Belt and Road in Rwanda: Private Sector Leads the Way

Guest contribution by Scott Wingo. Scott Wingo is a doctoral candidate in political science at the University of Pennsylvania specializing in China’s approach to development finance. You may follow him on Twitter @ScottCWingo.

Disclaimer: The views, thoughts, and opinions expressed in the text belong solely to the author.

 Source: CGTN

Source: CGTN

On July 23, 2018, Chinese President Xi Jinping paid a visit to Rwanda, where he and Rwandan President Paul Kagame announced that Rwanda was joining the Belt and Road Initiative. Followers of the Belt and Road’s blockbuster infrastructure or natural resource deals might be tempted to shrug. As of 2017, the World Bank estimates that Rwanda has a population of only 12.2 million and GDP of US $9.1 billion, and the country possesses neither the geostrategic significance of the likes of Djibouti or Egypt, nor the natural resource wealth of Angola or Equatorial Guinea. Nevertheless, China is betting on Rwanda, and the way in which it is doing so tells us something about the Belt and Road. China’s outreach to Rwanda is primarily smaller in scale, localized, and centered on the private sector. These deals rarely grab headlines in the same way as massive infrastructure or resource investments, but they are nonetheless important for growth.

Rwanda’s growth strategy focuses on providing clean governance and strong public services in order to attract business and foster investment. President Paul Kagame, who took over in the wake of the 1994 genocide, has made stability his top priority, drawing parallels to Singapore’s construction of a stable party-state following the city’s expulsion from Malaya. Rwanda’s reputation as a business-friendly destination has improved accordingly: in 2017, the World Bank’s Worldwide Governance Indicators project ranked Rwanda as the fourth least-corrupt country out of Africa’s fifty-four sovereign states. Rwanda would like to make use of this fact to repeat the successes of many low-cost Asian countries in attracting manufacturing industries, and as a global factory powerhouse, China is a natural partner in this effort.

China’s engagement in Rwandan manufacturing can be traced back to 1984, when the China Building Materials Corporation helped to set up the country’s only cement plant. Chinese firms’ pockets are much deeper today, and the scale of involvement has predictably increased. Textiles have become a recent area of emphasis. In 2016, Rwanda imposed tariffs on imports of used clothing, which have traditionally arrived in bales from developed Western countries and have provided a cheaper alternative to buying new clothes. The Rwandan government has made the case that these imports undercut the emergence of local garment manufacturers, but the Trump administration has responded to the tariffs by suspending the duty-free status of Rwandan textiles under the African Growth and Opportunity Act (AGOA), a law originally meant to give a leg up to low-income African countries by giving them preferential access to the American market. A tiff with one major power has made another all the more important. The Chinese-run C&H Garments is attracting particular attention for its operation of a factory in the capital of Kigali. According to a Johns Hopkins University report, the firm employs 1,500 Rwandans and, in a move reminiscent of China’s own economic history, is located in a Special Economic Zone in which factories receive favorable tax treatment. The firm’s co-founders Helen Hai and Candy Ma already have experience setting up factories in several other African countries, and Chinese Ambassador to Rwanda Rao Hongwei recently visited their Kigali plant.

This all being said, there are reasons to think that light manufacturing will not be as singularly transformative in Rwanda as it has been in many other developing countries. The country’s landlocked location means that even with better transportation infrastructure, it will always operate at a cost disadvantage to coastal countries. A much larger long-term challenge is posed by automation. Robotics technology in the textile sector is progressing at a pace such that even the lowest-cost labor may not be able to keep pace. The elimination of competitive advantage due to labor costs means that automated production is likely to be “re-shored” to major consumer markets in developed countries, leaving the traditional route to development via low-cost manufacturing exports in jeopardy. So, Rwanda faces incentives to focus on producing for the local market and for neighboring countries, where transportation costs are lower and industrial robots may not appear for some time. Toward this end, C&H has set up a second Rwandan factory to meet domestic demand; this allows the firm to avoid the first factory’s Special Economic Zone requirement that 80% of output be exported. This year’s African Continental Free Trade Agreement, a pan-African tariff-lowering agreement not coincidentally championed by President Kagame, should also help bolster the emergence of regional value chains. Of course, these regional value chains may not generate the same degree of growth seen in previous waves of industrialization which were better positioned to export to a wider array of markets. Making up the shortfall will require sectoral diversification, and China can help here as well.

The Rwandan government has long hoped to turn the country into a regional high-tech and services hub. A series of five-year “National Information Communication Infrastructure” (NICI) plans have been promoting this goal since 2000, and the timeframe alone is reminiscent of China’s own economic planning. Trade statistics indicate that the strategy is bearing results. As of 2016, a mere 0.9% of Rwanda’s exports were in the textiles and furniture sector; in contrast, 25.0% came from tourism, and another 20.8% from information and communications technology services (ICT). Chinese investors have contributed to hotels and luxury real estate in Kigali, and the national carrier RwandAir is planning a new direct flight to Guangzhou, but the real story here is in Sino-Rwandan cooperation in technology. Chinese firms such as Hong Kong-based Tecno already possess major shares of the Rwandan smartphone market, and Huawei has agreed to build data centers and expand broadband networks in the country. High-tech jobs require education, and the Rwandan authorities are committing substantial resources to building human capital. China is present here as well. Rwanda has been proactive about sending students to China, including as part of a Huawei-sponsored competition in which students pitch ideas to use technology toward Rwandan development.

Through these initiatives, Rwanda hopes to use technology both to generate jobs and to improve government service delivery and the ease of doing business. Network technology can facilitate easier communication between the government and citizens, and Rwanda has centralized many services through an online portal known as Irembo. Notably, Shenzhen-based tech giant Tencent has bought into an initiative connecting rural Rwandans to doctors via mobile technology, and the idea of routing much of society’s activity through mobile phones is Tencent’s bread and butter. Not to be left out, Alibaba founder Jack Ma has personally visited Rwanda and pledged to train local students in e-commerce technology; on a related note, Rwanda is a member of Alibaba’s Electronic World Trade Platform (eWTP), an e-commerce system aimed at greater financial inclusion and access to global markets for small firms.

Chinese technology firms, then, are likely to contribute to Rwanda’s efforts to deliver services such as financial inclusion and healthcare to poor, rural citizens, but tech jobs themselves are by default the preserve of the well-educated. Rwanda’s national strategy, and China’s contribution thereof, must walk a tightrope between promoting manufacturing sectors which can employ many Rwandans, but face uncertainty due to technological change; and high-tech sectors which are secure for the indefinite future but are likely to create concentrated pockets of wealth à la Silicon Valley or southern India.

Fortunately, there is a third piece of the puzzle. Amidst all this talk of building new industries, let us not forget the old. In the run-up to the recent China International Import Exposition, a reporter asked Rwandan Ambassador to China Charles Kayonga what type of products Rwanda hoped to export to China. His answer? “Mainly agro products. Agribusiness products. You know, coffee, tea, and handicrafts.” Rwanda has had significant success marketing its coffee beans as high-quality, boutique goods in Western markets; and the explosion in popularity of coffee among young Chinese means that Rwanda may able to replicate this success there. China currently sources most of its coffee imports from Asia—as of 2016, Vietnam by itself supplied 69.6% of the total—but there is obvious room for diversification. Coffee and tea production also tend to be fairly labor-intensive, and may provide a more robot-resistant source of employment for lower-income Rwandans.

When the Belt and Road was first announced, it was primarily focused on building Eurasian infrastructure, but the scope has clearly expanded. What is happening in Sino-Rwandan relations is telling: smaller firms and the private sector are the taking the lead in industries ranging from agriculture to technology. Perhaps this was not the Belt and Road’s initial focus, but… does it really matter? To quote Deng Xiaoping, “It doesn’t matter whether a cat is black or white, as long as it catches mice.”