Using Trade to Grow: Using Trade to Grow: Lessons (and Questions) from Lessons (and Questions) from

International Experience for RwandaInternational Experience for Rwanda

Jaime de Melo Jaime de Melo

University of GenevaUniversity of Geneva

Richard NewfarmerRichard Newfarmer

International Growth CentreInternational Growth Centre

October 28, 2010October 28, 2010

This presentation benefitted from research ofThis presentation benefitted from research of Laura Collinson, Economist IGC -RwandaLaura Collinson, Economist IGC -Rwanda

A key lesson of international experience is that international trade can be a driver of growth

…but trade remains an under-exploited opportunity for Rwanda – trade ratios for goods are low, diversification across products and geographic markets is low, and new exports seem to die quickly

International experience raises questions in four areas that might merit additional policy discussion: infrastructure, reducing trading costs, leveraging regional trade agreements, and management of real exchange rate.

22

Main points…Main points…

Rapid export growth is associated with rapid growth in Rapid export growth is associated with rapid growth in regional incomes…regional incomes…

Source: World Trade Report, 2008 based on World Development Indicators. See also Winters, 2004: Spence, 2008: Cline 2004. The period is 1961-2008 and growth rates are averaged over five years intervals. The data represent the following non-overlapping groups: East Asia and Pacific, High Income, Europe and Central Asia, Latin America and the Caribbean, Middle East and North Africa, South Asia, and Sub-Saharan Africa.

Trade drives productivityTrade drives productivityExports: access to larger – and faster growing -- market•Economies of scale productivity•Economies of specializationImports•Competition drives out less efficient firms -> productivity•Cheaper inputs • Products made with expensive inputs (R&D for poor countries; labor for rich countries) •Variety

EAC countries still have much to gain with trade EAC countries still have much to gain with trade integration – trade is below the predicted levelintegration – trade is below the predicted level

Rwanda trades less in goods than most other countries… Rwanda trades less in goods than most other countries… so trade provides an opportunity for growthso trade provides an opportunity for growth

Source: World Bank, World Development Indicators. Average 2007-2008 values. Landlocked represents the average value across landlocked developing countries excluding Rwanda.

Trade as a share of GDP, av. 2007-2008Trade as a share of GDP, av. 2007-2008

High performing countries were the fastest-growing in real GDP 1980-2006, and include Botswana, Burkina High performing countries were the fastest-growing in real GDP 1980-2006, and include Botswana, Burkina Faso, Cambodia, Chile, China, India, Indonesia, Korea, Malaysia, Mauritius, Pakistan, Singapore, Sri-Lanka, Faso, Cambodia, Chile, China, India, Indonesia, Korea, Malaysia, Mauritius, Pakistan, Singapore, Sri-Lanka, Chinese Tapei, Thailand, and Uganda. Chinese Tapei, Thailand, and Uganda.

Qualifications: Services trade is not shown Qualifications: Services trade is not shown Informal trade is unrecorded… and Informal trade is unrecorded… and

investing in better data is a investing in better data is a prioritypriority

Rwanda is over-reliant on a few export products…Rwanda is over-reliant on a few export products…

Source: Staff calculation based on SITC rev3 from Comtrade database

……and a relatively few geographic marketsand a relatively few geographic markets

Tanzania

Uganda

Rwanda

Source: Staff calculations and WITS comtrade database

Percent of countries importing the products that the EAC makes for the global market

So increasing geographic diversification is an opportunity

Source: IGC staff calculations and WITS comtrade database

0.0

00

.25

0.5

00

.75

1.0

0

0 5 10 15analysis time

Rwanda Tanzania

Survival Probability

Exports seem to “die young” …the probability that a Exports seem to “die young” …the probability that a Rwandan export product will survive into future years is Rwandan export product will survive into future years is lower than most other countrieslower than most other countries

Rwanda

Tanzania

We ran these numbers also with Kenya and Uganda and other countries, and Rwanda has among the lowest survival rates

Scope for export Scope for export promotion efforts promotion efforts to sustain to sustain products?products?

Year 2 only 70% of Year 2 only 70% of new products remainnew products remain

From international experience, four determinants of From international experience, four determinants of success in trade beyond good investment climate…success in trade beyond good investment climate…

Infrastructure Infrastructure is a major constraint in most countriesis a major constraint in most countries

Lowering costs of tradingLowering costs of trading is essential to rapid growth is essential to rapid growth

Regional trade agreements have to be designed to promote Regional trade agreements have to be designed to promote deep integrationdeep integration… otherwise smallest members suffer … otherwise smallest members suffer

Managing the Managing the real exchange ratereal exchange rate effectively is essential to effectively is essential to maintain competitivenessmaintain competitiveness

99

In each area, these lessons prompt questions that Rwandan authorities might want to address…

One finding: Improvements in infrastructure have a high One finding: Improvements in infrastructure have a high pay-offs in export growth… pay-offs in export growth…

Africa: Average increase in exports by improvements Africa: Average increase in exports by improvements to half the level of the best performing countries to half the level of the best performing countries

Source: Calculated from Portugal and Wilson, 2010

Main questions: •how to finance continued large investments•how to design regulation that balances competitive pricing and universal access with profitability

Trading costs: Is there more Rwanda could do to Trading costs: Is there more Rwanda could do to lower its costs of logistics?lower its costs of logistics?

…freight costs, administration costs, and induced costs (storage and inventory)

Importance of the logistics study under the World Bank’s Trade Facilitation Facility, DFID’s Trademark EAC, and other programs

Despite doing exceptionally well on business Despite doing exceptionally well on business indicators, Rwanda lags on logisticsindicators, Rwanda lags on logistics

Note: Burundi not covered in LPI

1313

Similarly delays at the border still seem to be a Similarly delays at the border still seem to be a problemproblem

Source: Arvis, et al, Cost of Being Landlocked, 2010Source: Arvis, et al, Cost of Being Landlocked, 2010

Regional integration agreements can be beneficial if they Regional integration agreements can be beneficial if they encourage encourage deep integrationdeep integration. Could Rwanda do more to . Could Rwanda do more to accelerate the creation of a single EAC market…?accelerate the creation of a single EAC market…?

1414

• ……through removal of nontariff barriers (NTBs)through removal of nontariff barriers (NTBs)

• ……through reductions in disadvantageous levels through reductions in disadvantageous levels of protectionof protection

• ……through greater attention to servicesthrough greater attention to services

Non Tariff Barriers in the EAC have been reduced…but Non Tariff Barriers in the EAC have been reduced…but still drive up costs…still drive up costs…

DairyDairy is one example… is one example…

1515

Veterinary certificatesVeterinary certificates • Required from both exporting Required from both exporting and importing countries and importing countries• Usually issued separately for Usually issued separately for every individual shipmentevery individual shipment

Quality analysisQuality analysis• National quality seals are meant National quality seals are meant to be sufficient proof of compliance to be sufficient proof of compliance with standards.with standards.• Every EAC country requires Every EAC country requires further testing by own lab or other further testing by own lab or other body.body.

Modest Progress to DateModest Progress to Date

National Monitoring Committees National Monitoring Committees established (not very effective)established (not very effective)

Some progress on reducing the # Some progress on reducing the # of of road blocksroad blocks

But most of But most of 35 NTBs35 NTBs that have that have been identified and agreed for been identified and agreed for immediate removal in December immediate removal in December 2008 remain in place2008 remain in place

Need for more ambitious Need for more ambitious mutual mutual recognition agreementsrecognition agreements in several in several fields – built around appropriate fields – built around appropriate standards standards

Scope for annual audit of progress, Scope for annual audit of progress, with private involvement?with private involvement?

22

29

31

33

SSA AverageSTRI

RWA

KEN

TZA

UGA

World Bank Services Trade Restrictiveness Index

Services are a fast growing segment of the global market Services are a fast growing segment of the global market and Rwanda is taking advantage and Rwanda is taking advantage

Sevices exports from RwandaSevices exports from Rwanda•Are larger than goods exportsAre larger than goods exports•Grew at 25% vs 10% for goods (1998-Grew at 25% vs 10% for goods (1998-2007)2007)•And have the second highest revealed And have the second highest revealed comparative advantage of 23 African comparative advantage of 23 African countries surveyed (RCA=2.75)countries surveyed (RCA=2.75)

Rwanda is now more open than EAC on Rwanda is now more open than EAC on average - and in finance, retail, average - and in finance, retail, accountancy and legal services, but accountancy and legal services, but more restrictive in telecoms and more restrictive in telecoms and transport transport Recent liberalization has spurred FDI in Recent liberalization has spurred FDI in Rwanda serviceRwanda service

Source: Gootiiz and Mattoo, 2009Source: Gootiiz and Mattoo, 2009Are there ways Rwanda can leverage its openness to Are there ways Rwanda can leverage its openness to expand services exports?expand services exports?

2325

0

31

60

85

19

75

0

35

10

2823

25 25

33

40

55

27 25

50

23

3033

020

40

60

80

ST

RI

KEN RWA TZA UGA

By Sector and EAC CountryServices Trade Restrictiveness

Financial Telecom RetailTransport Accountancy Legal

Rwanda is more open than EAC members in finance, retail, Rwanda is more open than EAC members in finance, retail, accountancy and legal -- but lags in transport and telecomaccountancy and legal -- but lags in transport and telecom

Source: Gootiiz Source: Gootiiz and Mattoo, 2009and Mattoo, 2009

1818

Tariffs: Are current levels of tariffs conducive to expanding Tariffs: Are current levels of tariffs conducive to expanding exports? One issue: tariffs on sensitive productsexports? One issue: tariffs on sensitive products

(2) (2) (9) (1) (5) (1) (12) (9)No.of products

Source: Carrere, De Melo (2007)

Imports with > 25% tariff accounted for 22 % of Rw importsImports with > 25% tariff accounted for 22 % of Rw imports

Px = 100 (exports) - 20 (transport) = 80 in earningsPm = 100 (imports) + 20 (transport) + 30 (tariffs) = 150 in payments

Px = 100 (exports) - 10 (transport) = 90 in earningsPm = 100 (imports) +10 (transport) + 0 (tariffs) = 110 in payments

.53.53

.82

Does Rwanda have to pay the full tariff – or are domestic prices Does Rwanda have to pay the full tariff – or are domestic prices lower than border costs plus tariff? Do tariffs drive up the cost lower than border costs plus tariff? Do tariffs drive up the cost of inputs to Rwanda’s exports? Do the poor pay more?of inputs to Rwanda’s exports? Do the poor pay more?

Simple illustration:Simple illustration:……how lowering transport how lowering transport and tariff costs can and tariff costs can improve Rwanda’s net improve Rwanda’s net earningsearnings

Creating an open services markets in 2015:Creating an open services markets in 2015:An EAC advisory group to advance integration?An EAC advisory group to advance integration?

An EAC advisory group on services to promote “one market with competition” An EAC advisory group on services to promote “one market with competition”

Evaluate policy options by bringing together Evaluate policy options by bringing together negotiatorsnegotiators with with regulatorsregulators and with and with services expertsservices experts – focus of negotiators/regulators often is not on international – focus of negotiators/regulators often is not on international trade/investment or on competitiontrade/investment or on competition

Assembling knowledge on regulation is sector-specificAssembling knowledge on regulation is sector-specific– A consultative mechanism to collect, analyze, and diffuse knowledge on services A consultative mechanism to collect, analyze, and diffuse knowledge on services

regulation and reform regulation and reform – A focal point for impact analysis – within EAC and for EPA negotiations A focal point for impact analysis – within EAC and for EPA negotiations – A mechanism to identify alternative options based on experiences of other A mechanism to identify alternative options based on experiences of other

countries (neighbors; BRICS, high-income countries/OECD, etc.)countries (neighbors; BRICS, high-income countries/OECD, etc.)– A vehicle to support development of national and regional services trade A vehicle to support development of national and regional services trade

strategies and to monitor implementationstrategies and to monitor implementation

2020

Management of the real exchange rate: Important to Management of the real exchange rate: Important to facilitate export drivesfacilitate export drives

2121

……is there room for a better alignment between monetary is there room for a better alignment between monetary and trade –growth objectives?and trade –growth objectives?

……Rwanda may wish to undertake its own analysisRwanda may wish to undertake its own analysis

Rwanda’s objective of using trade to power growth is well-formulated …and the government has identified all the right issues… from infrastructure to trading costs to regional integration.

But active pursuit of policy issues on logistics management, on NTBs, tariff structure, greater services liberalization within the EAC, and management of the exchange rate – can help Rwanda realize its Vision 2020.

Specific ideas: Improve trade data; RDB review with private sector of “product deaths”; annual transport and trade facilitation audit with EAC and private involvement; create services EAC advisory group to promote creation of one services market.

2222

Conclusions…Conclusions…

The International Growth Centre is ready to provide new research capacity to the government as it looks into any of these questions

References citedReferences cited

2323

Arvis, Jean François, 2010. The Cost of Being Landlocked: Logistics Costs and Supply Chain Reliability. World Bank: Washington DC

Aghion, Philippe, Philippe Bacchetta, Romain Ranciere and Kenneth Rogoff, 2006. Exchange Rate Volatility and Productivity Growth: The Role of Financial Development. NBER Working Paper No. 12117.

Carrere, Celine and Jaime de Melo, 2008. Trade Policy Harmonization in EAC: Revenue and Welfare Implication for Burundi and Rwanda, Coordinating Integration with COMESA. University d’Auvergne and University of Geneva.

Eichengreen, Barry, 2008. The Real Exchange Rate and Economic Growth. Commission on Growth and Development. World Bank: Washington, DC

Gootiiz, Batshur and Aaditya Mattoo, 2009. Services in. Doha: What's on the Table?, World Bank Policy Research. Working Paper No. 4903

Haddad M., and C. Pancaro, 2010. Can Real Exchange Rate Undervaluation Boost Exports and Growth in Developing Countries? Yes, But Not for Long. Economic Premise No. 20. World Bank, Washington, DC

International Monetary Fund (IMF), 2010. Rwanda: Request for a Three-Year Policy Support Instrument. IMF: Washington DC

Hausmann, Ricardo, Lant Pritchett, and Dani Rodrik, 2004. Growth Accelerations. NBER Working Paper No. W10566.

References citedReferences cited

2424

Levy Yetati, Federico Sturzenegger Eduardo and I. Reggio, 2003. On the Endogeneity of Exchange Rate Regimes. Unpublished manuscript, Universidad di Tella.

Portugal-Perez, Alberto and John S. Wilson, 2010. Export performance and trade facilitation reform: hard and soft infrastructure. Policy Research Working Paper Series 5261. World Bank: Washington, DC

Spence, Michael. 2008. The Growth Report: Strategies for Sustained Growth and Inclusive Development. Commission on Growth and Development. World Bank: Washington, DC

Winters, L. Alan, 2004. Trade Liberalization and Economic Performance: An Overview. The Economic Journal, 114 (February): Oxford

World Bank, 2010. Africa”s Trade in Services and Economic Partnership Agreements World Bank: Washington DC

Using Trade to Grow: Using Trade to Grow: Lessons (and Questions) from Lessons (and Questions) from

International Experience for RwandaInternational Experience for Rwanda

Richard NewfarmerRichard Newfarmer

International Growth CentreInternational Growth Centre

October 28, 2010October 28, 2010

This presentation benefitted from research of This presentation benefitted from research of Laura Collinson, Economist IGC -RwandaLaura Collinson, Economist IGC -Rwanda