◄UNIT 6: ECONOMIC INTEGRATIONUNIT 8:ECONOMIC GROWTH AND ECONOMIC DEVELOPMENT►

UNIT 7: GLOBALISATION

  • UNIT 7: GLOBALISATION

    Unit Competency: 

    Analyse the impact of globalisation on Rwandan economy.

    Introductory activity

    Since ancient times, humans have sought distant places to settle, produce and 
    exchange goods enabled by improvements in technology and transportation. But 
    not until the 19th century did global integration take off. Following centuries of 
    European colonization and trade activity, that first “wave” of globalization was 
    propelled by steamships, railroads, the telegraph, and other breakthroughs, and 
    also by increasing economic cooperation among countries. The globalization 
    trend eventually waned and crashed in the catastrophe of World War I, followed 
    by postwar protectionism, the Great Depression, and World War II. After World 
    War II in the mid-1940s, the United States led efforts to revive international 
    trade and investment under negotiated ground rules, starting a second wave of 
    globalization, which remains ongoing, though buffeted by periodic downturns 

    and mounting political scrutiny. Source: https://www.piie.com

    Analyse the above extract, base on it to carry out research and;
    a) Explain what you understand by the term globalisation. 

    b) Describe what has sparked off globalisation in the modern world?

    7.1: Meaning and forms of Globalization:

    Activity 7.1

    Base on the figures above to;

    a) Explain what you understand by the term globalisation

    b) Identify and explain the forms of globalisation portrayed.

    c) Describe other different forms which globalisation can take, apart 

    from those forms identified above,

    7.1.1: Meaning of Globalisation:

    Globalisation is the growing interdependence of the world’s economies, 
    cultures, and populations, brought about by cross-border trade in goods 
    and services, technology, and flows of investment, people, and information. 
    Economically, globalization involves goods, services, the economic resources 
    of capital, technology, and data. With the increased global interactions comes 
    the growth of international trade, ideas, and culture. Globalization is primarily an 
    economic process of interaction and integration that’s associated with social 
    and cultural aspects. Current globalization trends can be largely accounted for 
    by developed economies integrating with less developed economies by means 
    of foreign direct investment, the reduction of trade barriers as well as other 

    economic reforms and, in many cases, immigration. 

    7.1.2: Forms of Globalisation:

    Globalisation may take the following forms:

    1. Economic Globalisation

    Economic globalization is the increasing economic interdependence of national 
    economies across the world through a rapid increase in cross-border movement 
    of goods, services, technology, and capital. Economic globalization involves 
    the process of increasing economic integration between countries, leading 
    to the emergence of a global marketplace or a single world market. It also 
    involves worldwide economic system that permits easy movement of goods, 
    production, capital, and resources. No national economy is an island now. 
    To varying degrees, national economies influence one another. One country 
    which is capital-rich invests in another country which is poor. One who has 
    better technologies sells these to others who lack such technologies. Example: 

    Multinational corporations.

    2. Technological Globalisation.

    This is the connection between nations through technology such as television, 
    radio, telephones, internet, etc. This was traditionally available only to the rich 
    but is now far more available to the poor. Much less infrastructure is needed 
    now. Technological globalization makes it possible for countries to connect in 
    other ways, such as financially through sending loved ones money across the 

    globe or culturally by watching movies from other nations.

    3. Political Globalisation.

    Political globalization refers to the growth of the worldwide political system, both 
    in size and complexity. It includes national governments, their governmental and 
    intergovernmental organizations as well as government-independent elements 
    of global civil society such as international non-governmental organizations and 
    social movement organizations. It is the expansion of a global political system, 
    and its institutions, in which inter-regional transactions e.g. trade are managed. 
    Political cooperation between different countries is a form of globalization that 
    is used to prevent and manage conflict. For example, global organizations such 
    as the United Nations and the World Trade Organization were created to diffuse 

    political issues and maintain order on an international scale.

    4. Cultural Globalisation.

    Cultural globalization refers to the transmission of ideas, meanings, and values 
    around the world in such a way as to extend and intensify social relations. It involves 
    the merging or “watering down” of the world’s cultures e.g. food, entertainment, 
    language, etc. This process is marked by the common consumption of cultures 
    that have been diffused by the Internet, popular culture media, and international 
    travel. Cultural globalisation has been facilitated by the information revolution, 
    the spread of satellite communication, telecommunication networks, information 
    technology and the Internet etc. This global flow of ideas, knowledge and 
    values is likely to flatten out cultural differences between nations, regions and 

    individuals.

    5. Financial globalisation

    This is the interconnection of the world’s financial systems e.g. stock markets, 

    more of a connection between large cities than of nations.

    6. Ecological Globalisation

    This refers to seeing the Earth as a single ecosystem rather than a collection 
    of separate ecological systems because so many problems are global in nature 
    e.g. International treaties to deal with environmental issues like biodiversity, 

    climate change or the ozone layer, wildlife reserves that span several countries.

    7. Sociological Globalisation

    This is a growing belief that we are all global citizens and should all be held 
    to the same standards and have the same rights e.g. the growing international 
    ideas that capital punishment is immoral and that women should have all the 

    same rights as men.

    8. Environmental globalisation:

    This refers to the internationally coordinated practices and regulations (often in 
    the form of international treaties) regarding environmental protection. An example 
    of environmental globalization would be the series of International Tropical 
    Timber Agreement treaties (1983, 1994, 2006), establishing International 
    Tropical Timber Organization and promoting sustainable management of tropical 
    forests. Environmental globalization is usually supported by non-governmental 
    organizations and governments of developed countries, but opposed by 
    governments of developing countries which see pro-environmental initiatives 
    as hindering their economic development. Environmental globalization is 
    related to economic globalization, as economic development on a global scale 
    has environmental impacts on such scale, which is of concern to numerous 

    organizations and individuals.

    9. Military globalisation:

    Military globalization is defined by David Held as “the process which embodies 
    the growing extensity and intensity of military relations among the political units 
    of the world system. It reflects both the expanding network of worldwide military 
    ties and relations, as well as the impact of key military technological innovations 
    (from steamships to satellites), which over time, have reconstituted the world 
    into a single geostrategic space. Military globalization implies firmer integration 

    of armed forces around the world into the global military system.

    Application Activity 7.1.

    What indicates that the world is globalized?

    7.1.3: Causes and effects of Globalisation:

    Activity 7.2

    a) From the image above, categorize the different factors that have given 

    rise to globalisation.

    b) Other than the above mentioned factors, carry out research about 
    globalisation, and cite what factors have given rise to globalisation in the 

    recent past.

    7.1.3.1: Causes of Globalisation: 

    Globalization is driven by various new development and gradual changes in 
    the world economy. Generally, organizations go global for expanding their 
    markets and increasing their sales and profits. The process of globalization has 
    accelerated in the recent past due to a variety of factors, among which include 

    the following;

    - Improved transport, making global travel easier. As transportation 
    technology improved, travel time and costs decreased dramatically between 
    the 18th and early 20th century. Today, modern aviation has made long-distance 
    transportation and movement of people and goods across the 

    globe, quick and affordable. 

    - Increased rise in International education: More and more students 
    are seeking higher education in foreign countries and many international 
    students now consider overseas study a stepping-stone to permanent 
    residency within a country. The contributions that foreign students make to 
    host nation economies, both culturally and financially has encouraged major 
    players to implement further initiatives to facilitate the arrival and integration 
    of overseas students, including substantial amendments to immigration and 

    visa policies and procedures, hence promoting globalisation.

    - Transnational marriages: There has been a growing rise in marriages 
    between people from different countries thus spearheading globalization. 
    A growing number of people have ties to networks of people and places 
    across the globe, rather than to a current geographic location, thus, people 
    are increasingly marrying across national boundaries making it easier to 
    travel to different parts of the world since it’s become “a single village”, 

    hence globalisation. 

    - Improved technology: Technological advances allows states to learn 
    of others’ existence and this makes it easier to communicate and share 
    information around the world. E.g. through internet. Also, the advancement 
    in technology and improved communication network has facilitated the 
    exchange of goods and services, resources, and ideas, irrespective of 
    geographical location. In this way, advanced technologies have led to 

    economic globalization.

    - Globalization has been spread by Global journalism which provides 
    massive information and relies on the internet to interact, “makes it into an 
    everyday routine to investigate how people and their actions, practices, 

    problems, life conditions etc. in different parts of the world are interrelated.

    - Increased inter-dependency, stability, and regularity among world 
    economies    . If states were dependent on their own production and 
    resources to work then there is no way for any state to be mutually affected 
    by the other. Therefore, interdependence is one of the driving forces behind 

    global connections and trade.

    - The rate of globalization has also increased under the framework of 
    the General Agreement on Tariffs and Trade and the World Trade 
    Organization,     in which countries gradually cut down trade barriers and 
    opened up their current accounts and capital accounts. This recent boom 
    has been largely supported by developed economies integrating with 
    developing countries through foreign direct investment, lowering costs of 
    doing business, the reduction of trade barriers, and in many cases cross-

    border migration.

    - Growth of multinational companies with a global presence in many 

    different economies.

    - Growth of global trading blocs which have reduced national barriers. 

    (e.g. European Union, NAFTA, ASEAN)

    - Improved mobility of capital. In past few decades there has been a 
    general reduction in capital barriers, making it easier for capital to flow 
    between different economies. This has increased the ability for firms to 
    receive finance. It has also increased the global interconnectedness of 

    global financial markets.

    - Increased mobility of labour. People are more willing to move between 
    different countries in search for work. Global trade remittances now play a 

    large role in transfers from developed countries to developing countries.

    - Increase in Consumer Demand acts as a main driver to facilitate 
    globalization. Over the years, with increase in the level of income and standard 
    of living, the demand of consumers for various products has also increased. 
    Apart from this, nowadays, consumers are well aware about products and 
    services available in other countries, which impel many organizations to work 
    in association with foreign players for catering to the needs of the domestic 

    market.

    - High Competition: Organizations generally strive hard to grain competitive 
    edge in the market. The frequent increase in competition in the domestic 
    market compels organizations to go global. Thus, various organizations 
    enter other countries (for selling goods and services) to expand their market 

    share.

    - Reduction in Cross-trade Barriers: Gradual relief in the cross-border 
    trade restrictions by most governments has induced free trade, which, in 

    turn, has increased the growth rate globalisation.

    7.1.3.2: Effects of Globalisation:

    Activity 7.3

    From the image above, 

    a) Identify the positive and negative impact of globalisation.

    b) Discuss other effects of globalisation on world economies not mentioned 

    in the image above. 

    The aim of globalization is to benefit individual economies around the world 
    by making markets more efficient, increasing competition, limiting military 
    conflicts, and spreading wealth more equally. The wide-ranging effects of 
    globalization are complex and politically charged. As with major technological 
    advances, globalization benefits society as a whole, while harming certain 
    groups. Understanding the relative costs and benefits can pave the way for 
    alleviating problems while sustaining the wider payoffs. Therefore, the effects of 

    globalisation to global countries may include among others the following.

    Positive effects of globalisation.

    Globalisation can create new opportunities, new ideas, and open new markets 
    that an entrepreneur may have not had in their home country. As a result, there 

    are a number of positives associated with globalisation: 

    - Inward investment by Trans-National corporations (TNCs) has helped 

    countries by providing new jobs and skills for local people.

    - Foreign direct investment (FDI) have increased at a much greater rate than 
    the growth in world trade, helping boost technology transfer, industrial 
    restructuring, and the growth of global companies. They, therefore, have 
    brought wealth and foreign currency to local economies as they buy
    local resources, products and services. The extra money created by this 
    investment has been spent on education, health and infrastructure for 
    development purposes.
    local resources, products and services. The extra money created by this 
    investment has been spent on education, health and infrastructure for 

    development purposes.

    - It has enabled the sharing of ideas, experiences and lifestyles of people and 
    cultures. People have experienced foods and other products not previously 

    available in their countries.

    - Increased competition from globalization has helped stimulate new 
    technology development, particularly with the growth in FDI, which has 

    helped improve economic output by making processes more efficient.

    - Globalisation has increased awareness of events in far-away parts of the 
    world. This has helped to make people more aware of global issues such 
    as deforestation and global warming and alerted them to the need for 

    sustainable development

    - Globalization has tended to bring people into contact with foreign people 
    and cultures. This has reduced the issue of xenophobia and its negative 

    effects.

    - Open world trade has increased economic growth and raised living 

    standards of people in different countries across the world.

    - Globalization enables large companies to realize economies of scale that 
    reduce costs and prices, which in turn supports further economic growth, 
    although this can hurt many small businesses attempting to compete 

    domestically.

    - Economic globalization has given governments of developing nation’s 
    access to foreign lending. When these funds are used on infrastructure 
    including roads, health care, education, and social services, the standard 
    of living in the country increases. If the money is used only selectively, 

    however, not all citizens will participate in the benefits.

    - Globalization has led to free trade between countries. This is one of its 
    largest benefits to developing nations. Homegrown industries see trade 
    barriers fall and have access to a much wider international market. The 
    growth this generates, allows companies to develop new technologies and 

    produce new products and services.

    - It has allowed businesses in less industrialized countries to become part 
    of international production networks and supply chains that are the main 

    conduits of trade.

    - Globalisation has led to more access to capital flows, technology, human 

    capital, cheaper imports and larger export markets.

    - Access to new markets; It creates greater opportunities for firms in less 
    industrialized countries to tap into more and larger markets around the 

    world

    - Reduced tariff barriers encouraging global trade. Often this has occurred 

    through the support of the WTO.

    - Globalisation has helped build a global economic order governed by 
    mutually accepted rules and overseen by multilateral institutions. This 
    has created a better world with countries seeking to cooperate with one 
    another to promote prosperity and peace. Free trade and the rule of law 
    being the mainstays of the system, have helped to prevent most economic 
    disputes from escalating into larger conflicts. E.g. International Monetary 
    Fund (IMF), World Bank (WB), United Nations (UN), North Atlantic Treaty 

    Organisation (NATO), World Trade Organisation (WTO) etc.

    - Globalization encourages each country to specialize in what it produces 
    best using the least amount of resources, known as comparative 
    advantage. This concept makes production more efficient, promotes 
    economic growth, and lowers prices of goods and services, making 

    them more affordable especially for lower-income households.

    - Larger markets enable companies to reach more customers and get a 
    higher return on the fixed costs of doing business, like building factories 
    or conducting research. Technology firms have taken special advantage 

    of their innovations this way.

    - Competition from abroad drives different firms in different countries 
    to improve their products. Consumers have better products and more 

    choices as a result.

    - Expanded trade spurs the spread of technology, innovation, and the 
    communication of ideas. The best ideas from market leaders spread 

    more easily globally.

    - Better-paying positions have opened up in manufactured exports, 
    especially in high-tech areas, such as computers, chemicals, and 
    transportation equipment and other high-skill work, notably in business 

    services, such as finance and real estate.

    - Globalization has helped narrow inequality between the poorest and 
    richest people in the world. By outsourcing their services to developing 
    countries, Transnational companies have saved money and changed 
    people’s lives. Because of this, poverty rates have declined worldwide 

    over the past decades.

    - One of the primary advantages of globalization is the free trade of goods 
    and resources. For instance, a country that specializes in motor vehicles 
    will produce cars and accessories in a location that achieves the lowest 
    costs possible, and sell them on both local and foreign markets. This 
    means that people living in other countries will be able to purchase these 
    vehicles for less. At the same time, they will have access to a wider range 

    of brands and models.

    - Globalization has allowed people to relocate to wealthier countries and 
    start their own business or find work. This has led to higher incomes and 
    more opportunities in life. Additionally, migrants have always sent money 

    home without paying exorbitant fees.

    - The free movement of information and technology has enabled trade 
    unions to fight for workers’ rights worldwide. As new policies and 
    regulations were enforced, labor rights increased. Additionally, sensitive 
    issues, such as equal pay and gender equity, are becoming less and 

    less prevalent.

    - Multinational corporations are constantly expanding and hiring people in 
    the countries where they operate. Others implement exchange programs 
    to offer their employees the chance to work abroad. This further 

    accelerates globalization and promotes economic growth.

    Negative effects of globalisation

    No matter how much economists are quick to commend the universal benefits 
    of globalization, some politicians and other economist demonize globalization 
    as a force that takes away domestic sovereignty of all sorts. These conflicting 
    viewpoints have created a turbulence of opinions and policies across developed 
    countries that range from extreme protectionism through trade barriers, like 
    President Trump’s example, to complete openness. Therefore, like everything 

    else, globalization has its drawbacks and the following are some of them.

    -The free trade of goods, services and information set the world economy into 
    a cycle of income and employment growth. However, This, has led to declining 

    money flows and tight credit across local and national economies.

    -Furthermore, employees in developed countries are losing their jobs due to pay 
    cuts. More and more companies are choosing to outsource work and export 
    jobs as a means to keep the costs low, and this has led to unemployment in 

    most countries.

    -Large enterprises are now able to exploit tax havens worldwide, which has 

    affected the local economy.

    -The growth of international trade is worsening income inequalities, both 
    between and within industrialized and less industrialized nations.
    -The practice of outsourcing for cheaper labor is exploitative and widens the 

    gap between the world’s rich and the world’s poor.

    -Globalization has led to the interdependence between nations, which has 
    caused regional or global instabilities where local economic fluctuations have 

    ended up impacting a large number of countries relying on them.

    -Political globalization has led to declining importance of the nation-state and 

    the rise of other actors on the political scene.

    -Globalization has often been criticized for taking away jobs from domestic 
    companies and workers. Domestic industries go out of business because 
    imports from other countries drive down prices, even if consumption increases. 
    Small companies have found it difficult to compete and thus shut down, 
    leaving workers unemployed, while the larger industries have experienced a 

    significant protracted decline. 

    -In addition, it has contributed to job displacement especially low-wage workers 
    in certain regions. Many of them other than facing lower earnings have been 
    dropped out of the workforce. This is due to use of labor-saving technologies, 

    like automated machines and artificial intelligence.

    -Globalization has led to the increase in wages for workers, which has hurt 
    corporate profitability. For example, rich countries which have a high comparative 
    advantage in developing software, have driven up the price of software 
    engineers around the world, thus making it difficult for foreign companies to 

    compete in the market.

    -The benefits of globalization have been unfairly sloped towards rich nations or 
    individuals, creating greater inequalities and leading to potential conflicts both 

    nationally and internationally as a result.

    -Globalisation has increased Capital flight especially in developing where 
    assets or money rapidly flow out because of there is increase in unfavorable 
    financial conditions such as taxes, tariffs, labor costs, government debt and 

    capital controls as a result of sharp drop in the exchange rate.

    -Globalisation has moved taxation away from corporations, and onto individual 
    citizens. Corporations have the ability to move to locations where the tax rate is 
    lowest. Individual citizens have much less ability to make such a change. Also, 
    with today’s lack of jobs, each community competes with other communities 

    with respect to how many tax breaks it can give to prospective employers. 

    -Globalisation has set up a currency “race to the bottom,” with each country 
    trying to get an export advantage by dropping the value of its currency. Because 
    of the competitive nature of the world economy, each country needs to sell 
    its goods and services at as low a price as possible. This has been done 
    in various ways like paying its workers lower wages; allowing more pollution; 
    using cheaper more polluting fuels; or debase the currency by Quantitative 
    Easing (also known as “printing money,”) in the hope that this will produce 

    inflation and lower the value of the currency relative to other currencies. 

    -Globalisation has encouraged dependence on other countries for essential 
    goods and services. With globalization, goods can often be obtained cheaply 
    from elsewhere. Countries have come to believe that there is no point in 
    producing their own food and clothes which they can obtain cheaply from other 
    countries. It has become easy to depend on imports and specialize in something 

    else and become dependent on other countries for essential commodities. 

    -Globalisation ties countries together, so that if one country collapses, the 
    collapse is likely to ripple through the system, pulling many other countries with 

    it. This is because countries are increasingly interdependent.

    -Cultural uniqueness has been lost in favor of homogenization and a “universal 
    culture” that draws heavily from the western culture. As a result of globalisation, 
    the values and norms of developed countries are gradually rooted in developing 
    countries. This has led to the growth of a monoculture - the culture of the north 
    (developed countries) being imposed on the South (developing countries). This 

    has led to erosion of the cultures and loss of identity of developing countries. 

    -Global commerce is increasingly dominated by transnational corporations 
    which seek to maximize profits without regard for the development needs of 

    individual countries or the local populations

    -Competition among developing countries to attract foreign investment leads 
    to a “race to the bottom” in which countries dangerously lower environmental 

    standards.

    Application activity 7.2

    Analyse the impact of globalisation on Rwanda’s economy.

    7.2: Multinational corporations (MNCs)

    Activity 7.4

    Analyse the images above and answer the questions that follow.

    i) What activities does each photo portray?

    ii) Where do they originate from?

    iii)Identify different other companies that operate in Rwanda that don’t 
    belong to such activities named above and which are not of Rwandan 

    origin.

    iv)How have they impacted Rwanda’s development trend?

    7.2.1: Meaning and examples of MNCs.

    A multinational corporation or worldwide enterprise is an enterprise
    operating in several countries but managed from one (home) country. OR it is 
    an organization that owns or controls production of goods or services in one or 
    more countries other than their home country. It can also be referred to as an 
    international corporation, a “transnational corporation”, or a stateless 
    corporation.     Generally, any company or group that derives a quarter of its 
    revenue from operations outside of its home country is considered a multinational 

    corporation.

    A multinational corporation is usually a large corporation which produces or 

    sells goods or services in various countries. MNCs can get involved in;

    - Importing and exporting goods and services

    - Making significant investments in a foreign country

    - Buying and selling licenses in foreign markets

    - Engaging in contract manufacturing i.e. permitting a local manufacturer in a 

    foreign country to produce their products

    - Opening manufacturing facilities or assembly operations in foreign countries

    Foreign Multinational Corporations in Rwanda

    - Korea Telecom Rwanda Networks (KTRN)- the wholesaler of fourth

    generation long-term evolution (4G LTE)

    - Liquid Telecom- independent data, voice and IP provider and supplier of 
    fibre optic, satellite and international carrier services to Africa’s largest 

    mobile network operators, ISPs and businesses of all sizes.

    - Petroleum companies like Kobil Petroleum Rwanda, Engen etc.

    - Mobile network providers like MTN and Airtel-Rwanda

    - Financial institutions like Eco Bank, GT Bank, Bank of Africa, I &M bank etc.

    - Construction companies like SMEC Rwanda, NITSAL INTERNATIONAL, 

    Roko Construction Limited, STRABAG / ZÜBLIN INTERNATIONAL.

    7.2.2: Effects of Multinational Corporations

    Positive effects

    - MNCs bridge the forex gap in developing countries by increasing forex inflow.

    - They increase employment opportunities for citizens of the host countries 

    since they operate on large scales.

    - They close the investment gap through forex investment abroad.

    - They lead to improvement in domestic technology through transfer of superior 

    technology to developing countries based on research and development.

    - MNCs produce more output especially processed or manufactured which 

    increase exportation of manufactured goods hence more forex to developing.

    - MNCs promote capital accumulation in developing countries through transfer 

    of capital and building infrastructure.

    - MNCs produce better quality products which help to improve standards of 

    living of people in the society.

    - They bring new marketing techniques developing countries markets research 

    and promotional methods which encourage competition and efficiency. 

    - They provide revenue to the government through taxes imposed on activities 

    of the MNCs.

    - They help to train labor in the management basic skills and entrepreneur 

    ability in developing countries.

    - MNCs make a lot of profits which are ploughed back leading to the expansion 

    of the economy there by promoting economic growth.

    - They under take high risks and can invest in long term projects like mining 
    plantation and agricultural industries that bring about rapid economic growth 

    and development.

    - They are financially strong and hence provide large and cheap capital to 

    developing countries by way of direct investment.

    - They increase infrastructural development through construction of 

    telecommunication etc.

    - MNCs increase the exploitation of domestic resources which increase volume 

    of productivity hence increasing export exchange.


    - They p    romote international cooperation through consortiums hence increasing 

    the volume of trade.

    - They encourage competition which leads to efficiency and better-quality 

    products.

    - They help in filling the skilled manpower gap through exportation of expatriates 

    or trained personnel to the recipient countries.

    Negative effects of MNCs

    -MNCs repatriate their profits to their mother countries which lead to resources 

    outflow from developing countries thus disabling their development potentials.

    -They are given tax exemption and holidays which reduce net government 

    revenue from them.

    -MNCs usually use capital intensive technology and therefore may not help 
    to reduce their problems of unemployment in developing countries since are 

    labor surplus economies.

    -They create social costs like quick exhaustion of natural resources, 

    environmental degradation etc. since they operate on large scale.

    -MNCs influence internal policies of developing countries by bribing the 
    legislature for example offering employment to the relatives of politicians in 
    their companies and at times they subvert domestic fiscal policies which result 

    into low standards of living.

    -MNCs accelerate regional or sector imbalances e.g. urban and rural areas 
    since they mostly set up their production activities in urban areas where 

    infrastructure is already developed.

    -MNCs cause income inequalities because they reserve top jobs for their 
    national who are highly paid and low paying jobs to the national of investment 

    countries.

    -They promote external dependency of host countries on the countries where 

    they originate.

    -They reduce domestic initiative in technological and manpower development.

    -MNCs can bring about discontent and unrest among workers employed by 
    the government and indigenous firms due to the wage differentials between 

    the workers in MNCs and other workers.

    Application activity 7.3

    With specific examples of multinational financial institutions that operate 
    in Rwanda, assess their contribution towards the development process of 

    your country. 

    7.3: Foreign direct investments (FDIs)

    Activity 7.5

    Analyse the photos above and answer the questions that follow;

    a) Identify the type of activities they deal in.

    b) State their countries of origin.

    c) What economic term is given to such companies?

    d) Cite different other examples of companies that are not of Rwandan origin that 

    extend their services to Rwanda.

    e) Analyse the contribution of such companies to the development process of 

    Rwanda.

    f) How do you think Rwanda has been able to attract these investments in her 

    economy?

    7.3.1: Meaning and examples of Foreign Direct 

    Investments in Rwanda.

    Foreign direct investments are the net inflows of investment to acquire a 
    lasting management interest in an enterprise operating in an economy other than 
    that of the investor. It refers to direct investment equity flows in the reporting 
    economy. It is the sum of equity capital, reinvestment of earnings, and other 
    capital. Direct investment is a category of cross-border investment associated 
    with a resident in one economy having control or a significant degree of influence 
    on the management of an enterprise that is resident in another economy. Direct 
    foreign investment involves the transfer of productive resources or capital by 
    foreign individuals, companies and MNCs to operate in an economy other than 

    that of the investor. 

    Examples of FDIs in Rwanda

    Some of the registered foreign direct investments in Rwanda include; Movit 
    Uganda Ltd, JKK International from Dubai, which started a construction 
    company; Mukwano Industries, Roofing Uganda, China Electronics, Lifan 
    moto taxi-Chinese, ALINK Technologies, and Yvonne Exclusive Design, an 
    upmarket fashion store, Egyptian House of Kitchenware, which opened a shop 
    in Kimironko – Gasabo district for general trading, and Tanzania’s Dodoma that 

    makes mattresses.

    7.3.2: Advantages of Foreign Direct Investments

    - They increase the stock of capital in LDCs thus help break the cycle of poverty 

    which enables LDCs to achieve rapid economic growth.

    - Provide managerial, administrative and technical personnel, new technology, 
    research and innovation in LDCs. this help to improve LDCs technics of 

    production hence more employment opportunities.

    - Increase government revenue from taxes imposed on production activities 

    under taken by foreign investments.

    - Increase productivity and efficiency due to high levels of technology used 
    which leads to more export earnings and improvement in the Balance of 

    payment position.

    - Encourages entrepreneurial development in the country due to competition 
    thus would lead to the citizens of that country to invest in their country hence 

    more foreign exchange earnings.

    - Create employment opportunities in the recipient countries.

    - Increase savings thus closing the savings investment gap in LDCs.

    - Due to the inflow capital assets, foreign investment promotes capital 

    accumulation in LDCs.

    - Help in the exploitation of idle resources in LDCs thus promoting economic 

    growth and development.

    - Increase consumer choice due to production of wide variety of quality products 

    due massive productions.

    - Increase the exploitation of domestic infrastructure e.g. transport facilities, 

    communication facilities etc.

    - It accelerates industrial growth through manufacturing and provision of 

    services.

    - Promotes international cooperation hence increase the volume of imports and 

    exports.

    - Local firms become efficient through competition.

    - It fills the manpower gap through importation of expatriates’ manpower. 

    7.3.3: Disadvantages Foreign Direct Investments

    -It leads to profit repatriation and capital outflow thus worsening the balance of 

    payment deficits in LDCs.

    -Increased government expenditure in form of provision of basic facilities like 
    land, power and other basic facilities as well as tax concessions, tax holidays, 

    subsidized inputs etc.

    -Cause income inequality in the recipient countries because top posts are 
    reserved for their national and pay them very highly while citizens of the 

    recipients’ country occupy low status and low paying posts.

    -Foreign investors at times exert pressure on the government and may influence 
    the decision made by the government of the recipient country which brings 

    about dependency and of autonomy in the recipient country.

    -They bring about instabilities in the recipient country due to re-allocation of 

    their investments into other countries.

    -Foreign countries use capital intensive technology which creates technological 

    unemployment thus may not help in solving the problem of unemployment.

    -Increase demonstration effect in the recipient country due to increased 
    number of foreigners who impose life style of developed countries in LDCs 

    thus starting copying the consumption habits and lifestyle of the foreigners.

    -Most of the private foreign investments are urban based and this creates the 

    problems of rural urban migration and its negative effects.

    -It leads to loss of government revenue through tax holidays, concessions etc.

    -Causes dumping through importation of outside products or low-quality 

    equipment. 

    -May lead to loss of markets of products from indigenous enterprises.

    -May lead to irrational and exhaustion of domestic resources.

    7.3.4: Ways of attracting foreign investors in Rwanda.

    The Government of Rwanda (GoR) understands that private sector development 
    is critical if Rwanda is to achieve its aim to reach middle-income status by 
    2020, and reduce the country’s reliance on foreign aid. Over the past decade, 
    the Government of Rwanda has undertaken a series of pro-investment policy 
    reforms intended to improve the investment climate, expand trade in products 

    and services, and increase levels of foreign direct investment. These include;

    -In 2006, the Government of Rwanda consolidated multiple investment-related 
    government agencies, including the Office of Tourism and National Parks, 
    and the Rwanda Investment and Export Promotion Agency, to establish the 
    Rwanda Development Board (RDB), which serves today as the country’s 

    chief investment promotion agency.

    -There is no difficulty obtaining foreign exchange in Rwanda or transferring 
    funds associated with an investment into a usable currency and at a legal 
    market-clearing rate. In 1995, the government abandoned the dollar peg 
    and established a floating exchange rate regime, under which all lending and 
    deposit interest rates were liberalized. The central bank holds daily foreign 

    exchange sales freely accessed by commercial banks.

    -The government has maintained a high-profile anti-corruption effort and senior 
    leaders articulate a consistent message emphasizing that fighting corruption 
    is a key national goal. The government investigates corruption allegations 

    and generally prosecutes and punishes those found guilty.

    -Rwandan law provides permanent residence and access to land to investors 
    who deposit USD 500,000 in a commercial bank in the country for a minimum 
    of six months. There are neither statutory limits on foreign ownership or 
    control, nor any official economic or industrial strategy that discriminates 

    against foreign investors.

    -Rwanda is a stable country with low violent crime rates. A strong police and 
    military provide a security umbrella that minimizes potential criminal activity 

    and political disturbances.

    -Rwanda is a member of the East African Community (EAC), and participates 
    in a customs union that helps facilitate the movement of goods produced in 
    the region and allows EAC citizens with certain skills to work in any member 

    state.

    -Rwanda has also established a free trade zone outside the capital, Kigali, 
    which includes current and planned future communications infrastructure.
    Bonded warehouse facilities are now available both in and outside of Kigali 

    for use by businesses importing duty free materials.

    -RDB offers one of the fastest business registration processes in Africa: 
    new investors can register online at RDB’s website and receive approval 
    to operate in less than 24 hours, and the agency’s “one-stop shop” helps 

    foreign investors secure required approvals, certificates, and work permits.

    -The Government of Rwanda established the Privatization Secretariat and the 
    Rwanda Public Procurement Agency to ensure transparency in government 
    tenders and divestment of state-owned enterprises. Rwanda’s ranking in 
    Transparency International’s “Corruption Perception Index” has improved 
    significantly, falling from 102 in 2008, to 49 in 2013, the top ranked country 

    in eastern Africa.

    -The government reserves the right to expropriate property “in the public 
    interest” and “for qualified private investment” under the expropriation law 
    of 2007. The government and landowner negotiate compensation directly 
    depending on the importance of the investment and the size of the expropriated 
    property. RDB may facilitate expropriation in cases where the expropriation 

    is potentially controversial.

    -Rwanda is a signatory to the Convention on the Settlement of Investment 
    Disputes (ICSID) and African Trade Insurance Agency (ATI). ICSID seeks 
    to remove impediments to private investment posed by non-commercial 
    risks, while ATI covers risk against restrictions on import and export activities, 
    inconvertibility, expropriation, war, and civil disturbances. Rwanda is a 
    member of the East African Court of Justice for the settlement of disputes 
    arising from or pertaining to the East African Community (EAC). Rwanda has 

    also acceded to the 1958 New York Arbitration Convention.

    -Investors who demonstrate capacity to add value and invest in priority 
    sectors have generally enjoyed more tax and investment incentives, including 
    Value Added Tax (VAT) exemptions on all imported raw materials, 100 
    percent write-off on research and development costs, five-to-seven percent 
    reduction in corporate income tax for firms whose exports are worth at least 
    USD 3 million, duty exemption on equipment, and a favorable accelerated 
    rate of depreciation of 50 percent in the first year. The government also 
    offers grants and special access to credit to investors who develop in rural 

    areas

    -RDB has been successful in developing investment incentives and publicizing 
    investment opportunities abroad. Registered foreign investors have obtained 
    benefits in the past, including exemption from value-added tax and duties 

    when importing machinery, equipment, and raw materials

    -Protection of Property Rights; the law protects and facilitates acquisition and 
    disposition of all property rights. Investors involved in commercial agriculture 
    have leasehold titles and are able to secure property titles, if necessary. A 
    property registration and land titling effort, the result of a 2005 land law, was 

    completed in 2013.

    -The Government of Rwanda has implemented transparency of the regulatory 
    system; the government generally employs transparent policies and effective 
    laws to foster clear rules consistent with international norms. Institutions such 
    as the Rwanda Revenue Authority, the Ombudsman’s office, Rwanda Bureau 
    of Standards (RBS), the National Public Prosecutions Authority (NPPA), the 
    Rwanda Utilities Regulatory Agency, the Public Procurement Agency, and 

    the Privatization Secretariat all have clear rules and procedures.

    -Rwandan law allows private enterprises to compete with public enterprises 
    under the same terms and conditions with respect to access to markets, 
    credit, and other business operations. Since 2006, the government has 
    made an effort to privatize State-Owned Enterprises (SOEs), to reduce 
    the government’s non-controlling shares in private enterprises, and attract 
    FDI, especially in the information and communications, tourism, banking, and 

    agriculture sectors.

    -There is a growing awareness of corporate social responsibility (CSR), 
    but only a few companies – chiefly foreign-owned – have implemented 
    sustainable programs. In recognition of the firm’s strong commitment to 
    CSR, the U.S. Department of State awarded Sorwathe, a U.S.-owned tea 
    producer in Kinihira, Rwanda, the Secretary of State’s 2012 Award for 

    Corporate Excellence for Small and Medium Enterprises.

    -Rwanda is eligible for trade preferences under the African Growth and 
    Opportunity Act (AGOA), which the United States enacted to extend duty-free 
    and quota-free access to the U.S. market for nearly all textile and handicraft 
    goods produced in eligible beneficiary countries. The U.S. and Rwanda 
    signed a Trade and Investment Framework Agreement (TIFA) in 2006, and a 
    Bilateral Investment Treaty (BIT) in 2008. Rwanda has also signed bilateral 

    investment treaties with Germany (1967) and Belgium (1985).

    -The Export-Import Bank (EXIM) continues its program to ensure short-term 
    export credit transactions involving various payment terms, including open 
    accounts that cover the exports of consumer goods, services, commodities,
    and certain capital goods. Rwanda is a member of the Multilateral Investment 
    Guarantee Agency (MIGA) which issues guarantees against non-commercial 
    risks to enterprises that invest in member countries and the African Trade 

    Insurance Agency (ATI).

    -Rwanda attempts to adhere to International Labor Organization (ILO) 
    conventions protecting worker rights. Policies to protect workers in special 
    labor conditions exist, but enforcement remains inconsistent. The government 
    encourages, but does not require, on-the-job training and technology transfer 

    to local employees

    Application activity 7.4

    1. Examine the hindrances to Foreign Direct Investments in Rwanda?

    7.4: Global financial systems (GFS) and international 

    financial institutions (IFI)

    Activity 7.6

    Undertake a documentary research about Global financial systems and 

    institutions and share your views in class about.

    i) What global financial system and international financial institutions 

    mean..

    ii) What is the role of Global financial system? 

    iii) What are the components of Global financial system?

    7.4.1: Global Financial Systems and international financial 

    institution (IFI)

    The global financial system is the worldwide framework of legal agreements, 
    institutions, and both formal and informal economic actors that together 
    facilitate international flows of financial capital for purposes of investment and 
    trade financing. Since emerging in the late 19th century during the first modern 
    wave of economic globalization, its evolution is marked by the establishment of 
    central banks, multilateral treaties, and intergovernmental organizations aimed 
    at improving the transparency, regulation, and effectiveness of international 

    markets.

    While the global financial system is edging toward greater stability, governments 
    must deal with differing regional or national needs. Some nations are trying 
    to systematically discontinue unconventional monetary policies installed to 
    cultivate recovery, while others are expanding their scope and scale. Emerging 
    market policymakers face a challenge of precision as they must carefully institute 
    sustainable macroeconomic policies during extraordinary market sensitivity 
    without provoking investors to retreat their capital to stronger markets. Nations’ 
    inability to align interests and achieve international consensus on matters 
    such as banking regulation has perpetuated the risk of future global financial 

    catastrophes.

    The Global financial system has; 

    2 main functional components: 

    - The global capital market.

    - The foreign exchange market.

    There are two global institutions (Bretton woods institutions).

    - The world Bank.

    - The international monetary fund. (IMF)

    The global financial system main components

    An international financial institution (IFI) is a financial institution that 
    has been established (or chartered) by more than one country, and hence are 
    subjects of international law. Its owners or shareholders are generally national 
    governments, although other international institutions and other organizations 
    occasionally figure as shareholders. The best-known IFIs were established after 
    World War II to assist in the reconstruction of Europe and provide mechanisms 
    for international cooperation in managing the global financial system. They 

    include the World Bank, the IMF, and the International Finance Corporation.

    7.4.2: International Monetary Fund (IMF) and World Bank (WB)

    Activity 7.7

    Undertake a documentary research on IMF and discuss amongst 

    yourselves in class about

    a) What led to the establishment of IMF?

    b) The objectives of IMF 

    c) The functions of IMF

    d) IMF conditionalities. 

    7.4.2.1: International monetary fund (IMF): 

    The International Monetary Fund (IMF) is an organization of 189 countries, 
    working to foster global monetary cooperation, secure financial stability, facilitate 
    international trade, promote high employment and sustainable economic growth 

    and reduce poverty around the world.

    Created in 1945, the IMF is governed by and accountable to the 189 countries 
    that make up its near-global membership. The IMF’s primary purpose is to 
    ensure the stability of the international monetary system; the system of exchange 
    rates and international payments that enables countries (and their citizens) to 
    transact with each other. The Fund’s mandate was updated in 2012 to include 

    all macroeconomic and financial sector issues that bear on global stability.

    The IMF’s fundamental mission is to ensure the stability of the international 
    monetary system. It does so in three ways: keeping track of the global economy 
    and the economies of member countries; lending to countries with balance of 
    payments difficulties; and giving practical help to members. IMF is headquartered 

    in Washington, D.C.

    A) Objectives of IMF.

    - Establish International Monetary Cooperation amongst the various member 
    countries through a permanent institution that provides the machinery for 
    consultation and collaborations in various international monetary problems 

    and issues.

    - Ensure stability in the foreign exchange rates by maintaining orderly exchange 
    arrangement among members and also to rule out unnecessary competitive 

    exchange depreciations/ devaluation.

    - Promote international trade so as to achieve its required expansion and 
    balanced growth. This would ensure development of production resources 
    and thereby promote and maintain high levels of income and employment 

    among all its member countries.

    - Eliminate or relax exchange controls imposed by almost each and every 
    country before Second World War as a device to deliberately fix the 
    exchange rate at a particular level. Such elimination of exchange controls 

    was made so as to give encouragement to the flow of international trade.

    - To establish a multilateral trade and payment system in respect to current 
    transactions between members in place of the old system of bilateral trade 

    agreements was another important objective of IMF.

    - Help the member countries, especially the backward countries, to attain 

    balanced economic growth by exchange the level of employment.

    - Help the member countries in eliminating or reducing the disequilibrium or 
    maladjustments in balance of payments. Accordingly, it gives confidence 
    to members by selling or lending Fund’s foreign currency resources to the 

    member nations.

    - Promote Investment and flow of Capital from richer to poorer or backward 
    countries so as to help the backward countries to develop their own 
    economic resources for attaining higher standard of living for its people, in 

    general.

    - To ensure there is sufficient international liquidity and total means of payment 

    acceptable for international payment.

    - To stabilize prices so as to increase the rates of economic growth and 

    development among poor countries.

    - To harmonize policies pursued by different countries so as to create peace 

    among member nations.

    B) Functions of the International Monetary Fund

    - Maintains Exchange Stability thereby discouraging any fluctuations in 
    the rate of exchange. It does so by making necessary arrangements like 
    enforcing declaration of par value of currency of all members in terms 
    of gold or US dollar, enforcing devaluation criteria, up to 10 per cent or 
    more by more information or by taking permission from IMF respectively, 
    forbidding members to go in for multiple exchange rates and also to buy 

    or sell gold at prices other than declared par value.

    - The Fund is helping the member countries in eliminating or minimizing 
    the short-period equilibrium of balance of payments either by selling or 
    lending foreign currencies to the members. It also helps its members 
    towards removing the long period disequilibrium in their balance of 
    payments. In case of fundamental changes in the economies of its 
    members, the Fund can advise its members to change the par values of 

    its currencies.

    - IMF enforces the system of determination of par values of the 
    currencies of the members countries. As per the Original Articles of 
    Agreement of the IMF every member country must declare the par value 
    of its currency in terms of gold or US dollars. The members are given 
    autonomy to float or change exchange rates as per demand supply 
    conditions in the exchange market and also at par with internal price 

    levels.

    - IMF is exercising surveillance to ensure proper working and balance in 
    the international monetary system, i.e., by avoiding manipulation in the 
    exchange rates and by adopting intervention policy to counter short-term 

    movements in the exchange value of the currency.

    - The IMF has an important function to advise the member countries on 
    various economic and monetary matters and thereby to help stabilize 

    their economies.

    - IMF is maintaining various borrowing and credit facilities so as to help 
    the member countries in correcting disequilibrium in their balance of 
    payments. These credit facilities include-basic credit facility, extended 
    fund facility for a period of 3 years, compensatory financing facility, 
    stock facility for helping the primary producing countries, supplementary 
    financing facility, special oil facility, trust fund, structural adjustment 
    facility etc. The Fund also charges interest from the borrowing countries 

    on their credit.

    - IMF is also entrusted with important function to maintain balance between 
    demand and supply of various currencies. Accordingly, the fund can 
    declare a currency as scarce currency which is in great demand and 
    can increase its supply by borrowing it from the country concerned or by 

    purchasing the same currency in exchange of gold.

    - Maintenance of Liquidity of its resources by providing for the member 
    countries to borrow from IMF by surrendering their own currencies in 
    exchange. Again, for according accumulation of less demand currencies 
    with the Fund, the borrowing countries are directed to repurchase their 

    own currencies by repaying its loans in convertible currencies.

    - Providing Technical Assistance to the member countries; by granting 
    the member countries the services of its specialists and experts and also 
    by sending the outside experts. Moreover, the Fund has also set up two 
    specialized new departments: Central Banking Services Department and 
    Fiscal Affairs Department for sending specialists to member countries so 

    as to manage its central banks and also on fiscal management.

    - Reducing tariffs and other restrictions imposed on international trade by 
    the member countries so as to cease restrictions of remittance of funds 

    or to avoid discriminating practices.

    - The IMF is also keeping a general watch on the monetary and fiscal 
    policies followed by the member countries to ensure no flouting of the 

    provisions of the charter.

    - Buying and selling currency of the member countries and this assists 
    debtor countries to purchase forex or to use SDRs in order to pay its 
    debts. (SDRs are international reserve assets created by the IMF to 
    supplement its member countries official reserves.) Its value is based on 
    the basket of the currencies and it can be exchanged and freely usable by 
    all countries. It is rather a potential claim on the freely usable currencies 

    of the IMF members.

    - It is a reservoir of the currencies of all the member countries from which 

    a borrower nation can borrow the currency of other nations.

    - It is a sort of lending institution in foreign exchange. However, it grants 

    loans for financing current transactions only and not capital transactions.

    - The Fund contributes to the promotion and maintenance of high levels of 
    employment and real income and to the development of the productive 

    resources of all member nations.

    - Assist countries to restructure their economies through SAPs facility.

    - The IMF works with governments around the world to modernize their 
    economic policies and institutions, and train their people. This helps 

    countries strengthen their economy, improve growth and create jobs.

    - The IMF provides loans to member countries experiencing actual 
    or potential balance of payments problems to help them rebuild their 
    international reserves, stabilize their currencies, continue paying for 
    imports, and restore conditions for strong economic growth, while 

    correcting underlying problems.

    - The IMF oversees the international monetary system and monitors the 
    economic and financial policies of its 189 member countries. As part of 
    this process, which takes place both at the global level and in individual 
    countries, the IMF highlights possible risks to stability and advises on 

    needed policy adjustments.

    7.4.2.2.: The World Bank (WB):

    Activity 7.8

    Undertake a documentary research on World bank, and discuss amongst 

    yourselves in class about

    a) Why was the World Bank established? 

    b) The objectives of World Bank

    c) The functions of WB

    d) What is the major difference between IMF and World Bank?

    The World Bank is an international organization dedicated to providing 
    financing, advice, and research to developing nations to aid their economic 
    advancement. The bank predominantly acts as an organization that attempts to 
    fight poverty by offering developmental assistance to middle- and low-income 
    countries. Currently, the World Bank has two stated goals that it aims to achieve 
    by 2030. The first is to end extreme poverty by decreasing the number of people 
    living on less than $1.90 a day to below 3% of the world population. The second 
    is to increase overall prosperity by increasing income growth in the bottom 40% 

    of every country in the world.

    The World Bank was created in 1944 out of the Bretton Woods Agreement, 
    which was secured under the auspices of the United Nations in the latter days 
    of World War II. Since their founding both the World Bank and the International 

    Monetary Fund have worked together toward many of the same goals.

    Though titled as a bank, the World Bank, is not necessarily a bank in the traditional, 
    chartered meanings of the word. The World Bank and its subsidiary groups 
    operate within their own provisions and develop their own proprietary financial 
    assistance products, all with the same goal of serving countries’ capital needs 
    internationally. The World Bank is headquartered in Washington, D.C. Currently 

    it has more than 10,000 employees in more than 120 offices worldwide. 

    a) Objectives of World Bank:

    - To help in the reconstruction and development of member countries by 
    facilitating the investment of capital for the productive purposes, including 

    the restoration and reconstruction of economies devastated by war.

    - To encourage the development of productive resources in developing 

    countries by supplying them investment capital. 

    - To promote private foreign investment through guarantees and participation 

    in loans and other investment made by private investors.

    - To supplement private foreign investments by direct loans out of its own 

    capital for productive purposes.

    - To promote long term balances growth of international trade and the 
    maintenance of equilibrium in the balance payments of member countries 

    by encouraging long term international investments.

    - To bring about an easy transition from a war economy to a peace time 

    economy.

    - To help in raising productivity, the standard of living and the conditions of 

    labour in member countries.

    b) Functions of World Bank (IBRD)

    The principal functions of the IBRD following.

    - To assist in the reconstruction and development of the territories of its 

    members by facilitating the investment of capital for productive purposes.

    - To promote private foreign investment by means of guarantee of participation 
    in loans and other investments made by private investors and when private 
    capital is not available on reasonable terms to make loans for productive 

    purposes out of its own resources from funds borrowed by it.

    - To promote the long-term balance growth of international trade and the 
    maintenance of equilibrium in balances of payments by encouraging 
    international investments for development of productive resources of 

    members.

    - To arrange loans made guaranteed by it in relation to international loans 
    through other channels so that more useful projects, large and small alike, 

    will be dealt with first.

    7.4.2.3: Structural Adjustment Programs (SAPs) / IMF 

    Conditionalities.

    Structural Adjustment Programs (SAPs) sometimes labeled as the Washington 
    Consensus     refers to a set of economic policies often introduced as a condition 
    for gaining a loan from the IMF. SAPs are created with the goal of reducing the 
    borrowing country’s fiscal imbalances in the short and medium term or in order 
    to adjust the economy to long-term growth. The bank from which a borrowing 
    country receives its loan depends upon the type of necessity. The IMF usually 
    implements stabilization policies and the WB is in charge of adjustment 
    measures. Structural adjustment policies usually involve a combination of free-
    market policies such as privatisation, fiscal austerity, free trade and deregulation. 
    Structural adjustment policies have been controversial with detractors arguing 
    the free market policies are often unsuitable for developing economies and 
    lead to lower economic growth and greater inequality. Supporters of structural 
    adjustment (IMF and World Bank) argue that these free-market reforms are 
    essential for promoting a more open and efficient economy, which ultimately 
    help to improve living standards and reduce relative poverty. SAPs therefore, 
    are supposed to allow the economies of the developing countries to become 
    more market oriented. This, then forces them to concentrate more on trade 
    and production so it can boost their economy. They include among others the 

    following;

    Structural Adjustment Policies

    To be eligible for a loan from IMF, developing countries often have to implement 

    some or all of the following policies.

    -Cutting Government Spending to reduce the budget deficit. Also known as 
    ‘fiscal austerity’ e.g. reducing on government expenditure on education and 
    health in order to reduce the size of the work force to reduce on government 

    expenditure hence a balanced budget.

    -Raising tax revenues and trying to improve tax collection by clamping down 

    on tax avoidance.

    -Control of Inflation. Usually through Monetary policy (higher interest rates) 

    and fiscal austerity which have the effect of depressing aggregate demand.

    -Privatisation of state-owned industries. This raises money for the government, 
    but also, in theory, can help improve efficiency and productivity because 

    private firms have a profit incentive to be more efficient.

    -De-regulation of markets to encourage competition and more firms to enter 
    the industry. Opening the economy to free trade by removing tariff barriers 
    which protect domestic industries. i.e. avoid government control of prices 

    which lead to inefficiency and to allow private producers to compete.

    -Ending food subsidies. i.e. Raising food and petroleum prices to cut the 
    burden of subsidies. This, can distort the market and lead to over-supply 
    and hold back diversification of the economy to a more industrial based 

    economy.

    -Devaluation of currencies to restore competitiveness, increase forex and 

    reduce current account deficit. This usually leads to higher import prices. 

    -Retrenchment of the civil servants and demobilization of the army in order to 
    reduce on the size of the work force and government expenditure as well 

    as ensure efficiency.

    -Introduction of policies that attract both foreign and domestic investors. For 

    example, reduction in borrowing rates and having an open economy.

    -Infrastructural development in order to improve productivity thus promoting 

    economic growth and development.

    -Emphasizes on the improvement of productivity through research and 

    adoption of modern technology.

    -Market expansion through economic integration in order to increase export 

    earnings.

    -Ensure political stability and security in the economy.

    -Forex liberalization and granting autonomy to the central bank to pursue on 

    appropriate monetary policy.

    -Focusing economic output on direct export and resource extraction.

    -Improving governance and fighting corruption 

    -Enhancing the rights of foreign investors vis-à-vis national laws

    -Increasing the stability of investment (by supplementing foreign direct 

    investment with the opening of domestic stock markets)

    -Creating new financial institutions

    Application activity 7.5.

    Describe how the SAPs policies have impacted Rwanda.

    End unit assesment

    1. a) What role has the IMF played in economic development of your 

    country

     b) What structural adjustment programs have been implemented in 

    your country?

     2. a) Giving examples in Rwanda, analyse the role played by FDI’s in 

    Rwanda’s development struggle.

    b) Although Rwanda has tried her level best to attract Foreign Direct 

    Investments, their inflow is still low. Why?

    3. a) Explain the roles of World Bank.

     b) Identify different sectors supported by World bank in Rwanda.

    ◄UNIT 6: ECONOMIC INTEGRATIONUNIT 8:ECONOMIC GROWTH AND ECONOMIC DEVELOPMENT►