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Doing Business in Africa: Rwanda

Doing Business in Africa: Rwanda

In the second in a series of reports on doing business in Africa, AFKInsider examines Rwanda – a country with a history of bitter inter-ethnic relations.

Rwanda is deeply embroiled in the on-again, off-again armed conflict in the eastern half of the Democratic Republic of the Congo. Though Rwanda has been devastated by civil war, genocide, and is greatly hampered in its development by a long-running, semi-covert military intervention into the affairs of its giant neighbor to the east, the country is nonetheless recovering from its experiences over the tumultuous past 20 years.

Ethnic peace is being maintained and overseen by a government led by Tutsi rebel leader Paul Kagame, who freed the country from the anti-Tutsi Hutu militants that ruled the country during the 1994 genocide. Ostensibly elected through free, multi-party elections, his restrictions on how Rwandan parties may operate and not-so-subtle government repression mean that Kagame effectively runs a one-party state – one which he has ruled directly since 2000.

Given Rwanda’s bloody history, it comes as no surprise that Kagame’s primary focus has been on ensuring the security of post-genocide Rwanda. As a result, economic development – while becoming an issue of increasing importance – has nonetheless paled in comparison to creating inter-ethnic peace and pursuing Hutu militants across the border in Eastern Congo. If this has been the goal, Kagame has been relatively successful – and the post-genocide, Tutsi-led Rwandan government looks secure.


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This is largely because Kagame’s party – the Rwandan Patriotic Front – has widespread support and is seen as being relatively inclusive of non-Tutsis. The party is rather progressive in this regard, and it has shown itself to be especially open to women who make up the majority of representatives in the country’s parliament. This, combined with institutional measures enacted to combat corruption, has made Rwanda one of the least-corrupt countries in Africa.

While Rwanda can best be described as quasi-democratic due to the lack of a viable opposition party, its one-party system looks more like Tammany Hall New York, Daley Chicago, or Lee Kuan Yee’s Singapore than, say, Mugabe’s Zimbabwe. As such, Kagame may best be described as an old-time political boss running a political machine rather than a dictator per se – an important distinction. A boss, however powerful, is still nonetheless limited in what he or she can and cannot do by other actors and interests in the political system. Given the devastation that unaccountable kleptocrats have wreaked upon Africa over the decades, this is no small thing.

Economically, this means the first ingredient necessary for any subsequent take-off in growth, political stability, is present. Whether the country can take advantage of it, however, is an open question as many significant problems remain. True, the economy has grown significantly with per capita income tripling since 1994, but given the devastation of genocide, quick growth – via reconstruction and significant foreign aid – was to be expected. Today, while Rwanda is richer than prior to the genocide, it is still largely dependent on the same system of traditional, subsistence agriculture as it was before, while its manufacturing sector remains relatively small and underdeveloped.

That said, significant progress has been made. Over the past decade Rwandan economic output has increased substantially, averaging an annual growth rate more than 7.5 percent per year. In the all-important agricultural sector, while farms remain small and relatively inefficient, production has diversified to include significant output of coffee and tea, both of which have become major cash crops geared for export. Manufacturing has also slowly grown, pushed by ambitious government support, while electrification, like in much of the rest of Africa, is slowly helping make the country much more productive.

Figure 1:

Rwandan Economic Growth,

Percent Increase,  2003 – 2012

                Rwandan GDP Growth

In particular, there are three long-term bright spots that should make one optimistic about Rwanda. First, tourism is becoming an increasingly important part of the economy, an economic activity that brings needed hard currency into the country while also employing a relatively large number of people. Second, integration into the wider Eastern African regional economy holds out the promise of increased trade with neighboring countries that are undergoing their own economic boom, meaning Rwanda could be become linked with an important source of global growth in the coming decades.

Finally, third, if peace and stability are ever imposed in Eastern Congo, that region’s huge mineral and resource potential could turn Rwanda into an important transport hub. Natural resources from that vast region could be shuttled through Rwanda to the Horn and East Africa while manufactured and other goods make their way west into Central Africa. This is a very long-term possibility that is dependent on significant improvements in regional security, cooperation, and transport infrastructure.

Ease of Doing Business

With that in mind, how do conditions in Rwanda compare to the rest of the world and other countries in Africa? According to the World Bank, Rwanda currently ranks 58th out of 183 countries on its Ease of Doing Business Index – a measure created to gauge the degree to which commercial enterprises encounter regulatory hurdles, legal threats to property, and the time and money spent on things such as registering a business, ensuring right of title to property, and acquiring licenses. By way of comparison, the U.S. ranks 4th on ease of doing business, right after Singapore, Hong Kong, and New Zealand.

What does this ranking mean? Take, for instance, the bank’s measure of how easy it is to start a business, which is depicted in Figure 2 below.The Bank defines business-creation costs as the time and money outlays involved in the series of legal steps the entrepreneur must take to legally establish an in-country firm. Using this framework, the bank then tasks researchers to go through this process in order to establish in-country averages.

When this metric is applied to Nigeria, the bank finds that Rwanda ranks 9th out of 183 in ease of starting a business, making Rwanda one of the easiest countries in the world to start a commercial enterprise. To start a business in Rwanda, one has to complete just two bureaucratic procedures that take a total of three days and cost approximately $48.40, with no minimum capital required by the government for the start-up. To give this some perspective, one could easily fly in for a couple of days and start a legal business with the money the average Western tourist may have stashed away in his wallet.

Figure 2:

How the World Bank Measures Ease of Starting a Business

Fig 1 Ease of Business Graphic WB

Using similar metrics for other aspects of business operations, the bank has ranked Rwanda in a number of other areas.

As a basis for comparison, consider Nigeria. To obtain a construction permit, Nigeria is ranked 82nd out of 183. It takes 14 procedures and 195 days at a cost of more than $1,600 to begin construction on a given property. To obtain and register that property, another area measure by the World Bank, Nigeria ranks 41st out of 183 countries measured.

To register property in Rwanda requires four bureaucratic procedures that take, on average, 55 days and .04 percent of the property’s financial value in fees and other costs to complete.

Rwanda is also a relatively easy place to obtain credit. It ranks 32nd out of 183. Here, as depicted in Figure 3, the bank examines the legal rights of creditors and borrowers in secured transactions and bankruptcy law as well as the strength of credit information bureaus and exchanges. When lenders have both strong legal rights and easy access to a wide variety of information about the client’s creditworthiness, reasons the bank, the more available credit will be. For Rwanda, information on borrowers is growing while strong legal protections for lenders provide further protections against loss.

 

Figure 3:

How the World Banks Conceptualizes Credit Acquisition

Fig 2 Ease of Business Graphic WB

Rwanda also does extremely well on protecting investors and minority shareholders. The bank ranks Rwanda 28th out of 183 countries. Here, tiny Rwanda ranks highly on the need for conflict-of-interest disclosures and director legal liability, but less well on the ease of bringing shareholder suits against a corporate board.

Next, paying taxes is relatively straightforward in Rwanda. World Bank estimates that rendering Caesar his due requires a total of 26 payments over the course of a year which take up to 148 hours to complete and consume up to 31 percent of a company’s profits. Accordingly, Rwanda ranks near the global bottom on tax burden, coming in 43rd out of 183 nations.

What really hurts Rwanda is the ease with which one can engage in international trade – not unsurprising for a landlocked country deep in the heart of Central Africa. In Rwanda, to import goods into the country requires eight documents for customs’ officials to inspect. On average, it takes a total of 35 days to import goods into Rwanda with the cost amounting to $4,990 (excluding tariffs) per container shipped into the country.

The cost to export goods is relatively similar as Rwanda also requires eight documents for customs. The total cost (excluding tariffs) is $3,275 per container, with delivery taking up to 34 days from point of origin. Compared to global averages this is an abysmal performance, thus netting Rwanda a ranking of 159th out of 183 on ease of engaging in cross-border trade.

Rwanda does better in the area of contract enforcement, where it ranked 39th out of 183 countries. On average, reports World Bank analysts, it takes 24 legal procedures to take a contract from dispute to resolution, at the cost of 230 days spent in court or attending to legal issues. The financial cost of pursing a contract claim, says the bank, is quite high, and typically accounts for nearly 79 percent of the value of the claim. Finally, in terms of closing and or liquidating a business, World Banks ranks Rwanda at the bottom of the pack, largely as there is no history or practice of doing so in the country.

Table 1 presents a summary of these rankings as well as Rwanda’s overall ease-of-doing business rating. As one can see, when compared to the rest of the world, Rwanda is a relatively easy place to do business under normal circumstances. Unfortunately, its distant, inaccessible location makes transport extremely expensive.

Table 1:

World Bank Ease of Doing Business

Assessment and Rankings: Rwanda

 Rwanda ease of doing business Table

 

Prospects

Going forward, Rwanda represents a mixed basket of opportunities. Setting the stage for the future are political stability, economic growth, the prospect of becoming integrated into the East African growth complex, and ethnic peace under the relatively clean and benign leadership of Paul Kagame. If one considers just the regulatory environment, Rwanda is a very good place to do business compared to much of the rest of the continent.

Unfortunately, against this business-friendly regulatory environment are significant obstacles, including the gargantuan cost of engaging in cross-border trade. Rwanda is extraordinarily isolated from world markets, and while the information age may have made it easy to broadcast images of ethnic slaughter to the rest of the world 20 years ago, it has done little to alleviate the country’s geographic isolation.

Furthermore, there is very little the government of Rwanda can do about this isolation as its small size and landlocked location mean it is extraordinarily dependent upon its neighbors for access to the rest of the world. To its west, the chaotic armed conflicts in Eastern Congo have largely shut off hope for peaceful trade and transport. To the east, Rwanda has been making efforts to improve relations and open up commercial and transport links.

A society does not recover from a horror like genocide overnight – or even over 20 years. The scars left by that violence are deep and have affected the country in every conceivable way – not least of which is the political system that is operating there today. Tutsis, though once again on top, are still a minority in a largely Hutu country, and until this problem of political representation is sorted out in a peaceful, democratic manner, the specter of inter-communal violence will always be present. In hindsight the 1994 genocide is only the worst in a cyclical pattern of ethnic violence that has troubled the country since independence from Belgium in 1962. Perhaps it was enough to break the pattern, but only time will tell. Until then, it remains to be seen whether the country Kagame runs can move past that pattern by evolving into a society in which all Rwandans, not just Tutsis or Hutus, are better off.

Jeffrey Cavanaugh holds a Ph.D in political science with a specialization in international relations from the University of Illinois at Urbana-Champaign. Formerly an assistant professor of political science and public administration at Mississippi State University, he writes on global affairs and international economics for AFKInsider, Mint Press News and BAM South.