Debating Rwanda's Kagamenomics

Let me define Kagamenomics as the economic model that has shaped Rwanda's post-genocide development, pulling the country from near collapse and placing it on a fast lane of the growth highway. "But how sustainable are your Kagamenomics?" a critic asked recently.

Let me define Kagamenomics as the economic model that has shaped Rwanda’s post-genocide development, pulling the country from near collapse and placing it on a fast lane of the growth highway. “But how sustainable are your Kagamenomics?” a critic asked recently.

The most notable use of the term Kagamenomics was recently in an Economist article published on April 10 under the title, ‘Rwanda at Crossroads.’ The author doesn’t define the term but he points out the pillars that support it; one of them being the “establishment of an efficient state administration capable of channeling large amounts of aid to build the country’s social and physical infrastructure.”

An efficient state administration is by far Kagamenomics’ strongest pillar; highly accountable, transparent, result-oriented and intolerant to corruption. As a poor country, just emerging from a long civil war that climaxed into genocide, those elements built a strong foundation for a good relationship with donors whose contributions accounted for 80% of total government revenue by 2000.

But if donor aid is to be seen as fish handouts to a hungry man, Rwanda has been exceptional by choosing to wisely invest aid into buying own fishing nets (priority areas) and now budgetary aid dependency has drastically dropped to just 38 percent. 

The aim of Kagamenomics is to build a self reliant Rwanda that uses external help to strengthen its domestic capacity—a good example being government’s capacity to fund its own budget by almost 70 percent today.

Another Kagamenomics pillar is investing in a robust private sector to diversify the economy from farms to firms. The government’s target of 200, 000 off-farm jobs per year clearly has its eyes on a strong private sector to support such an ambitious target.

Kagamenomics have made economic reforms a top priority with the goal of improving the business environment to promote local enterprise and attract foreign direct investment and today, Rwanda is one of the World Bank’s best reformers. 

But while these economic reforms are praised by most, they also inspire regular debate like was the case on Friday when a colleague faulted Kagamenomics’ alleged tendency of discouraging an urban informal sector to promote formal taxable businesses; as counter-productive to small scale entrepreneurship and poverty alleviation efforts.

He gave roadside vendors and city hawkers as an example of urban informal sector that shouldn’t be harassed by city authorities arguing that such people ultimately graduate to formal practice after undergoing a natural growth cycle.

Basically, informal sector is that part of an economy that is not taxed and by encouraging enterprising Rwandans to register formally government is seeking to bring them into the taxable fold to widen its domestic tax-base. 

However, the question is whether to leave the urban informal sector to evolve naturally into formal practice or push it through deliberate reforms such as easing the business registration process and cutting other structural red tape to increase benefits of formal enterprises.

On the opposition is the argument that by forcing informal sector practitioners to join formal sector prematurely, their ‘natural growth cycle’ is interrupted and most of them would open business formally but close shortly after because they can’t sustain the cost of being formal such as rent and tax obligations.

But then, it could be argued that by discouraging the urban informal economy, Kagamenomics is laying a strong foundation for formal enterprise culture and while it could be costly in the short run, the long term benefits will be lucrative.

Granted, the informal sector contributes about 55 percent of Sub-Saharan Africa’s GDP and 80 percent of the labour force but all parties agree that that’s not the ideal discourse that will transform Rwanda into a middle or high income economy. 

In the end, the desired goal is to have a larger formal sector and a small informal sector. 

After setting records in the past, Kagamenomics have a new goal, transforming Rwanda into a middle income country by 2020 but one major attribute of middle income economies is having very small informal sectors. 

Of course Rwanda is still far from the prize as its informal sector forms 46 percent of the economy compared to formal sector’s 24 percent with19 and 11 percent for non-monetary production and government, respectively. 

With over 85 percent of all Rwandan businesses reportedly operating informally it’s just right to promote formal enterprises for sustainable growth but how can that be achieved without endangering urban livelihoods of those not ready for the transition?

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