Rwanda is a Model for an Impact Economy and Developing Nations Should Follow It
Over the past decade, Rwanda’s GDP has grown at an average of 8% per year. The country has amassed a large number of prestigious titles on global scales, often earning top scores in economic performance metrics such as least corrupt country, ease of doing business, government efficiency and others. This economic growth has not just been in terms of capital, however, but the country has been holistically developing, exceeding many of the sustainable development goals.
The statistics speak for themselves: poverty rate going down 40% in the past 25 years, universal healthcare covering 80% of the population, 90% of the population having access to financing services, and more. As a country that hit complete rock bottom 25 years ago, this kind of transformation is highly unusual. With the principle factor of good leadership, a fitting economic system and strategy must be in place for this to happen. As it turns out, Rwanda’s economic system can best be characterized as an impact economy, which explains it all.
An impact economy as defined by McKinsey and Company is an economic system in which “institutions and individuals give equal priority to social and financial impact when making decision on how to allocate resources.” Because of this, an economy that is impact-focused tries to generate the financial gain necessary to run an economy through the creation of social and environmental change.
Seemingly idealistic, an impact economy is not as hard to implement, especially in developing nations. This is because developing nations, like Rwanda, still have various market gaps to fill as well as poverty issues that often need large amounts of capital, which can only be generated through the private sector. Because of this, an opportunity to build and shape impactful markets presents itself. With the right policies and incentives, the government becomes able to create a private sector that not only enjoys the benefits of a capitalist market as we know them but most importantly contributes to development needs, which is the essence of an impact economy.
To understand this, let’s look at some of Rwanda’s economic policies. The Rwanda Development Board (RDB), is an institution established by the Rwandan government for the mission of “Fast tracking economic development in Rwanda by enabling private sector growth.” When it comes to development through business, the institution examines the performance of each sector eligible for investment like energy, healthcare, education, manufacturing, tourism, and others. It then gives a summarized market study on these sectors, including investment opportunities and how investors and entrepreneurs can use them, as well as different fiscal and non-fiscal incentives available to them.
In terms of incentives, the country’s effort to attract impactful investment is unmatched. To name a few, the country offers: a 7 year tax break companies willing to invest in the sectors mentioned above, a 0% corporate income tax (CIT) to companies that set their regional offices in Rwanda and a 15% CIT rate to others, a 5 year tax holiday for micro-finance institutions and many more like these, given that they fulfill the requirements.
One of the important measures developing countries must take in order to have sustainable development is to build self-reliance and be involved in non-exploitative and fair-trade deals. This involves developing local manufacturing industries (even when it means starting from scratch) as well as implementing protectionist policies. An example of this is the Made in Rwanda Initiative, a policy created to promote local textile manufacturing. One of its key parts was a total ban on secondhand garment imports, something that was also initially adopted across East Africa.
After this decision, however, the U.S. decided to ban textile imports from these countries in the African Growth and Opportunity Act (AGOA), which led to East African countries, except for Rwanda, to go back on their decision. No one can blame them for this, but what makes the Rwandan government and President Paul Kagame’s foreign policy, economic strategy, and political mindset so effective is that he not only understands but also stands up to the exploitative, unfair, neoliberal, and neocolonial trade and diplomatic dynamics that have been imposed on African nations for decades. This still comes with its consequences in terms of economic sanctions but at the end of the day, the country makes up for it through homegrown solutions, multilaterally beneficial deals which build sustained development and self-reliance. This last part is one of the key components of an impact economy, especially in the context of developing nations – a non-corrupt government that puts its people first, not money or any other bureaucratic interests, but its people.
Though it requires more than one system for a nation to grow out of poverty, the Rwandan economy has shown that large-scale impact economy is possible, and that combined with the right policies, it can be a major driver of development. Most importantly, Rwanda’s model provides an applicable socio-economic structure that developing nations can follow. As economists, politicians, and policymakers, it is our duty to contribute to systems like these that create actual change; as investors, there’s never been a better time to partake in this movement.