Faking it: The Rwandan GDP Growth Myth
This is a follow up to the blog-post, which was published on roape.net on 31 May, 2017, in which we showed that poverty increased by between 5 and 7 percentage points between 2010 and 2014 in Rwanda, even as the government claims it decreased by 6 percentage points. The blogpost concluded that the information emerging from the household survey data appeared to be incompatible with the official figures on economic growth, and invited researchers to more closely scrutinize the data coming out of the National Institute of Statistics of Rwanda (NISR). Indeed, with agriculture accounting for more than one third of GDP and two thirds of the workforce, it is difficult to imagine a scenario in which total GDP growth could average between 6% and 8% annual growth, while incomes in the agricultural sector appear to be decreasing for a substantial proportion of farmers. This blogpost tries to substantiate those claims using the NISR's Integrated Household Living Conditions Survey (EICV) data as well as looking at more recent trends in relevant macroeconomic variables.
According to economic theory, GDP per capita measured from National Account Statistics (NAS) should be equivalent to average income or consumption measured from Household Surveys (HHS). In practice, this is rarely the case because of measurement errors. For instance, households tend to deliberately under-report earnings, while NAS have trouble capturing illicit and informal economic activity (read Ken Simler's 2008 paper on this theme). Even when there are differences in levels of income estimated by the two methods, however, Martin Ravallion (2003) concludes that, "NAS consumption growth rate is an unbiased predictor of the HHS consumption growth rate." Furthermore, he finds that NAS/HHS estimates should converge over time as the economy develops and becomes more formalized.[1]
In figure 1 below, we show the evolution of average household consumption between 2000 and 2013 in Rwanda, as estimated from the EICV datasets and nominal GDP per capita in local currency units, as reported in the World Bank's World Development Indicators databank. [2] As the graph shows, estimates of average income/consumption from the EICV and national accounts were almost identical in 2000 and 2005, and started to grow apart thereafter. By 2013, the national account estimate was more than 50% higher than the average consumption estimated from the EICV. This does not constitute incontrovertible proof that GDP growth rates have been over-estimated in Rwanda, since there are different factors listed above that could explain such discrepancies. But it does strongly suggest that something is amiss in Rwanda's GDP growth figures. At the very least, it does raise serious questions about the reliability of national account statistics, which the government and donors rely on to claim the success of their policies. As mentioned in our previous blogpost, GDP figures are easier to manipulate than household survey data, as the Greek case famously showed a few years back.
Figure 1: GDP per capita vs. Average EICV consumption
Source: EICV1-4, World Bank WDI
Even if we were to conclude that growth data have not been manipulated in the past, there are reasons to be concerned about the current performance of the Rwandan economy. The most recent growth data coming out of Rwanda shows that economic growth slowed to its lowest level since 2002 (1.7%) in the first quarter of 2017. With a population growth rate of 3% per year, this means that Rwanda's GDP per capita growth rate is now effectively negative, even according to the NISR's own estimates (see figure 2 below).
Figure 2: GDP Annual Growth Rate
Source: tradingeconomics.com
This should come as no surprise to those who have paid attention to the facts behind the dazzling numbers that Rwanda and its donors like to boast about. While there has been undeniable progress since the war, much of the improvements we see in Kigali today are cosmetic and driven by the government's obsession to portray an image of success rather than to lay the foundations of lasting economic growth. As we mentioned in the previous blogpost, much of the investments have been financed with public debt, leading to a surge in external debt levels (see figure 3 – remember that actual debt to GDP ratios may be even higher, if GDP has been overestimated as our analysis suggests).
Figure 3: Debt to GDP
Source: tradingeconomics.com
This would all be fine, if the investments had been strategically targeted at growth areas aimed at leapfrogging development Korean style. But to date, the vast majority of investments have gone into cosmetic – and crucially loss-making – prestige projects, such as the Kigali Convention Centre, Rwanda Air, Kigali skyscrapers and luxury housing units for the non-existent Rwandan upper-middle class. Even if these investments were not making a loss, this would arguably be a questionable use of public resources, since they are all highly regressive and aimed at subsidizing the super-rich or foreign clients. Rather than enabling economic development, these projects cost the Rwandan taxpayer dearly in running costs and take away precious resources from more pressing areas of development, such as the agricultural sector. The result of these irresponsible investments is beginning to be felt. For the first time in recent years, capital account flows to Rwanda were negative by a large margin in 2016, indicating that investors may be starting to put their assets abroad (see figure 4 below).
Figure 4: Capital Flows
Source: tradingeconomics.com
At the same time, Rwanda's current account deficit reached a whopping 16.6% of GDP, even as the government put in place draconian measures to restrict imports (see figure 5)
Figure 5: Current Account
Source: tradingeconomics.com
With such economic fundamentals, it is not surprising that the value of the Rwandan franc has almost been halved in the past few years (see figure 6 below):
Figure 6: Rwf/ USD exchange rate
Source: tradingeconomics.com
The situation is likely to get worse, not better, over the coming years as even larger prestige projects come online and existing ones start accumulating more losses. The East African reported on 3 July that "Rwanda's foreign reserves are expected to fall below the East African Community's convergence criterion of four months [of imports] in the coming year" and may fall below IMF's critical threshold of three months of imports.
The conclusion of this brief analysis is that if there ever was a Rwandan economic miracle it has probably fizzled out some time ago and is likely to come crashing down very soon. At the very least, the data shows that the development strategy adopted by the Rwandan government is risky in the extreme, bordering on reckless. The closest example we can find in recent history of similar policies is Mobutu's Zaire that squandered the country's resources on space projects, nuclear power plants and a Concord airplane. As outlandish as they seem today, these projects also helped to give Mobutu an image of success up until the 1970s (remember the Rumble in the Jungle?) But Rwanda's PR machine has even surpassed Mobutu's, having managed to keep the narrative of success going for all these years even as evidence to the contrary has been in plain sight, or just below the surface waiting to be scratched. Even today, there is not a single article in the press (even the critical ones) that does not mention Rwanda's alleged economic success, and its low levels of corruption – forgetting to mention that close associates of Kagame appeared in the Panama Papers last year and a transparency international coordinator was assassinated.
The authors of this article have asked for anonymity.
Featured Photograph: Kigali Convention Centre dome (2014)
Notes
[1] Ravallion, M. 2003. "Measuring Aggregate Welfare in Developing Countries: How Well do National Accounts and Surveys Agree?" Review of Economics and Statistics 85(3): 645–652
[2] The do-files required to estimate average household consumption are the same ones that were published in the previous blogpost. Once the do-file has run its course, you simply need to run the following command to obtain average household consumption: svy: mean adtot. For EICV2 use this do-file (click here to download the file). For EICV1, we used the figures in Table 2, page 13 in: McKay, A. (2015). The recent evolution of consumption poverty in Rwanda (No. 2015/125). WIDER Working Paper.
Posted by: Nzi Nink <nzinink@yahoo.com>
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