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


Determinants of Income Mobility in Uganda
Susan NAMIREMBE-KAVUMA and Edward BBAALE
EARP-EF No. 2018:35
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This study investigates the rate and determinants of income mobility in Uganda using three waves of the household panel survey data (2009-10, 2010-11 and 2011-12). It employs the Markov transition matrices and probit techniques for the analysis and finds a higher rate of income mobility (60 percent) at the bottom of the income distribution than at the top of the income distribution (43 percent). It also finds that capital stock, whether human or physical, has the most economically significant impact on income mobility. The impact of education is more pronounced at higher levels of educational attainment. For example, having a university degree increases the probability of moving up the income distribution level by 36 percentage points. Conversely, having a university degree reduces the probability of moving down the income distribution level by 21 percentage points. Having highly valued physical assets increases the chances of moving up the distribution ladder by 24 percentage points and reduces the movement down by 18 percentage points. Equally important are the gender of the household head, main source of income and geographical location of the household. Hence, there should be increased investments in education, especially at higher levels and strategies should be designed that are aimed at increasing the viability of land as a factor of production. Additionally, efforts aimed at women’s empowerment should also be strengthened.

Achieving the Sustainable Development Goals in Rwanda: The Role of Administrative Data Inclusion
Theogene RIZINDE, Ferdinand NKIKABAHIZI, Leonidas BABAMWANA and Josephine UMUTESI
EARP-EF No. 2018:34
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This study investigates the extent to which decision makers in Rwandan institutions appreciate and use administrative data in their everyday decision making to achieve sustainable development. The study is based on semi-structured interviews with 120 Rwandan establishments by institutional sector selected randomly in Remera sector in Gasabo district in Kigali city. The research reveals that a majority of the decision makers did not understand the need to use statistics in their decision making while others felt overwhelmed by the volume and complexity of the data. Our study finds that there is a strong lack of dissemination or sharing of data by institutions, especially in the private sector, to inform their decisions. The study also finds that the non-use of administrative data for decision making is highly linked to the size of the institution and the level of education of the decision makers.

An Analysis of the Determinants of Youth Employment in Rwanda
Joseph NDAGIJIMANA, Tharcisse NZASINGIZIMANA and Almas HESHMATI
EARP-EF No. 2018:33
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The main objective of this research is to analyze the determinants of youth employment in Rwanda from the point of view of the demand, supply and the general labor market. An analysis of the data shows that a skill gap is most critical for employment creation and a transition from school-to-work seems problematic. Further, questions remain about what factors influence youth employment in Rwanda and how youth employment is related to poverty reduction and distribution of income. The study uses a multinomial logit model to shed light on the determinants of youth employment status in the country using data from the National Institute of Statistics of Rwanda (NISR). It verifies how the current status of youth employment in Rwanda has evolved over time and based on its findings it provides policy recommendations to promote youth employment. The research finds that youth employment in Rwanda is influenced by gender, age, education and geographical location.

Employment in Manufacturing and Service Firms in Rwanda
Barham MUHIRE
EARP-EF No. 2018:32
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This study analyzes employment and its determinants in the manufacturing and services sectors in Rwanda. As a growing economy in East Africa, it is very important for Rwanda to have good and quality employment in both manufacturing and services sectors as this will have an impact on its economic growth and improving welfare standards. The study also provides practitioners with a better understanding of employment in manufacturing and services sectors in Rwanda. Using the World Bank’s Enterprise Survey’s database for 2011, the study finds that firm size, the number of establishments that form a firm, wages and social payments and research and development are statistically significant for employment in manufacturing and service firms at the 0.05 per cent level of confidence. These factors can be used in forming public policy with the aim of using manufacturing and service firms as an engine for speeding up the shift from a low-income to a middle-income country as this is the way that the Rwandan economy is heading. The location of a firm, age square, managers’ experience, females’ experience, national sales and research and development have a positive but insignificant impact on employment in both manufacturing and services sectors. On the basis of these observations we make a number of policy recommendations for promoting the quality of employment.

Job Creating Growth and Governance: The Case of Rwanda
Thomas R. KIGABO and Callixte KAMANZI
EARP-EF No. 2018:31
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This paper analyzes whether Rwandan economic growth is creating jobs. The World Bank’s Job Generation and Growth Decomposition (JoGGs) tool reveals some interesting insights into the relationship between economic growth and job creation in Rwanda. Rwanda’s growth profile for the period 2011-14 was job-creating; there was a 9.12 per cent change in per capita value added thanks to an increase in the employment rate. In addition, we also analyze the role of governance, particularly policies targeted at creating jobs. As seen from international organizations’ reports, Rwanda has been improving and performing well in all governance indicators. Various government policies in favor of employment have been initiated and implemented including the National Employment Program that came up with different initiatives to promote employment; investment facilities as indicated by a good ranking in Doing Business reports are improving and so is access to finance. These have all created a business climate that attracts investments and fosters new enterprise creation that further boosts employment opportunities. As a result, there has been a remarkable increase (24.4 per cent) in the number of establishments accompanied by new jobs that increased by 34 per cent between 2011 and 2014. This can be linked to government policies implemented in that period. This makes us attribute job creating growth in Rwanda to good governance.

Excess Liquidity and Rwanda’s Monetary Policy
Thomas R. KIGABO and Ananias GICHONDO
EARP-EF No. 2018:30
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This study examines the potential determinants of precautionary excess liquidity in the Rwandan banking system during the period 2004-16 and its optimal level above or below which excess liquidity becomes a constraint in monetary policy transmission. The study uses the FMOLS autoregression approach to estimate the determinants of precautionary excess reserves. However, for ease in interpreting the coefficients, the study also estimates the sum of coefficients using the dynamic least squares (DOLS) method with the lag operator set to 1. For the optimal excess liquidity level it uses the Kernel density estimation to estimate the probability density of the estimated precautionary excess liquidity. To avoid sample dependence on the optimal level obtained it uses the bootstrap method to obtain a confidence interval of the values computed. The results obtained from the regressions suggest that the reserve requirement, change in demand for cash proxied by the output gap and the lagged value of excess liquidity are important determinants of precautionary excess liquidity in the Rwandan banking system. Using the summation of coefficients, the lagged values of the cash-to-deposit ratio, discount rate and foreign exchange exposure are also found with significant positive relationships. Considering the first and second conditions of liquidity minimization, the study finds the optimal level of excess liquidity at around Frw 34 billion. On an average of five years, the excess reserves should be around Frw 14.3 billion. The estimations are based on the assumption that the existing reserve requirement is optimum. The findings can be used as a base for the central bank to improve its liquidity management for an effective monetary policy.

Monetary Transmission Mechanisms in Rwanda
Thomas R. KIGABO
EARP-EF No. 2018:29
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This paper assesses monetary transmission mechanisms in Rwanda. By first analyzing their key determinants the paper highlights the good progress accomplished in increasing the National Bank of Rwanda’s (BNR) independence, flexibility in the current monetary policy framework and financial sector development. However, the banking sector continues to show persistent short-term liquidity, the size of the formal financial sector remains small and banks are more competitive in the deposit rather than in the loan market. Thus, the interest rate pass-through to the lending rate remains very weak and this limits the impact of monetary policy actions on the cost of banking loans. The exchange rate channel has started improving after the introduction of more flexibility in the exchange rate policy and a decline in foreign resources. There is clear evidence that the monetary aggregates channel is active in Rwanda. A shock to M3 as well as changes in the available amount of credit as a result of BNR’s actions appears to have a very rapid, significant and persistent effect on output which peaks after around 5 quarters. This may be a reflection of the increasing monetization of the Rwandan economy that has taken place. The effect of a shock to M3 on prices is positive and significant but appears late, after more than two years. More efforts are needed to support further development of the financial markets and extending the formal financial sector to all sectors of the economy.

The Determinants of Investment Decisions in the Rwanda Stock Exchange
Jonas BARAYANDEMA and Idrissa NDIZEYE
EARP-EF No. 2018:28
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Stock markets play an important role in providing investment opportunities as they offer investors a means to maximize wealth for an acceptable level of risk. The Rwanda Stock Exchange (RSE) has been operational since 2008 but it is still under-developed and so it is not attractive enough for many potential investors whose investment decisions are subject to certain factors that have to be identified and understood so that they can be given special consideration by RSE’s authorities for the sake of better development. The aim of this study is to explore which economic, psychological, social and demographic factors determine investment decisions in RSE the most. The study adopts an explanatory design combined with a survey design. A sample of 187 respondents was selected from a population of 350 active investors operating in RSE. Data was collected using various techniques including a structured questionnaire for investors, semi-directed interviews with brokers and a documentary review. The collected data was analyzed using SPSS and a factor analysis. The research findings show that economic factors were the most influential with an average mean of 4.05, followed by psychological factors with an average mean of 3.96 and then social factors with an average mean of 3.64 whereas demographic factors were ranked last with an average mean of 3.08. The five most influential factors were two economic factors (expected corporate earnings and ownership structure) and three psychological factors (irrational thinking, get-rich-quick and cognitive bias). The five least influential factors were four demographic ones (income, education, age and gender) and one psychological factor (over-reaction). It is, therefore, recommended that RSE’s authorities should reshape the stock exchange by focusing attention on the identified influential determinants of investment decisions with more emphasis on economic and psychological factors and less emphasis on social and demographic ones.

Factors influencing the development of Capital markets in Rwanda: A case study of the Rwanda Stock Exchange
Gisele U. CYUZUZO
EARP-EF No. 2018:27
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This study investigates the factors influencing the development of capital markets in Rwanda. Its main objective is to study how macroeconomic variables affect the growth and development of the Rwanda Stock Exchange (RSE). It also analyzes RSE’s contribution to the increasing economic growth in Rwanda. The study uses quarterly secondary data from 2011 to 2016 and estimates two models using the GLM method. It measures RSE’s performance by market capitalization. The macroeconomic variables that it uses are the key repo rate, inflation rate and money supply; consumption is used as a conditioning variable. It uses GDP as the dependent variable, market capitalization as the independent variable and capital formation and consumption as the conditioning variables to analyze the second model. It uses a 2SLS regression method to overcome the endogeneity problem. Our results show that among the four macroeconomic variables only money supply had a statistically significant relationship with market capitalization as we found that an increase in money supply by one Frw led to an increase in the market capitalization ratio by 0.003. The results also show that there was a positive relationship between market capitalization and GDP where an increase in market capitalization by one unit increased GDP by 0.19.

External Economic Shocks and Food Price Volatility in Rwanda: Evidence from the ARCH and GARCH Models
Sandrine UNEZEZA and Jean Baptiste HABYARIMANA
EARP-EF No. 2018:26
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This paper adopts and explains the use of autoregressive conditional heteroscedasticity (ARCH) and generalized autoregressive conditional heteroscedasticity (GARCH) models to investigate how variations in the price of crude oil in Rwanda and in the world market as an external economic shock affect the price of cereals in Rwanda’s domestic market. Our empirical results show that cereal price series are linearly related to crude oil price series and that they suffer from a high relative variability. Price returns’ analyses reveal that there is evidence of volatility in cereal price returns clustering from variations in the price of crude oil in both the domestic Rwandan market and the world market. ARCH and GARCH results demonstrate that volatility in the market price of cereals in Rwanda is strongly influenced by own past squared residuals and by past squared residuals in the price of crude oil in both domestic and world markets. Further, the scedastic functions reveal that upward movements in the price of crude oil in Rwanda lead to a period of high cereal prices (maize and wheat). To reduce inefficiencies in the domestic cereal distribution system while improving cereal market efficiency and ensuring food security, this paper suggests that trade policy in Rwanda should take into consideration the relationship that exists between the price of crude oil and the price of cereals. This paper also suggests that as there exists a negative relationship between the devaluation of the Rwandan currency and the price of crude oil in Rwanda, stabilizing the Rwandan franc will lead to stability in crude oil prices which will be a key factor in rendering the cereal distribution system in the country more efficient.

A Spatial Price Transmission Analysis of Beans and Rice Markets in Rwanda
Charles RURANGA, Martin MUGENZI and Aline MUTABAZI
EARP-EF No. 2018:25
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An increase in food prices has many effects for consumers especially for vulnerable people because this decreases their purchasing power. We use the spatial price transmission to examine the impact of a change in prices in one market in another market. Specifically, we analyze the spatial price transmission in beans and rice markets. We analyze monthly data from January 2002 to December 2014 of retail prices of beans and rice in Huye, Nyabugogo, Musanze, Gisenyi and Nyagatare markets. The series are stationary in their first differences and the Johansen co-integration tests reveal that the variables are co-integrated implying that there is a long-run relationship. Impulse-response functions show that if a shock on retail price of beans in Musanze is 100 per cent, it will not affect other markets in the first month but in the second month it will affect all markets. If there is a shock of 100 per cent in the retail prices of rice in the Huye market other markets will not be affected in the first month but in the second month the Musanze market will be more affected (25 per cent effect). Variance decompositions reveal that the effect of a shock in the price of beans in the Musanze market will be shared with other markets from the second month. For retail prices of beans, the Granger causality tests show that there is unidirectional Granger causality between prices in different markets; for retail prices of rice there is bidirectional Granger causality.

Determinants of Livelihood Diversification among Rwandan Households: The Role of Education, ICT and Urbanization
Aristide MANIRIHO and Pia NILSSON
EARP-EF No. 2018:24
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Rural households in many different contexts have been found to diversify their income sources allowing them to spread their risks and to smoothen consumption. Generating diversified incomes for a majority of the rural poor is an essential component of a successful rural development strategy. This paper identifies the determinants of income diversification among Rwandan households using unique panel data obtained from the Integrated Households Living Conditions Surveys of 2011 and 2014. It applies a binary logit panel model to a representative sample of 3,839 households across Rwanda controlling for latent household specific factors. It also conducts a Hausman test the results of which show that the random effect estimates were more efficient than fixed effect estimates (Chi2=20.73 and Prob>Chi2=0.1891). The results reveal that education, access to ICT and urban areas were among the most important factors that influenced livelihood diversification given that p <0.05. We also found that other measures of household specific factors were important (for example, the age and gender of the household head along with asset endowments). From these results, it is recommended that professional training, internet access through phones and wireless and urbanization should be enhanced so as to enable households to diversify their sources of income and thus improve food security for their family members.

An Analysis of Causality between Tea Exports and its Determinants in Rwanda
P. UWIMANA, C. MUGEMANGANGO, Mary KIPSAT, Timothy SULO and S. NSABIMANA
EARP-EF No. 2018:23
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Tea growing in Rwanda started in 1952 and by 2002 tea had become the country’s largest export item. However, an increase in tea farm land has been constrained by population growth, impacting the quantity of tea that the country produces. Tea exports are volatile and are influenced by the real effective exchange rate, incomes of major trading patterns, total investments as a proportion of GDP, tea world market prices and coffee world market prices. There is little recent empirical research on factors affecting Rwandan tea exports. This study assesses the causality between tea exports and their determinants in Rwanda. The study applies a causal research design and uses time series data collected from different sources. It uses the Granger causality test to test for predictability between exports and their factors. The research concludes that non-causality in the long term was possible because before the late 1980s Rwanda had an economy that was based on a pre-structural adjustment program when exports were under total control. Short-run causality was possible because after the 1980s, a decline in world tea prices may have led to an increase in exports as demand increased in the short run. What is needed now are more investments in tea factories, diversification of commodities that are exported, prioritizing forward selling or contracting and widening niche markets for tea products.

An Analysis of the Causative Factors of Trade Flows between Rwanda and its main Trading Partners
Marie C. UMUTESI
EARP-EF No. 2018:22
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Trade play an important role in Rwanda’s economy, influencing the level of its economic growth, balance of payments and employment. Rwanda has initiated several trade policy reforms aimed at promoting trade. Given the role of trade in the economy it is important to study the causative factors of trade in Rwanda and its main trading partners. This research examines the factors affecting Rwanda’s trade using a gravity model. Using the World Bank Development Indicators dataset and data from the National Bank of Rwanda (NBR), it finds that Rwanda’s GDP, its trading partners’ GDP, population growth and real exchange rate had positive and significant effects on Rwanda’s trade. The study also shows that Rwanda’s population growth is not significant, while distance has a negative effect on Rwanda’s trade. Having common borders, an official common language and the formation of EAC are not significant. Based on these results the study gives a number of recommendations for improving Rwanda’s trade.

Measurement and Analysis of Multidimensional Well-being in Rwanda
Almas HESHMATİ, Masoomeh RASHİDGHALAM and Pia NİLSSON
EARP-EF No. 2018:21
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The well-being of families and their children is given high priority in development goals. Children’s well-being in Africa is important since the growing number of children is the greatest resource of this continent. Rwanda was one of the first countries that ratified the Convention on the Rights of the Child. The country, despite its very low GDP per capita, also has one of the best child well-being indicators in Africa. In the recent past the country has also had two important achievements: protection of children by establishing the National Commission for Children and launching a Strategy for National Child Care Reform. The measures aim to protect children’s rights and integrate children into families that are supported to provide needed care to them. These achievements are largely the result of strong laws and policies many of which have been developed with support from UNICEF. Investments in children’s well-being will help in addressing many persistent difficulties that society may have to face in the future. What happens during the early years is of crucial importance for every child’s development. This period offers great opportunities, but children are also vulnerable to negative influences. The objective of this research is to estimate multidimensional well-being of children and their families in Rwanda. The aim is to compute an overall well-being index decomposed into its underlying main components. The households are ranked by the level of well-being and by various household and community characteristics. The results shed light on the state and changes in the well-being of children and their families in Rwanda indicating which provinces and districts offer relatively better conditions for them. This can serve as a model for public policies aimed at improving general well-being in the country.

Measurement and Analysis of Poverty in Rwanda
Almas HESHMATI and Masoomeh RASHIDGHALAM
EARP-EF No. 2018:20
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This study examines the extent of poverty in different provinces and districts in Rwanda using both consumption and income per capita. It also looks at the determinants of household poverty and focuses on four categories for studying the determinants of poverty in the country. The income based study of poverty is based on information from the household survey and uses 14,810 observations in 2006, 2009 and 2012, while the consumption based poverty analysis is based on 7498 observations from 2012 database. The results is found to be very sensitive to the cdefinition of poverty line and use of income or consumption in analysis of poverty. This study shows that older household heads and female-headed households are more likely to be poor. Also living in rural and semi-urban areas increases the probability of being poor. Asset ownership (having a garden, cash crops, and banana trees) decreases the probability of being poor. The findings of this study serve as evidence for policymakers to employ poverty alleviation policies. Increasing investments in physical infrastructure, creating jobs for female-headed households and improving educational levels of household heads should also be focused on.

Good Governance, Economic Growth and Development: Insights from a 22-Year Econometric Analysis in Rwanda
Jean-Baptiste HABYARIMANA and Bertrand DUSHIMAYEZU
EARP-EF No. 2018:19
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This paper uses two techniques -- scatter and line plots and ordinary least squares -- to investigate how governance is related to economic growth and development. It simulates Benhabib and Spiegel’s (1994) alternative model for growth and calibrates it with the estimated shock in human capital development to investigate the spillover effects of lack of good governance on economic growth and development. This paper demonstrates the existence of a pro-cyclic relationship between governance and economic growth and development. It uncovers the existence of a counter-cyclic relationship between a shock in human capital development and growth. It suggests that, ceteris paribus, the level of economic development and growth not only depends on fixed capital formation and the labour force, but also on good governance. Thus, this paper demonstrates that significantly good economic performance, further economic growth and development in Rwanda will be driven by good governance in the country. It argues that the most important pre-requisites for sustainable growth and development are strong politico-socio-economic policies and strategies to develop appropriate ‘home grown solutions’ and channelizing them. It also suggests that taking lessons from Rwanda's good governance system and replicating it in other African countries can lead to political stability and sustainable growth and development elsewhere on the continent, which is the most pressing issue in Africa.

An Applied Macro-econometric Model for Rwanda
Alemayehu GEDA and Addis YIMER
EARP-EF No. 2018:18
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This study develops a macro-econometric model for a typical supply constrained African economy aimed at developing a theoretical and empirical template for such policy tools that are increasingly being demanded by African ministries of finance and central banks. We concretize it by building a macro-econometric model for Rwanda. The Rwanda macro-econometric model has 107 equations of which 72 are endogenous. In addition, we also build a supplementary ARIMA based model with 33 equations for the exogenous variable to make the model useful for forecasting. We disaggregate the fiscal, balance of payments and money supply blocks of the model to offer an adequate picture of the macro-economy. We also do an econometric estimation of the core behavioral equations of the model using the error correction modeling approach for the period 1960-2009. The model can be easily extended further to the support budgeting, forecasting and macroeconomic policy analyses in the relevant ministries and central banks in Africa. We successfully solve the model and reproduce historical values from 1999 to 2009 and forecast major macro-variables for 2010 to 2015. We also use the model to conduct a policy and external shock related simulation exercise that is important for policymakers.

An Evaluation of Rwanda Vision 2020’s Achievements
Pereez NIMUSIMA, Nathan KARUHANGA and Dative MUKARUTESI
EARP-EF No. 2018:17
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This paper evaluates the extent to which Rwanda has achieved its Vision 2020 targets. To address this, it reviews the six-pillar composite indicators -- good governance and a capable state; human resource development and a knowledge based economy; a private sector-led economy; infrastructure development; productive and market oriented agriculture; and regional and international economic integration. It uses descriptive and analytical approaches in analyzing the data and also in its reporting. It also reviews different theories that explain the development discourse and contrasts these with Rwanda’ growth path since 1994. Further, it also reviews short-term country development strategies (PRSP, EDPRS 1&2, the seven-year government program (7YGP) and imihigo (annual performance targets).

Farm-Heterogeneity and Persistent and Transient Productive Efficiencies in Ethiopia’s Smallholder Cereal Farming
Oumer BERISSO
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
Eric UWITONZE and Almas HESHMATI
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
Atnafu GEBREMESKEL
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
Atnafu GEBREMESKEL
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
Emmanuel MUSHIMIYIMANA
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
Atnafu GEBREMESKEL
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
Almas HESHMATI and Masoomeh RASHIDGHALAM
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
Pia NILSSON
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
Joseph NDAGIJIMANA, Tharcisse NZASINGIZIMANA and Almas HESHMATI
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
Abdou MUSONERA and Almas HESHMATI
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 2018-02-21






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