Tuesday, April 7, 2009

Rwanda and the fight against poverty: The danger of a growth-led strategy for poverty reduction

By An Ansoms

February, 2007
Graph 1:
Evolution of GDP per capita
Source: World Bank, 2006.

The following are excerpts from a discussion paper “Striving for Growth, Bypassing the Poor? ” published by the Institute of Development Policy and Management (IOB), University of Antwerp, Belgium.


Abstract:
This paper critically analyses the challenges and priorities for Rwanda’s rural sector policies in the fight against poverty. The lessons drawn are important, as this sector will be at the forefront of Rwanda’s new Economic Development and Poverty Reduction Strategy (EDPRS or PRSP-2). The paper first looks at the dangers of the purely growth-led development focus in Rwanda’s PRSP-1 (implemented between 2002 -2005), and evaluates the extent to which the agricultural sector has, indeed, been a pro-poor growth engine. It then studies the government’s current agricultural policies and looks at the recently adopted land law, both of which aim to modernize and ‘professionalize’ the rural sector. There is a high risk that policy measures in favor of a more professional and modern farm sector will be at the expense of the large mass of small-scale peasants. This paper stresses that the real challenge to transform the rural sector into a true pro-poor growth engine will be to value and incorporate the capacity and potential of small-scale ‘non-professional’ peasants into the core strategies for rural development. Rwandan policy makers and international donors should shift their focus away from a purely output-led logic towards distribution-oriented rural development policies. Striving for pro-poor growth requires reconciling output growth with equity, and perhaps even putting equity first.

After four years implementing poverty-combating policies, we can now conclude on whether the assumptions made in Rwanda’s PRSP-1 were realistic. Targets for annual growth per capita in the first Rwandan PRSP were set at 4-5% for the next 15 to 20 years. This implies 7-8% per annum overall real growth (GoR, 2000). Projections were, however, later reduced to 6-7% for the PRSP-1’s 2002-2005 implementation period (GoR, 2002). In subsequent PRSP progress
Reports and IMF statistical documents, growth projections were typically set at around 6%. Two important questions then arise. First, have these growth expectations been realistic; and second, to what extent did growth translate into poverty reduction?

These ambitious projections for the first PRSP implementation period seemed to be justified based on Rwanda’s solid post-civil war economic recovery with average annual growth of 8.6% between 1996 and 2001. There are, however, some critical observations to add. Graph 1 shows how the average period growth rate is influenced by exceptional growth figures in the first years (i.e. the steep slope), which moderate a few years later. From a longer-term perspective, economic performance has still not reached mid-1980s levels. Moreover, Rwanda benefited from the receipt of substantial aid funds, which significantly exceeded the sub-Saharan African average (Ansoms, 2005). The country also benefited from financial transfers out of the DRC during the years of Rwanda’s military involvement there (Cassimon and Marysse, 2001). It seems likely that these capital inflows fuelled Rwanda’s exceptional economic recovery in the immediate post-war period.

In more recent years (i.e. 2003-2006), annual growth did not meet the projected rate of approximately 6% (IMF: 2005B, 2006B).This recent trend illustrates the vulnerability of Rwanda’s economy to structural limitations, including overpopulation, resource scarcity and a limited potential for economic diversification. Further, overall growth targets for the coming years were lowered to between 4% and 4.5%. This would dampen per capita growth to a modest 2.1 – 2.6% (3), far below the rate of 4 to 5% presented as a target in PRSP1.

With reference to the above, the first issue to consider is whether growth will be substantial and sustainable enough in the near future; or whether current economic trends will signal the onset of more temperate times.

The second principal issue is the degree of economic growth’s ‘pro-poorness’. There are two dominant views on what constitutes pro-poor growth (Page, 2006). One definition highlights the importance of reducing inequality by defining pro-poor growth as growth that disproportionably benefits the poor (Kraay, 2006; Klasen, 2003; Kakwani and Pernia, 2000). Another definition regards economic growth as pro-poor when the living conditions of the poor improve in absolute terms, thus when poverty decreases (Ravallion and Chen, 2003).The main issue then is how much growth is pro-poor. This can be measured in several ways, for example with the country’s growth elasticity of poverty index.

Cross-country evidence situates the average growth elasticity of poverty within the interval -2 and –3. This implies that positive (or negative) growth of 1% should lead to a 2-3% decrease (or increase) in the incidence of poverty, as measured by the percentage of people living below poverty line of US$ 1 PPP per head (Ravallion and Chen, 1997; World Bank, 2000; Ravallion, 2001 and Adams, 2004). Adams (2004) found that this elasticity might differ for individual countries depending upon their initial inequality levels. Countries with higher inequality levels (i.e. Gini > 0.4) have lower poverty elasticity rates and vice versa.

Turning to Rwanda, the growth elasticity of poverty for the recent post-conflict period is not very promising in comparison with other developing countries. In the immediate post-genocide period (1994-2000), each percentage point of economic growth led only to a 0.37% decrease in the incidence of poverty, this is an elasticity of –0.37 (Ansoms, 2005). Rwanda’s case thus seems to be a clear example of the highly negative impact of inequality upon the pro-poor effect of growth (GoR, 2002). 2001’s high inequality rate (Gini of 0.451) contrasts dramatically with those of the mid-1980s when Rwanda qualified as a low-inequality country (with a Gini of 0.289 - Ansoms, 2005) (4).

Moreover, inequality has further increased over the PRSP–1 implementation period, with the Gini reaching 0.51 in 2006. For the same period, the incidence of poverty decreased from 60.3% to 56.9% based on the national poverty line (which is different from the US$ 1 PPP per day poverty line(5) - GoR, 2006A). In combination with an average annual growth of 4.6%, this results in a growth elasticity of poverty of -0.40. Although this figure is not comparable with the cross-country average (due to the difference in poverty lines), the result is clearly disappointing. The pro-poor character of Rwandan economic growth is thus extremely weak, and this despite the implementation of PRSP policy.

Overall, the disappointing derived effect of post-conflict growth on poverty incidence, in combination with more moderate growth projections for the coming years, certainly tempers the potential of a successful growth-reliant strategy for poverty reduction in Rwanda.

Notes:
(3) T his is the per capita growth rate based on the overall GDP growth rate and a continued annual population increase of approximately 1.9 %, this is the 2001-2005 average according to World Bank (2006). Other sources estimate population growth to be much higher, which would result in an even lower per capita growth rate.

(4) There are no nationally representative, comparable data available to measure the Gini coefficient between 1985 and 2001.

(5) The incidence of poverty, using the poverty line of 1$ PPP per head per day, is not yet available for 2006. The national poverty line is equivalent to 250 frw (US$ 0.44 nominal 2006 prices) per adult equivalent per day.

Bibliography:

Government of Rwanda (2000). Vision 2020, Kigali, Ministry of Finance and Economic Planning.
Government of Rwanda (2002). Poverty Reduction Strategy Paper, National Poverty Reduction Programme, Kigali, Ministry of Finance and Economic Planning.

Ansoms, A. (2005). Resurrection after civil war and genocide: growth, poverty and inequality in post-conflict Rwanda, European journal of development research, 17 (3), pp. 495-508.

Cassimon, D. et Marysse, S. (2001). Evolution socioéconomique au Rwanda et au Burundi (2000-2001) et la politique financière internationale, L’Afrique des Grands Lacs: Annuaire 2000-2001, eds. S. Marysse and F. Reyntjens, Paris, L’Harmattan.

IMF (2005B). Fifth Review Under the Three-Year Arrangement Under the Poverty Reduction and Growth Facility, IMF Country Report No. 05/333, Washington, D.C., IMF.

IMF (2006B). Sixth Review Under the Three-Year Arrangement Under the Poverty Reduction and Growth Facility, IMF Country Report No. 06/245, Washington, D.C., IMF.

Page, J. (2006). Strategies for pro-poor growth: pro-poor, pro-growth or both?, Journal of African Economies, 15 (4): pp. 510-542.

Kraay, A. (2006). When is growth pro-poor? Evidence from a panel of countries, Journal of Development Economics, 80 (1): pp. 198-227.

Klasen, S. (2003). In Search of the Holy Grail: How to Achieve Pro-Poor Growth?, Ibero-America Institute for Economic Research Discussion Papers, Nr. 96, Göttingen, Ibero-America Institute for Economic Research.

Kakwani, N. and Pernia, E.M. (2000).What is pro-poor growth?, Asian Development Review, 18(1): pp. 1-16.

Ravallion, M. and Chen, S. (2003). Measuring pro-poor growth, World Bank Policy Research Working Paper 2666, Washington, D.C., World Bank.

Ravallion, M. and Chen, S. (1997). What can new survey data tell us about recent changes in distribution and poverty?, World Bank Economic Review, 11 (2), Washington, D.C., World Bank, pp. 357-382.

World Bank (2000). Attacking poverty, World Development report 2000/2001, Oxford, Oxford University Press.

Ravallion, M. (2001). Growth, Inequality and Poverty: Looking Beyond Averages, World Development, 29 (11), pp. 1803-1815.

Adams, R.H. (2004). Economic Growth, Inequality and Poverty: Estimating the Growth Elasticity of Poverty, World Development, 32(12), pp. 1989-2014.

Government of Rwanda (2006A). Preliminary Poverty Update Report: Integrated Living Conditions Survey 2005/06, Kigali, National Institute of Statistics, Rwanda.

Related Materials:
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On The Myth of Economic Prosperity in Rwanda

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