In the first months of 2017, Rwanda took several steps to facilitate its drive to increase manufacturing output, as international investors, many of whom are Chinese, are increasingly attracted by this east African country.
China's declining role as a manufacturing powerhouse
China is projected to lose 85 million manufacturing workers in the next ten years, according to the World Bank. Chinese investors searching for competitive margins elsewhere as wage rises rise at home have therefore begun looking to other markets, including Africa, whose development indicators suggest that there will be considerable opportunities for foreign investors in the future. According to a report by McKinsey Global Institute from September 2016, business spending in Africa is set to grow from USD2.6 trillion in 2015 to USD3.5tn by 2025. By 2034 Africa is expected to have a larger workforce than either China and India, and by 2025 could double its manufacturing output from USD500 billion to USD930bn.
Chinese investors are also looking towards African countries that benefit from preferential trade agreements with the European Union and the United States, which allow them to avoid import duties of up to 30 per cent. Although several African economies want to industrialise to reduce their dependence on foreign aid, many are uncompetitive in this segment due to relatively high labour costs and critical infrastructure deficits. However, the story of Ethiopia and little landlocked Rwanda paint a different picture, and are leading Africa's manufacturing drive outside of South Africa.
Africa's manufacturing boom, driven by Chinese investments
A heated debate about China's investments in Africa has emerged in the past two decades, suggesting that the Asian country's role on the continent perpetuates existing socio-economic structures and hampers development, due to its reliance on natural resources, such as minerals and oil. However, Chinese investments in Ethiopia and Rwanda follow a different trend. Ethiopia has become a poster child for international aid organisations and investors in terms of developing its manufacturing industry, particularly textiles, to a large extent thanks to foreign direct investments (FDIs) from China. Several well-known multinational companies have started operations in the country, including Swedish fashion retailer H&M, which opened a textile factory in the town of Mek'ele in north Ethiopia's Tigray region. However, Chinese investors dominate Ethiopia's FDI inflows, thanks to a stable policy environment, a skilled workforce and improving infrastructure, characteristics that Rwanda also shares. In January, Djibouti and Ethiopia's heads of state inaugurated a Chinese-built standard gauge railway that would reduce transport times between the two capitals from three days to 12 hours. The country has also adopted a Chinese model of development that is based on developing special economic zones (SEZs), a model which Rwanda also follows.
Rwanda looks east
Over two decades after a genocide perpetrated by the majority Hutu population against the minority Tutsi population, Rwanda has emerged as one of the fastest-growing economies on the continent. The economy has grown 7 to 8 per cent for the past decade, and the International Monetary Fund projects that its economy will grow by 6.1 per cent and 6.8 per cent in 2017 and 2018, respectively. While a majority of the population still relies on agriculture, the Rwandan economy is diversifying and has seen impressive growth of its services and manufacturing sectors over the past five years. Between 2007 and 2013, manufacturing grew by over 14 per cent, but Rwanda still has a long way to go.
Rwanda has emerged as one of the fastest-growing economies on the continent
Most of its manufactured goods are still sold on the domestic or wider east African markets, including in the Democratic Republic of the Congo, Kenya and Uganda, but exports of manufactured goods to other markets in Asia, Europe or North America remain comparatively limited, which has made Rwanda's exports sensitive to external shocks. For instance, Rwandan beer and tobacco exports which constitute the bulk of the country's exports in the region to the DRC periodically suffer due to unrest in the Congo's eastern provinces of North Kivu and South Kivu. But the country's Vision 2020, a development plan that was adopted by the government at the turn of the millennium, seeks to modernise the country into a knowledge-based economy, which would allow it to sell its goods and services at higher margins. To this end, President Paul Kagame looked east to Asian countries, such as China, Singapore, and Thailand, which performed tremendously well during the 1980s and 1990s.
Kigali's special economic zone
However, at the end of the 1994 genocide, Rwanda was left with a severely decimated workforce and significant infrastructure deficits, which followed years of underinvestment. Because of the constrains on private-sector investments, Rwanda sought to model its development strategy on the Asian Tigers, particularly China, which used special economic zones (SEZs) that helped launch the Asian powerhouse's economic opening of the 1980s.
SEZs are demarcated areas with customised business and trade laws that are separate from those of the country in order to attract investors. A survey by China Development Bank found that SEZs contribute to about 22 per cent of China's GDP, 45 per cent of FDI and 60 per cent of exports. In China, SEZs are estimated to have created over 30 million jobs, increased the income of participating farmers by 30 per cent, and accelerated industrialisation, agricultural modernisation and urbanisation.
Rwanda began rolling out Phase I of its SEZ in 2011 which was built on 98,000sqm of land, 2km north-east of Kigali International Airport (KGL), which services the capital of the same name. The project is a merger of two previous projects: Kigali Free Trade Zone and Kigali Industrial Park. In April 2015, the British newspaper the Financial Times reported that about 60 businesses had started operations in the SEZ's first roll-out phase, including three companies seeking to manufacture goods for export. Among them was a Chinese textile manufacturer, one company producing baby milk and another that makes in-flight meals. Two more extension phases are currently being rolled out, with Phase II being built on 178,000sqm and Phase III is to be extended across 134,000sqm.
To support the successful implementation of its strategy, the government is also building an inland container port in Masaka, a suburb in east Kigali, some 10km south-east of the SEZ. The facility is being built by Dubai Ports World, a global ports construction firm and operator, on 30,000sqm for a value of about USD35 million. Project planners hope that the container port will have a capacity of 50,000 twenty-foot equivalent units (or TEUs), and is aimed at reducing transport costs. On average, transport costs in east Africa are 60 per cent higher than they are in the U.S. or Europe. This is according to TradeMark East Africa, a non-profit organisation funded by international development agencies, that works closely with the East African Community trade bloc to advise on issues relating to private-sector development and trade.
Kigali has limited the access of trucks in the city to mitigate the risk of congestion within the central business district, and trucks are only allowed between 2100 and 0900. Currently there are cases where offloading containers can take a whole week. Sometimes trucks can wait up to 20 hours before being allowed into the city. However, with the new infrastructure the government hopes to shorten the processing times, which will increase the number of trips that truck drivers are able to make between the countries in the region.
The Rwandan government has also signed several bilateral trade agreements recently. In April, the government signed several agreements with the governments of Djibouti and Ethiopia, aiming to boost bilateral trade, for instance by unlocking their respective airspaces. Given the proximity of the SEZ and the inland container port to KGL, these agreements were likely made against the backdrop of Rwanda's broader Vision 2020 plan, and Rwanda is looking to benefit from the comparative advantage of Djibouti's geographical location on the Red Sea. For example, last year, Rwanda offered Djibouti a plot of land in its SEZ in the Gasabo district of Kigali, which is adjacent to Masaka. This came after Djibouti offered a 20-hectare plot of land to Rwanda at the port of Djibouti in 2013, which Rwanda wants to use and develop as its strategic base for its imports.
ASSESSMENT - Rwanda's competitive (dis)advantage
Domestically, Rwanda enjoys a stable policy environment due to the authoritarian nature of Kagame's administration. Many of the policies pursued by the government are tailored to attract FDI. Although a presidential election is looming this year, it is unlikely that Kagame will be seriously challenged by anyone and the policy environment is likely to remain stable, at least until 2024. In December 2015, the electorate adopted a new constitution with 98 per cent of the vote, which allows Kagame to run for a third seven-year term. He announced his intention to run in January 2016. Furthermore, Rwanda benefits from low tariffs with the broader EAC as well as the European Union (E.U.) and the United States. To attract investors, Rwanda is also offering businesses tax incentives. For instance, businesses that set up their headquarters in the country and invest USD10m are entirely exempt from tax, while organisations that export at least 50 per cent only pay 15 per cent in corporate tax.
However, despite its clear advantages, Rwanda also faces critical challenges, such as a lack of infrastructure and an adequately trained workforce. One of Rwanda's main barriers to developing a good infrastructure is its topology, which is dominated by hills and valleys.
Perhaps a greater obstacle to its manufacturing boom, however, is a countrywide...
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