Manufacturing vs service sector: Which way for Rwanda?

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Employees of a stone-coated tiles-making firm monitor the production line. Manufacturing is key to ensure sustainable development. / File

The service sector has become one of most thriving and promising sectors in most of countries of the world since the advent of globalisation. The share of tertiary sector is expanding in terms of contribution to the world’s Gross Domestic Product (GDP). Though there is a decline in importance of primary and secondary sectors, a trend that has changed composition of world GDP.

1497895059Dr-Shukla
Dr Jaya Shukla

Historically, the pattern of economic growth in developed countries showed that most of them progressed from agrarian economies to industrial and, finally, to service sector-dominated economies. Presently, most developed economies are dominated by flourishing, growing, and diversified service sector. In contrast, most developing economies are dominated by agriculture and going through structural change.

Due to globalisation, there has been expansion and growth of service sector in last two decades. In developing economies, the secondary sector growth and development is still low. However, the manufacturing sector plays a big role toward any country’s growth and development. For instance, the US, Japan, Germany and China all reached high levels of growth and development through industrialisation.

Rwanda’s current situation, challenges

Based on 2016 estimates, the agriculture sector contributes 30 per cent to Rwanda’s national GDP (shares at current prices), industry added 17 per cent and the service sector was the biggest driver, contributing 48 per cent. The previous year, growth rate of service sector was 10 per cent, while that of the manufacturing sector was 8 per cent. In 2016, both registered growth of 8 per cent. In post globalisation era, economic reforms favoured service sector growth.

Rwanda’s manufacturing sector is dominated by the production of import substitutes for internal consumption. According to 2016 estimates, among manufacturing activities, construction contributed 7 to total GDP. Other manufacturing activities with minor contribution to GDP included beverages and tobacco, textile clothing and leather goods, wood and paper, chemicals, non-metallic, metal products, and electricity.

Among services real estate (8 per cent) was among the major contributor to GDP. Other services included professional, scientific and technical services (3 per cent), administrative and support services (4 per cent), public administration and defence (5 per cent) cultural, domestic and other services (5 per cent). Finance, health, education, hotel and restaurant, communication, etc, are growing, but their contribution to GDP has been very small.

Note that construction in manufacturing and real estate in service sector are related activities. The contribution of real estate and construction to GDP together was 15 per cent. This high share in GDP has been a result of huge investment by both private and public sectors. Such investments have high potential for pushing economic growth in the short-run by creating employment opportunities and demand for related sectors like cement, electric cables, steel materials, clay products like tiles, bricks, and paving blocks; plus float glass, wood products and paints.

As construction and real estate are related sectors, recession in one sector could bring a downturn in other sector, too. In addition, expansion through service sector without achieving strong diversified manufacturing sector cannot lead to sustainable growth in Rwanda over the long-run. Thus there is need for developing growth model for Rwanda which can be sustainable in the long-run.

Recommendations

There is need for a strong manufacturing sector with well-developed infrastructure and technology that will contribute to sustainable economic growth through production and increased exports. Also there is need to diversify manufacturing in more economic activities.

Foreign investment through technology transfer agreements can help on this front. Even growth through services sector will help the economy by identifying and boosting areas of comparative advantage and achieving expansion through export of services.

The writer works with Jomo Kenyatta University of Agriculture and Technology Kigali Campus.