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Type Working Paper - IFPRI Discussion Paper 01363
Title The Role of Agriculture in the Fast-Growing Rwandan Economy: Assessing Growth Alternatives
Publication (Day/Month/Year) 2014
URL http://www.ifpri.org/sites/default/files/publications/ifpridp01363.pdf
Rwanda is experiencing its best growth performance since independence, accompanied by heralded progress in reducing poverty. However, the stylized facts show that recent growth was led by nontradable services and that the public sector dominates investment, which is primarily financed by foreign grants. Foreign aid has caused the real exchange rate to appreciate, compounding difficulties faced by manufacturing and other tradable economic activities. This study assesses the future growth prospects of Rwanda. The report first focuses on broad economic growth using a rather aggregated 18-sector dynamic general equilibrium model to display the trade-off between rapid growth and structural change. The analysis shows that with the current investment pattern, rapid growth is possible but structural transformation is slow. With an overvalued exchange rate, growth in the tradable sector slows down and its share in the economy stays small. The importance of agriculture thus should be considered in the broad development strategy, for its role not only in poverty reduction but also in economic growth. For this reason, this study further develops a 54-sector dynamic computable general equilibrium model with more detail for the agricultural sector. The analysis shows that the agricultural and service sectors are less sensitive than other sectors to foreign inflows and their induced overvaluation of the real exchange rate, due to these two sectors’ stronger linkages with the rest of the economy. This outcome indicates that the domestic market plays a crucial role in stimulating growth in Rwanda, a low-income country in its early stage of development. Based on the analysis of future economic growth prospects, a threefold strategy is recommended for agriculture to play an active role in Rwanda’s future economic growth: (1) If overall economic growth continues to be supported by foreign-financed investment similar to that in the present, meeting domestic market demand will be the dominant force to lead agricultural growth, and such growth will be driven primarily by market forces from increased domestic demand. (2) Exploring regional market demand is part of this growth strategy, because the regional market differs significantly from the international market for Rwanda’s agriculture but is close to the domestic market in nature. The regional market is also less sensitive to the overvaluation of the real exchange rate that will hurt agricultural exports going to international markets. (3) When the issue of overvaluation of the real exchange rate is corrected, export agriculture will grow more rapidly and will increase its role in leading total agricultural growth. Although broadening the international trade basket and exploring nontraditional export niche markets are important, Rwanda’s international trade will continue to be dominated by its two traditional export commodities, coffee and tea. Thus, increasing value addition or price premium by improving the quality of these two commodities in their production and processing is important.

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