female Uibai faial General
12-14 4.3 4.0 3.0 4.8 4.1
15-19 6.4 5.9 3.4 8.5 6.1
20-24 8.6 139 153 9.6 123
25-29 136 21 5 242 155 183
30-34 106 20.1 242 12.4 17.1
35-39 163 16.4 21 3 136 16.4
40-44 17.4 145 20.4 135 156
45-49 18.7 103 132 14.1 133
50-f 140 7.4 6.5 113 103
GeneraJ 10J8 11.3 11.6 10J8 11.1
Source:Programme National deLutte contre le SIDA
Cohen (1993) argues that HIV/AIDS affects the economy through reducing both the quantity and the quality of the labor available to invest. In the case of the business sector on one hand, there will be a rise in labor costs as productivity declines due to high morbidity and increased absenteeism, and additional training costs will be
incurred as labor turnover increases. On the other hand, health and social expenditures will rise, so that current outlays of firms will increase as a proportion of
total expenditure. This will consequently lower the resources available for capital expenditure financing and engender additional investmentto maintain the output rates
in the private sector.
In summary, the Government of Rwanda has embarked on a programme meant to develop and attract private investment, particularly foreign direct investment. Though
the productive activity has recovered from 1995 onwards, the private investment is still very low, as mentioned earlier. Further, Rwanda is still plagued with unsustainable
external debt burden, whether in terms of NPV or debt service ratios to exports. The question here is to investigate whether the latter does not cause weak private sector activities in the country. The next chapter will explore the literature review on the existence of negative relationships between external debt overhang and private investment.