East Africa Research Papers in Economics and Finance (EARP-EF)

Farm-Heterogeneity and Persistent and Transient Productive Efficiencies in Ethiopia’s Smallholder Cereal Farming
EARP-EF No. 2016:16
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This paper investigates persistent and transient productive efficiencies of Ethiopian cereal farmers for the period 1999-2015. It uses a 4-random error component stochastic frontier panel data model to distinguish between time-invariant farm heterogeneity and persistence and transient inefficiencies. It compares this model with three other stochastic frontier panel data models in which one of the four components is missing. The models allow the estimation of persistent and transient efficiencies for each farmer and each time period. The first-order estimates of the parameters indicate that agrochemicals, livestock, machinery and labor significantly enhanced cereal production. The results of the efficiency estimation indicate that the mean and dispersion of efficiencies among farmers differed by the model’s specifications and their agro-ecological zones and sub-zones. The results also show that cereal farming was technologically regressed at an increasing rate and exhibited increasing returns to scale. The results confirm that in general farmers were unable to achieve full productive efficiency and efficiency estimates consistently declined over time. The results further show that cereal growing farmers’ experienced much more persistent inefficiency problems as compared to transient inefficiencies. These findings are important and can be used to initiate agricultural policy options which are tailored at enhancing improvements in farming efficiency. The study therefore recommends policies that will improve measures that can reduce persistent inefficiencies, improve the supply of agricultural inputs and also policies that can meet the needs of farmers and which suit their agro-ecological zones.
Multidimensional Measure of Household Energy Poverty and its Determinants in Ethiopia
Mekonnen BERSISA
EARP-EF No. 2016:15
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Access to and affordability of energy is crucial for the well-being of society. Life without energy is unthinkable. It is an important ingredient for attaining the general good quality of life. The objective of this study is to analyze the extent and determinants of energy poverty using the Ethiopian Socioeconomic Survey of 2011 and 2014 which is part of the World Bank survey on living standards. The analysis focuses on multidimensional measures of energy poverty using four dimensions and five variables for rural and small towns in Ethiopia. The determinants of multidimensional energy poverty and their effects are also examined using the static random effect logit model. The results show that the extent of energy poverty in rural and small towns in Ethiopia is very severe. About 74 per cent and 73 per cent of the respondents were found to be multi-dimensionally energy poor in 2011 and 2014 respectively. Further, the results also show that a larger family size, living in a rural area and male headed households significantly increase the probability of a household being multi-dimensionally energy poor while the age of the household head, the number of rooms occupied by the household and total household expenditure significantly reduce the probability of households falling into poverty. The study recommends that interventions for reducing energy poverty should be coupled with poverty reduction policies, promotion of rural energy and energy efficient technologies and appropriate energy source pricing mixes.

The Dynamics of State and Market Relations and the Question of Inequality
Albert T. AKUME and Ankama G. ROSEACANA
EARP-EF No. 2016:14
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The desire of all true egalitarian governments the world over is to curb inequality. This ideal is indelibly imprinted in most, if not all federal constitutions of which Nigeria is assumed to be one. However, despite this constitutional demand inequalities seem to be rife in Nigeria. Hence the objective of this paper is to examine if the market or the state or both are the cause of inequalities in Nigeria. Using the documentary and qualitative research methods, this study shows that in most developed economies, the market seems to account for inequalities in these societies. On the contrary, in Nigeria’s case it is the government that is mainly responsible for the growing inequalities in the country even though the market is not guiltless. One implication of this is the dominance of major ethnic groups to the utter neglect of minority groups in Nigeria. Correcting this requires a deliberate and collaborative relationship between the market and the state aimed at ensuring equitable enforcement and distribution of social, economic and political rights for society.

Service Sector Development and its Determinants in Rwanda
EARP-EF No. 2016:13
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The service sector is an avenue for economic transformation as not all countries have a competitive edge in manufacturing. The growing literature on service sector primarily focuses on its development in the US and Europe and on Asian emerging service economies like India. Not as much attention has been paid to the role that services can play in the economic growth of African countries primarily due to the high prevalence of agriculture in these countries. But with avenues of structural adjustments and globalization, some African countries have become service-based economies. Services are considered as an alternative to manufacturing-led development in Rwanda since its aims is to become a service-based hub to serve countries in the East African Community (EAC). Recently, the growth rate of the service sector has been impressive in the Rwandan economy. The present study is an attempt to study in detail the development of the service sector over the years in Rwanda’s economy and empirically estimate its determinants by using an econometric methodology. The empirical results are based on micro-data collected during the Rwanda Enterprise Survey 2011 and the 2014 Establishment Census. The survey has data on 241 firms and establishments. Linear and limited dependent variable techniques are employed to investigate the factors behind the development of the service sector. Models are specified and estimated to assess the factors contributing to sales growth, innovation and turnovers of service firms. The results show the factors that have contributed to the development of the service sector. These factors can be used in forming public policy with the aim of using the service sector as a vehicle for speeding up the shift from a low income to a middle income state.

Income Distribution and Economic Growth: Empirical Evidence from an Evolutionary Growth Perspective
EARP-EF No. 2016:12
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This paper links access to bank loans and income distribution to productivity growth. The main focus of the paper is examining how functional income distribution can influence the evolution of productivity and thereby promote economic growth. We obtained key variables and their evolution from the Central Statistical Agency (CSA) dataset. We employed Nelson and Winter’s (1982) evolutionary economic framework; the evolutionary theory of economic change and subsequent developments are used jointly with an evolutionary econometric approach which sees economic growth as an open ended process. The major conclusion of this paper is lack of strong evidence of evolution (intra-industry selection) to foster productivity growth and re-allocation (structural change).

Assessing the Revenue Implications of Indirect Tax Reforms in Rwanda
Etienne NDEMEZO and Francis MENJO-BAYE
EARP-EF No. 2016:11
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This article analyzes the tax revenue implications of the 2002 Value Added Tax (VAT) rate reform in Rwanda. For this it uses an adaptation of the methodological framework of the elasticity of the taxable base with respect to the tax rate (Gruber and Saez, 2002). Data used are from the second Integrated Survey on the Living Standards of Rwandan Households (EICV2) conducted in 2005-06 by the National Institute of Statistics of Rwanda (NISR). As compared to Gruber and Saez’s (2002) method, our adaptation has the merit of using data which are easy to collect and to archive in developing countries. Our analysis led to two main outcomes: (i) the 2002 VAT rate reform slightly raised household consumption expenditure because it grew by only 0.3 per cent; (ii) the increase in tax revenue was significant (approximately 20 per cent), thanks to the mechanical component. The behavioral component was lower and mainly borne by the poorest households. This attests that consumption spending by poor households was relatively insensitive to changes in relative prices after the VAT reform.

The Link between Access to Bank Loans and Income Distribution in Agent Based Modeling: Empirical Validation
EARP-EF No. 2016:10
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This paper empirically validates the results obtained in the first paper which theoretically linked firms’ access to bank loans and income distribution. Descriptive output and econometric (external) validations techniques were used as an indirect identification strategy to examine the link between access to bank loans and income distribution. We used Ethiopian firm level data from the medium and large manufacturing industries in the country and the national personal income distribution data from the Ethiopian Ministry of Finance and Economic Development. The major conclusions are: (i) firms’ access to bank loans is one mechanism through which distributional issues can be explained,(ii) firms’ financial structures matter, that is, whatsoever the source of funds, if they are used for investments in fixed capital there is improvement in functional income distribution, and (iii) functional income distribution is strongly associated with personal income distribution. This paper will contribute in terms of policy and enriching the limited literature base on finance-inequality relations.

An Assessment of the Contribution of Mineral Exports to Rwanda’s Total Exports
EARP-EF No. 2016:09
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In 2012, the International Council on Mining and Metals (ICMM)2 proved that mineral exports can be an alternative for increasing exports for agrarian, low and middle income countries and that in the past two decades their contribution to total exports had increased from 30 to 60 per cent. Based on this theory, we use an econometric model and work with data techniques to test whether Rwanda maintained this pace from 1998 to 2014. Our results show that Rwanda did not manage to reach that level since she only averaged 29.1 per cent. The findings show that if mineral exports increase at 10 per cent, the total exports will increase at 7 per cent. This implies that the Government of Rwanda needs to bring in a lot of reforms in the mining sector and take Botswana and Namibia as its role models.

The Link between Access to Bank Loans and Income Distribution in Agent Based Modeling: A Theoretical Framework
EARP-EF No. 2016:08
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The agent-based model of Dosi, Fagiolo, Napoletano, and Roventini (2013) assumed that there exists a well-functioning banking system and industries are composed of both capital and non-capital goods producing sectors. They found that monetary policy has a minimal role in affecting functional income distribution. The model is modified to capture the realities of developing countries where the banking system’s supply of services is smaller than what is optimal. The system is heavily influenced by inside agents and industries are dominated by non-capital goods producing firms. The modified model theoretically links firms’ access to bank loans and functional income distribution in agent-based modeling. The results based on the modified model indicate that when firms have access to bank loans, functional income distribution improves. Unlike many firm level studies which focus on the firms per se, this study argues that it is possible to utilize firms’ economic actions and their access to bank loans to explain how income inequality is generated and how it evolves over time. This paper theoretically finds personal income distribution as an emergent phenomenon. This result is in agreement with Thomas Schelling’s ‘Micromotives and Macrobehaviour’, where he established aggregate behavior as an emergent phenomenon. The major conclusion is that access to bank loans at the firm level improves income distribution in society.

Impact of Weather Variations on Cereal Productivity and Influence of AgroEcological Differences in Ethiopian Crop Production
Oumer BERISSO Metaksa
EARP-EF No. 2016:07
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This study investigates the impact of weather variations on cereal crop productivity over a period of 15 years in Ethiopia. Consistent with previous productivity studies in sub-Saharan Africa, this study also confirms the importance and strong influence of most of the weather related variables on cereal crop productivity. Descriptive results show that cereal crop production and productivity increased over the period in the study area and in each agroecological zone. Average annual and seasonal rainfall distribution declined, while average annual and seasonal temperatures increased through the study period. However, the weather variables were not uniform in the agro-ecological zones. Panel data estimation results indicate which inputs significantly enhanced cereal crop productivity and which ones including weather variables (temperature and rainfall) influenced cereal crop productivity negatively. Considering the effect of the weather variables annually and seasonally, both in their linear and squared terms, the regression results reveal that productivity of cereal crops was generally sensitive to climate variables. Moreover, regression results show evidence of agro-ecological differences and crop productivity regress over time. These findings are important and can be used to initiate government policy options when planning climate change adaptation strategies and agricultural policies tailored to support various agroecological zones across the country. The study recommends that policies that will help improve extension services, farmers’ education, supply of agricultural production inputs and developing climate change adaptation strategies suitably designed to meet the needs of different agro-ecological zones should be actively pursued.

Labour Productivity in Kenyan Manufacturing and Service Industries
EARP-EF No. 2016:06
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Labour productivity reflects a firm’s ability to generate higher production or value-added. This paper analyses labour productivity and its determinants in the manufacturing and service sectors in Kenya. As the largest economy in East Africa, it is crucial for Kenya to have high labour productivity as it has strong implications for economic growth and welfare. The paper also provides practitioners with a better understanding of the state of labour productivity in the country. Using the World Bank’s Enterprise Survey’s database for 2013, we find that capital intensity and wage significantly and positively affected labour productivity. A higher female share in the labour force reduced labour productivity. We also found that training and education were associated with higher labour productivity. Reliance on technologies such as emails and websites for communication had a positive but insignificant impact on firms’ labour productivity. On the basis of these observations we make a number of recommendations to promote higher productivity of labour.

Spatial Spill-overs and Households Involvement in the Non-Farm Sector: Evidence from Rural Rwanda
EARP-EF No. 2016:05
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This paper studies the effects of external economies of scale on households’ involvement in the non-farm sector. The focus of the paper is on the type of knowledge spill-overs that occur at the level of individuals; these relate to learning processes and non-market interactions. Nationally representative data on 8,100 households surveyed in 2006 and 2009 are used and unobserved heterogeneity and spatial dependencies are modelled by employing a multi-level model and instruments in the form of clustered cantered means. The findings show that in addition to other household characteristics related to education, asset endowments and credit availability, measures of agglomeration economies are positively associated with smallholders’ degree of involvement in non-farm activities. The results indicate that there exist significant scale efficiencies associated with local markets and that an important part of the capacity to diversify lies outside households, residing instead in their locations.

An Econometric Analysis of Business Startups in Rwanda: Effects of Interest Rate Spread, Inflation, Exchange Rate and Taxation
EARP-EF No. 2016:04
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The financial sector in Rwanda has been growing rapidly in recent years, especially in the banking sector in which some regional and international commercial banks are entering the fast growing market. This paper analyses how interest rate spread, inflation, exchange rate and taxation affected business start-ups in Rwanda during 2006-2015. A co-integration approach for a long-run association between the variables and the vector errors correction model was applied to the compiled data series to arrive at the final results that reflect the prevailing situation. The analysis reveals how starting a business in Rwanda is affected by these determinant factors. The econometrics methodology was used to test a number of hypotheses based on up-to-date data. The significance of variables like interest rate spread, taxation, exchange rate and inflation was tested to evaluate their impact on business start-up conditions in Rwanda and their relationships with commercial banks. The paper also provides policy recommendations on how to promote business start-ups.

Role of Insurance in the Demand for Healthcare in Rwanda: A Household Level Investigation
Charles Mulindabigwi RUHARA and Urbanus Mutuku KIOKO
EARP-EF No. 2016:03
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In the 2000s the Government of Rwanda initiated health sector reforms aimed at increasing access to healthcare. Despite these reforms there has not been a corresponding increase in demand for health services, as only about 30 per cent of the sick use modern care (NISR, 2011). The objective of this paper is to examine the factors influencing outpatient care demand in Rwanda and suggest appropriate measures to improve utilization of health services. The source of data is the Integrated Household Living Conditions Survey (EICV2) conducted in 2005 by the National Institute of Statistics Rwanda (NISR). A structural model of demand for healthcare is estimated to measure demand effects of covariates. The findings indicate that health insurance is a significant determinant of outpatient medical care. In addition, the price of healthcare and household income are among the main drivers of utilization of healthcare. Women are more likely to seek outpatient healthcare. Two main policy recommendations emerge from these findings. First, the government should reduce out-of-pocket healthcare expenditures (OOPE) through subsidies for public health facilities. Second, the government should reduce the premiums for Community Based Health Insurance Schemes (CBHIs) to increase coverage rates.

Measuring Women’s Empowerment in Rwanda
EARP-EF No. 2016:02
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This study examines the determinants of women’s empowerment in Rwanda using data obtained from DHS 2010. A regression analysis is used to investigate the association between women’s empowerment and its covariates. The study also uses a multinomial logistic regression to assess what determines households’ decision-making and attitudes towards physical abuse of spouses. Variables of sources of empowerment such as education and media exposure were found to have a net positive association with women’s empowerment while other variables such as residence and the age at first marriage were negatively associated with women’s empowerment. Further analysis showed that the effects of education, age of the respondent, wealth and the number of children ever born remained strong conditions which effected households’ decision-making and attitudes about physical abuse. In general, therefore, it seems that for women to fully realize their potential and rights, specific emphasis should be put on variables that increase their access to resources and knowledge such as education, employment for cash and media exposure but variables that are negatively associated with women’s empowerment such as higher age at first marriage should also be taken into account.

Gender Equality, Women’s Education and Pro-Poor Development Lessons from Nigeria
Augustine Oby OBIORAH
EARP-EF No. 2016:01
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Economic development which is worth sustaining is one that not only guarantees economic growth but also reduces poverty. This has been elusive in many countries. Several past studies point at gender equality as a possible solution. Studies have also shown that balancing the gender equation through economic empowerment of women not only benefits the women themselves but that it also benefits men, children and society. Using data from the World Bank for 1970-2012, this study demonstrates the influences of women’s labour participation rates (LAPAR) and education (WEDU) on both per capita growth and poverty levels separately using the ‘Bound Testing technique’. The study proves that if women are not restricted or hindered from income generating activities, there are significant improvements in both output per capita and poverty reduction. Specifically, the long-run model reveals that a percentage increase in women’s labour participation rates will increase output per capita by over 214 per cent and decrease poverty levels by at least 5 per cent. Ironically, women’s education just till the secondary level does not conform to à-priori expectations for both metrics. This buttresses an earlier study showing that for most poor countries the impact of education on economic development becomes significant only at the tertiary level (perhaps below the tertiary level women in poor nations are not capable of challenging the usual sociocultural factors that limit their involvement in formal paid employment). We conclude that undermining women in developing countries in most part may have led to the wide divergences between the development in the global North and South. The study recommends that women should be fully empowered and unrestricted in workplaces for increasing output per capita and reducing poverty. In addition, women’s education should be encouraged up to the tertiary level to enhance their chances of catching-up with developed nations in an inclusive manner.

Content updated 2018-02-08

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