Rwanda - Poverty reduction and sustainable growth

Report No. 12465-RW Rwanda Poverty Reduction and Sustainable Growth May 16, 1994 Population and Human Resources Division South-Central and Indian Ocean Department Africa Region FOR OFFICIAL USE ONLY MICROGRAPHICS Report No: 12465 RW Type: SEC Document of the World Bank This document has a restricted distribution and may be used by recipients only in the performnance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENT Currency Unit Rwandese Franc (FRW) 1992 US$1.00 = FRW 125 (lst Halt) 1992 US$1.00 = FRW140(2ndHall) 1993 US$1.00 m FRW 145 WEIGHTS AND MEASURES Metric System FISCAL YEAR January 1st to December 31st ABBREVIATIONS AIDS Acquired Immune Deficiency Syndrome DHS Demographic and Health Surveys ESN Economic Strategy Note MOH Ministty of Health HWV Human Immunodeficiency Virus IEC Infonafion, Education and Communications KAP Knowledge, Attitudes and PrACtice MOH Ministry of Health MNITRlAPE Ministre de Travaux Publics et de l'Energie/ Ministy of Public Works and Energy NRR Net Reproduction Rate NGO Non-Governmental Organization OCIR-The Office des Cultures Industrielles du Rwanda-Thel Rwanda Industrial Crops Authority-Tea ONAPO Office National de la Population I National Population Offlice PNAS Programme National des Actions Sociales National Social Action Program TFR Total Fertility Rate This report is based on the findings of a main mission to Rwanda in September, 1993. Mission n:mmbers werc: Qaiser Khan, Mission Leader, Amolo Ngweno, Economist; Girindre Beeharry, Macroeconomist, and Colette Craven (Operations Officer). Separate missions by Thierry Brim , Agriculture Food Secuity Specialist; and Claudine Voyadzis, Social Anthropologist; also contributed to the report The report was prepared by Qaiser Khan and with inputs from Amolo Ngweno and Girinde Beehary. Separate annexes were prepared by Marco Ferroni (Poverty Profile), Colette Craven (Environment), Claudine Voyadzis (Social and Anthropological lssues Affecting Women) and Thierny Brun (Agiculture). A participative poverty survey financed by the Netherlands Poverty Trust Fund is being carried out by the Reseau des Femmes Rwandaises Oeuvrant pour le Developpement and the results will be integrated into the report as a. annex The peer reviewers are Messrs. Martn RavaUlion and Jeffrey Hammer. Tile report was processed by Ms. Hilda Emeruwa. Messrs. Francisco AguirreSw and Mr. David Bark are the Department Director and managing Division Chief respectively while Mr. Ulrich Tkunum is the Departnental Lead Economist  FOR OFFICIAL USE ONLY This report was prepared but could not be reviewed by the Government before the tagic events unfolding in Rwanda since the beginning of April, 1994. It is widely believed that hundreds of thousands of people have been killed and over two million people (L quarter of the population) have been displaced. This has no doubt greatly worsened the poverty situation. It is, however, far too early to assess the full impact of these events. The report shows the difficult conditions that Rwanda faced even before the recent events. The poverty reduction strategy proposed is based on accelerated economic growth, particularly agricultural growth, and all facets of human resource development. It is likely to be the ordy viable one after peace is restored and after a first phase of reconstruction/rehabilitation and restoration of basic economic and social services. This doumen has a resticted disuudr o and may to used by piet ooly in the pefbraa of their officil dutiesw , ts cotetms not ot s be discled wiut Wold Bankaui  RWANDA: POVERTYREDUCTIONAND SUSTAIN4BLE GROWTH TABLE OF CONTENTS EXECUTIVE SUMMARY In Overview ............................ i Poverty Profile .iv Macroeconomic and Regulatory Poicies .v Sectoral Issues Affecting Poverty Reducing Growth .vi Reconunendations for a Poverty Reducing Growth Strategy. viii 1. COUNTRY BACKGROUND AND OVERVIEW OF REPORT A. Background .I B. Overview of this Report .2 H. SUMMARY POVERTY PROFILE AND TRENDS 4 A- Overview of Findings .4 B. Poverty Profile. 4 C. Education, Health and Malnutrition .7 D. Geographic Dispersion of Poverty . E. Poverty Trends since 1985 .9 F. National Capacity for Poverty Monitoring .10 G. Women and Poverty . .10 H. The Problem of Refugees and Displaced Persons .II III. POVERTY DIMENSIONS OF MACROECONOMICS, REGULATIONS AND PUBLIC FINANCE ISSUES 14 A. Overew. .14 B. Macroeconomic Trends .14 C. Incentive and Regulatory Framework .21  Rwanda: Poverty Reduction and Sustainable Growth ii D. Public Expenditure and Revenues ......................................... 24 IV. SECTORAL CONSTRAINTS TO POVERTY REDUCING GROWTH 28 A. Overview ......................................... 28 B. Population and Family Planning ......................................... 28 C. Environmental Issues ......................................... 30 D. The Urban Situation in Rwanda ......................................... 31 E. Agriculture Issues ......................................... 33 F. Human Resources Development ......................................... 40 V. RECOMMENDATIONS FOR A POVERTY REDUCING GROWTH STRATEGY 42 A. Overview ......................................... 42 B. Overall Viion ......................................... 42 C. Recommendations for Macroeconomics and Publlc Finance ..................... 44 D. Sectoral Strategies ......................................... 48 ANNEX A. POVERTY PROFILE FOR RWANDA 55 ANNEX B. TECHNICAL NOTES 92 ANNEX C - PARTICIPATORY SURVEY ON POVERTY IN RWANDA 101 REFERENCES 139  EXECUTIVE SUMMARY OVERVIEW i. With a population of 7.2 million growing at just under 3% a year, Rwanda has a population density of 280 per mn2. Over 90% live in rural areas on subsistence agriculture. Through bringing marginal lands under cultivation and expanding productivity by increasingly labor intensive practices on small holdings, Rwanda was able to increase per capita food production in the past. This is no longer continuing and frequent localized famines have started since the late 1980s. When its per capita income is adjusted for pu: chasing power differentials, Rwanda falls among the ten poorest countries in the world. Due to poor economic conditions which have been exacerbated by an armed conflict since 1990, the percentage of the population living belowv the poverty line ($170 at 1985 prices and exchange rates) is estimated to have risen sharply from 40% in 1985 to over 53% in 1992. This ch-onic poverty problem has been worsened by the civil-war related displacement of people. IFig. 1: Trends in Percent Population Below Poverty Line 60.0%: 50.0% _ 40.0% 30.0% - 20.0% -__________________ 10.09% % Population Below Poverty Line with no dange in Inc. Dist. 0.0% 19S5 1986 1987 1988 1989 1990 1991 I192 Source: Bank Staff Estimates i. The extent of Rwanda's poverty problem means that the country cannot address it by targeted programs' alone. It needs to attain sustained labor intensive growth while assuring that the strategy chosen provides the poor with equitable access to the benefits. A system of targeted transfers to bring all those below the poverty line up to the that line would have cost 4.5% of GDP in 1985 and almost 10% of GDP in 1992 which is not feasible. Rwanda needs to: (a) create an environment to encourage development of Nevertheless, tageted progams such as labor intensive works to help the poore suive tdi sustamed growth reduces poverty will be tnecessazy and are being executed with World Bank support  Rwanda: Poverty Redaction with Sustainable Growth iv export-oriented labor-intensive industries (a long term growth strategy moving towards an open economy has been developed in Rwanda: Note de Stratigie Econonmque:Vers une Croissance Durable, World Bank, 1993);2 (b) remove restrictions to population movements to allow non-agricultural development and the growth of larger market centers; (c) promote food security and environmentally sustainable agriculture by encouraging a mnix of food crops, animal husbandry and cash crops; (d) reduce fertility by improving the outreach and effectiveness of family planning programs; (e) augment the human capital of the poor through investments in education; (f) improve health conditions; and (g) address malnutrition through nutritional surveillance, nutritional education and supplemental feeding. All of these should increase growth and reduce poverty. Hunran resource development and removal of restrictions on labor mobility should allow the poor to benefit from growth. Increased agricultural productivity and growth of the urban informal sector would directly help to reduce poverty and provide the basis for sustained growth. POVERTY PROFIE iii. A poverty profile based or, the household surveys from 1983-85 (the most rec..at available surveys) shows that the mean value of expenditure per capita for the Rwandese population was 18,760 FRW per year in 1985 (US$235 using rates of exchange prevalent at the time of survey). The average consumption of the bottom 40% was under 11,000 FRW per year and that of the bottom 20% was under 9,500 FRW per year. The share of the population living below the poverty line (set at 13,810 FRW/capita3) was 11% in urban areas and 41% in rural areas. The average consumption of those above the poverty line was about 22,000 FR. per year. There was a gender bias in urban areas where female headed households had an average consumption level 35% below that of male-headed households. Poverty was worst in the south central region while the northwest region was the most well-off. Income sources varied significantly between poor and non-poor households with agriculture production and wages accounting for over 70% of the income of the poor households but only 52% for the non-f oor. Expenditure patterns varied between the poor and the non-poor with the poor spending 88% on food and the non- poor 74%. iv. The chronic poverty problem has been worsened by the 1990-93 armed conflict and associated events which displaced 900,000 persons at one stage (more than 12% of Rwanda's population). The displaced persons abandoned some of Rwanda's most productive farm-land, affecting output and food supply. These flows were accompanied by a dramatic rise in mortality among the displaced. 2 The macrenomic firmework in this report has bee based on the ESN and underlies the projections given in this report 3 This is defined as the consumption of the 40% percentile and in 1985 was equivalent to about $170 at the exchange rate prevailing at the time of the survey. The level is held constant in real terms as a bencbmnark for making calculations for other years.  Summay and Recommendations v MACROECONOMIC AND REGULATORY POLICIES v. Rwanda!s macroeconomic and regulatoty policies have historically worked against the onset of private sector led growth and sustained poverty reduction (though during the 1970s and early 1980s the country made considerable progress). The adjustment program carried out from 1990 put in place reforms wnich should have reduced poverty and increased growth had it not been for the effect of the armed conflict and some regulatory practices which worked against the goals of the program. Trends before the 1990 Structural Adjustment Program vi. Supported by generous donors and good coffee prices, the govermnent was able to maintain over-valued exchange rates, low inflation and fiscal balance through the 1970s and 1980s. Export taxes on coffee were a good source of revenue, but, following the drop in coffee prices during the 1980's, these had to be replaced by price supports causing fiscal imbalance. These imbalances became unsustainable by 1990 and the govermnent requested support of the Bretton Woods institutions for a structural adjustment program Iupact of the Structural Adjustment Program vii. The core of the 1990 adjustment was a 40% devaluation (in foreign cuffency terms) designed to stimulate production of tradable goods and to creat3 employment. Rwanda's adjustment program benefited the poor on balance though this positive effect was dampened considerably by regulatory restrictions on the mobility of labor, the impact of state marketing boards and a downward trend in international prices for tea and coffee. Most of the poor produce and sell cash crops in Rwanda and should have benefited from an increase in the price oftradables. While there seems to have been some incre-se in the production of tradable goods due to higher prices, the poor were generally unable to benefit from any increased employment opportunities in production of tradables due to restricted labor mobility. Significantly, the poor were hardly affected by increased prices of consumption goods b'^ause (a) they are less exposed to the cash economy than the non-poor and (b) the price of food, which is the major consumption item among the poor, did not rise significantly. Incidence of Public Expenditures and Revenues by Poverty Group viai. Unlike that of many other countres, Rwanda's fiscal system was historically fair to the poor, with the incidence of public expenditures and revenues having little net effect on income distribution. The situation changed with the down-turn in coffee pdces, which led the govemment to support the domestic producer price turning the coffee sector from a source of revenues to a drain on the treasury. Another negative factor was the anned conflict. The share of social sectors declined from 35% of current expenditures in 1985 to 20% in 1992 while the share of defense and administration rose from 45% to 64%. The Government ran a surplus equivalent to 1.4% of GDP in 1985 which had changed by 1992 to a deficit of about 7.4% of GDP. These changes in the expenditure pattern made the net  Rwanda: Poverty Reduction with Sustainable Growth vf effect ol the tax and expenditure system less equitable as illustrated by Figure 2 (this shows the net effect of government revenues and expenditures on consumption). Fi1g. 2 Net Inddence of Goit SpendingandaRewnutd 15.0% El L Net Incidence of Govt. _____________________S pending and Revenues I U.