• Unit7:Globalisation

    Key unit competence: Learners will be able to analyse the impact of
    globalisation on Rwandan economy.

    My goals

    By the end of this unit, I will be able to:

    ⦿ Explain the causes of globalisation.

    ⦿ Explain the impact of MNCs and FDIs on economic development.

    ⦿ Describe the origin of Breton woods conference and the operation of IMF and WB.

    ⦿ Identify SAPs conditionality to Rwanda from IMF and WB.

    ⦿ Analyse the impact of globalisation on the economy (local, national and international).

    ⦿ Extract key principles of globalisation by looking at specific examples of MNCs and FDIs.

    ⦿ Practice SAPs conditionality from IMF and WB to attain economic growth.

    ⦿ Appreciate the implication of globalisation on the economy of Rwanda.

    Activity 1

    There is a growing desire by world economies to depend on one another socially, economically and politically, this is witnessed by different countries opening up different businesses and travelling to different parts of the world; Use the library, internet or any other economics source to
    research and discuss with the class about:

    (i) How you call such desire by world economies to become interdependent.

    (ii) The features of global economic interdependence.

    (iii) The different ways in which world economies can become interdependent.
    Facts

    7.1 Meaning of Globalisation

    Economic globalisation is the increasing economic interdependence of national economies across the world through a rapid increase in crossborder movement of goods, services, technology and capital. Whereas the globalisation of business is centreed on the diminution/reduction of international trade regulations as well as tariffs, taxes, and other impediments that suppresses global trade, economic globalisation is the process of increasing economic integration between countries, leading to the emergence of a global market place or a single world market. It involves the free movement of goods, services and people across the world in a seamless and integrated manner. This means that countries increase their base of operations, expand their workforce with minimal investments, and provide
    new services to a broad range of consumers.

    Depending on the paradigm, economic globalisation can be viewed as either a positive or a negative phenomenon. Economic globalisation comprises the globalisation of production, markets, competition, technology, and corporations and industries. Current globalisation 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.

    7.1.1 The main features/ characteristics of globalisation

    Globalisation has a number of characteristics as shown below:

    1. Liberalisation: The freedom of the industrialists/businessmen to establish industries, trade or commerce either in their countries or abroad; free exchange of capital, goods, service and technologies
    between countries.

    2. There is free trade: I.e. free trade between countries; absence of excessive governmental control over trade.

    3. There is globalisation of economic activities: Control of economic activities by domestic market and international market; coordination of national economy and world economy.

    4. There is connectivity: Localities being connected with the world by breaking national boundaries; forging of links between one society and another, and between one country and another through international transmission of knowledge, literature, technology, culture and
    information.

    5. Globalisation is borderless globe: i.e. breaking of national barriers and creation of inter- connectedness.

    6. Globalisation is a composite process: Integration of nation-states across the world by common economic, commercial, political, cultural and technological ties; creation of a new world order with no national boundaries.

    7. Globalisation is a multi-dimensional process: Economically, it means opening up of national market, free trade and commerce among nations, and integration of national economies with the world
    economy. Politically, it means limited powers and functions of state, more rights and freedoms granted to the individual and empowerment of private sector; culturally, it means exchange of cultural values
    between societies and between nations; and ideologically, it means the spread of liberalism and capitalism.

    8. Globalisation is a top-down process: Globalisation originates from developed countries and the MNCs (multinational corporations) based in them. Technologies, capital, products and services come from them to developing countries. It is for developing countries to accept these things,
    adapt themselves to them and to be influenced by them. Globalisation is
    thus a one-way traffic; it flows from the North to the South.

    9. There is interdependence with globalisation: With the advent of globalisation, it has been understood that no country can be said to be totally independent, not needing anything from any other country.
    Hence, a culture of interdependence has been established between nations.

    10. Globalisation is basically a ‘Mindset’: Globalisation is basically a mindset that is ready to encapsulate the whole universe into its scheme of things; a mindset that is broader and open to receive all ideas; that
    takes the whole globe as an area of operation.

    11. Globalisation is an opportunity: While it does open our markets for entry of multinationals, it also opens all other markets in the whole world for our products and services too.

    12. Globalisation means “caring and sharing”: The world today is more united and concerned about common problems being faced by the people- be it global warming, terrorism, or malnutrition etc. Natural
    disasters faced or atrocities encountered at any part of the world attract immediate attention all over.

    13. Globalisation puts technology in service of mankind: The world would not have shrunk into a small global village without the support of technological innovations like computers, internet,
    telecommunication, e-commerce etc. Thus, technology has proved to be the major source of the concept of globalisation, and for bringing people nearer to each other.

    14. Globalisation is inevitable and irreversible: It is rightly said, “You cannot stop the advent of an idea whose time has come”. Globalisation is one such idea.

    15. Globalisation links politics with economics: Earlier, political ideologies and relations between nations have determined the fate of people over centuries; with economics being subservient to
    politics. However, in the new era of globalisation, it is the economics, employment generation and public welfare that determine the need and strength of relations between nations.

    16. Globalisation means raised standards of living: With consumers having more choice to pick quality items at right price, and with no boundary restrictions on flow of goods and services, the markets have
    turned from ‘Sellers’ Market’ to ‘Buyers’ Market’. This has helped in raising the standard of living for vast populations across the world. It has also raised aspirations among billions of people to upgrade their
    lifestyles

    17. Globalisation demands and respects excellence: With global level opportunities available to all the countries, the field is wide open for the excellent companies, products and people from any remote part
    of the world to showcase their excellence and win over markets and contracts. There is pressure on everyone to continuously improve to meet the raised bar of expectations.

    18. Globalisation means that “we are not alone in this Universe and the world is cohabited by others too at far off places.” This means that the world is a small global village of linked families.

    7.1.2 Types of globalisation

    1. Economic globalisation

    This is a worldwide economic system that permits easy movement of goods, production, capital, and resources (free trade facilitates this) 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 otherswho lack such technologies. Example is multinational corporations.
    The products of an advanced country enter the markets of those countries that have demands for these products. Similarly, the natural resources of developing countries are sold to developed countries that need them. Thus, globalisation is predominantly an economic process involving the transfer
    of economic resources form one country to another.

    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.

    3. Political globalisation

    This is where countries are attempting to adopt similar political policies and styles of government in order to facilitate other forms of globalisation e.g. move to secular governments, free trade agreements, etc.
    Since long, efforts have been on to bring the whole world under one government. It is believed, as by the League of Nations and the UN, that the world under one government will be safer and freer from conflicts.

    4. Cultural globalisation

    This is the merging or “watering down” of the world’s cultures e.g. food, entertainment, language, etc. 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. Culture flow is mainly from the North to the South i.e. mainly from the
    Centre to the periphery, and from the towns and cities to villages, it is the cultures of villages of poor countries which will be the first to suffer erosion.

    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.

    7.1.3 Causes of globalisation
    Activity 2
    From the understanding of economic globalisation as gained from the research carried out in Activity 1 of this unit; what do you think is the cause of the current increased desire for global interdependence?

    Facts

    Globalisation is not a new phenomenon. The world economy has become increasingly interdependent for a long time. However, in recent decades the process of globalisation has accelerated; this is due to a variety of factors, among which include the following:

    1. Improved transport, making global travel easier. For example, there has been a rapid growth in air-travel, enabling greater movement of people and goods across the globe.

    2. Containerisation. From 1970, there was a rapid adoption of the steel transport container. This reduced the costs of inter-modal transport making trade cheaper and more efficient.

    3. Improved technology which makes it easier to communicate and share information around the world. E.g. internet. Therefore, people from any country can bid for the right to provide a service.

    4. Growth of multinational companies with a global presence in many different economies.

    5. Growth of global trading blocs which have reduced national barriers. (e.g. European Union, NAFTA, ASEAN).

    6. Reduced tariff barriers encourages global trade. Often this has occurred through the support of the WTO.

    7. Firms exploiting gains from economies of scale to gain increased specialisation. This is an important feature of new trade theory.

    8. Growth of global media. Such as internet, telecommunication etc.

    9. Global trade cycle. Economic growth is global in nature. This means countries are increasingly interconnected. (E.g. recession in one country affects global trade and invariably causes an economic
    downturn in major trading partners.)

    10. 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.

    11. 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

    7.1.4 Effects of globalisation

    Activity 3

    Basing on the research carried out in Activity 1 and 2 of this unit, assess the impact of globalisation on world economies.

    Facts

    Financial and industrial globalisation is increasing substantially and is creating new opportunities for both industrialised and developing countries. The largest impact has been on developing countries, which are now able to attract foreign investors and foreign capital.

    Positive effects of globalisation

    Globalisation can create new opportunities, new ideas, and open new markets
    and many other positives result as follows:

    • Inward investment by Trans-National corporations (TNCs) helps countries by providing new jobs and skills for local people.

    • Trans-National corporations (TNCs) bring wealth and foreign currency to local economies when they buy local resources, products and services. The extra money created by this investment can be spent on
    education, health and infrastructure.

    • The sharing of ideas, experiences and lifestyles of people and cultures. People can experience foods and other products not previously available in their countries.

    • Globalisation increases awareness of events in far-away parts of the world. For example, the UK was quickly made aware of the 2004 tsunami tidal wave and sent help rapidly in response.

    • Globalisation may help to make people more aware of global issues such as deforestation and global warming - and alert them to the need for sustainable development.

    • Increased standard of living: Economic globalisation gives 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.

    • Access to new markets: Globalisation leads to freer 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. This allows companies to develop new technologies and produce new products and services.

    • It allows businesses in less industrialised countries to become part of international production networks and supply chains that are the main conduits of trade.

    • Globalisation can lead to more access to capital flows, technology, human capital, cheaper imports and larger export markets.

    • It creates greater opportunities for firms in less industrialised countries to tap into more and larger markets around the world.

    Negative effects of globalisation

    In real life, businesses are facing increased competition, and the worker may be laid off because of greater competition due to globalisation. The

    following are some of the negative effects of globalisation.

    1. Globalisation makes it virtually impossible for regulators in one country to foresee the worldwide implications of their actions. Actions which would seem to reduce emissions for an individual country may
    indirectly encourage world trade, ramp up manufacturing in coalproducing areas, and increase emissions over all.

    2. Globalisation tends to move 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.

    3. Globalisation sets 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 a low price as possible. This can be done in various ways–pay its workers lower wages; allow more pollution; use 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.

    4. Globalisation encourages dependence on other countries for essential goods and services. With globalisation, goods can often be obtained cheaply from elsewhere. However, if the built-in instabilities in the system become too great and the system stops working, there is suddenly a very large problem if imports are interrupted.

    5. 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.

    6. Cultural uniqueness is lost in favour of homogenisation and a “universal culture” that draws heavily from American culture. the values and norms of developed countries are gradually rooted in
    developing countries. This involves the erosion and loss of the identity and the cultures of developing countries.

    7. The growth of international trade is worsening income inequalities, both between and within industrialised and less industrialised nations.

    8. Global commerce is increasingly dominated by transnational corporations which seek to maximise profits without regard for the development needs of individual countries or the local populations.

    9. Protectionist policies in industrialised countries prevent many producers in the third world from accessing export markets.

    10. The volume and volatility of capital flows increases the risks of banking and currency crises, especially in countries with weak
    financial institutions.

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

    12. Globalisation uses up finite resources more quickly. As an example, China joined the world trade organisation in December 2001. In 2002, its coal use began rising rapidly.

    7.2 Multinational Corporation (MNC)

    Activity 4

    Basing on the research carried out in Activity 1 of this unit, and using the photos a), b) and c) below:

    (i) Explain what you understand by Multinational Corporations.

    (ii) What examples of MNCs can you sight in Rwanda?

    (iii) What activities do those MNCs in Rwanda deal in?

    Facts

    A multinational corporation or worldwide enterprise is an enterprise operating in several countries but managed from one (home) country. It is an organisation 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.
    There are four categories of multinational corporations:

    1. A multinational, decentralised corporation with strong home country presence.

    2. A global, centralised corporation that acquires cost advantage through centralised production wherever cheaper resources are available.

    3. An international company that builds on the parent corporation’s technology.

    4. A transnational enterprise that combines the previous three approaches. 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—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

    7.2.1 Effects of multinational corporations

    Activity 5
    As a class, basing on the understanding of MNCs gained from Activity
    4 of this unit, assess the view that MNCs have done more good than
    harm towards the development process of Rwanda.

    Positive effects

    1. MNCs bridge the forex gap in LDCs by increasing forex inflow.

    2. They increase employment opportunities for citizens of the host countries since they operate on large scales.

    3. They close the investment gap through forex investment abroad.

    4. They lead to improvement in domestic technology through transfer of superior technology to LDCs based on research and development.

    5. MNCs produce more output especially processed or manufactured which increase exportation of manufactured goods hence more forex to LDCs.

    6. MNCs promote capital accumulation in LDCs through transfer of capital and building infrastructure.

    7. MNCs produce better quality products which help to improve standards of living of people in the society.

    8. They bring new marketing techniques in LDCs markets research and promotional methods which encourage competition and efficiency.

    9. They give revenue to the government through taxes imposed on activities of the MNCs.

    10. They help to train labour in the management of basic skills and entrepreneur ability in LDCs.

    11. MNCs make a lot of profits which are ploughed back leading to the expansion of the economy there by promoting economic growth.

    12. They undertake high risks and can invest in long term projects like mining plantation and agricultural industries that bring about rapid economic growth and development.

    13. They are financially strong and hence provide large and cheap capital to LDCs by way of direct investment.

    14. They increase infrastructural development through construction of telecommunication etc.

    15. MNCs increase the exploitation of domestic resources which increase volume of productivity hence increasing export exchange.

    16. They promote international cooperation through consortiums hence increasing the volume of trade.

    17. They encourage competition which leads to efficiency and better quality products.

    18. They help in filling the skilled manpower gap through exportation of expatriates or trained personnel to the recipient countries.

    Negative effects of MNCs

    1. MNCs repatriate their profits to their mother countries which lead to resources outflow from LDCs thus disabling the development potentials of LDCs.

    2. They are given tax exemption and holidays which reduce net government revenue from them.

    3. MNCs usually use capital intensive technology and therefore may not help to reduce their problems of unemployment in LDCs which are labour surplus economies.

    4. They create social costs like quick exhaustion of natural resources, environmental degradation etc. since they operate on large scale.

    5. MNCs influence internal policies of LDCs 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.

    6. MDCs accelerate regional or sector imbalances eg urban and rural areas since they mostly set up their production activities in urban areas where infrastructure is already developed.

    7. MDCs cause income inequalities because they reserve top jobs for their nationals who are highly paid and low paying jobs to the national of investment countries.

    8. They promote external dependency of host countries on the countries where they originate.

    9. They reduce domestic initiative in technological and manpower development.

    10. 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.

    Activity 6

    Use the library or the internet or any other economics source to do research on direct foreign investments with reference to Rwanda’s economy and share with the rest of the class about:

    (i) What Foreign Direct Investment is.

    (ii) Examples of Foreign Direct Investments in Rwanda

    (iii) The impact of FDI’s on Rwanda’s development process.


    Facts

    7.3 Meaning of Foreign Direct Investments

    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. Ownership of 10 percent or more of the ordinary shares of voting stock is the criterion
    for determining the existence of a direct investment relationship.

    Foreign Direct Investment in Rwanda increased by 267.70 Million USD in 2014. Foreign Direct Investment in Rwanda averaged 211.44 Million USD from 2009 until 2014, reaching an all-time high of 267.70 Million USD in 2014 and a record low of 118.67 Million USD in 2009. Foreign Direct Investment in Rwanda is reported by the National Bank of Rwanda.

    In 2014, Utilities (water and energy), transport, communication and storage; construction and manufacturing sectors were the main recipient of FDI jointly accounting for 73.4 percent (US$ 382.9 million) of total FDI inflows. In terms of new investment projects, manufacturing and agriculture, fishing,
    forestry and hunting were leading with 41.0 percent. The total jobs expected to be created through FDI in 2014 were 8,914. Manufacturing accounted for 35.7 percent followed by mining and quarrying with 18.1 percent and agriculture, fishing, forestry and hunting with 9.9 percent.


    In 2014, Rwanda’s four major sources of FDI were USA, Mauritius, India and Uganda while in 2013; the leading sources of FDI were Turkey, South Korea, South Africa and USA. In terms of employment, projects from China, USA, India, France and Uganda were expected to create 47.8 percent of
    the total employment in 2014.
    Examples of FDIs in Rwanda

    Sorwathe Tea Ltd., Forestry and Agricultural Investment Management, and West rock Coffee Holdings, LLC, Kenya Commercial Bank (KCB), Kenya’s National Media Group (NMG).

    China, Indonesia and Germany are the main investing countries (Source:
    Doing Business - 2016.)

    In early 2016, the Rwandan Development Board (RDB) signed an agreement
    with Thomson Reuters to support further innovation within the country.

    7.3.1 Advantages of foreign direct investments

    The following are the advantages of foreign direct investments.

    1. They increase the stock of capital in LDCs thus help break the cycle of poverty which enables LDCs to achieve rapid economic growth.

    2. FDIs provide managerial, administrative and technical personnel, new technology, research and innovation in LDCs. This helps to improve LDCs technics of production hence more employment opportunities.

    3. They increase government revenue from taxes imposed on production activities undertaken by foreign investments.

    4. FDIs 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.

    5. They encourage 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.

    6. They create employment opportunities in the recipient countries.

    7. They increase savings thus closing the savings investment gap in LDCs.

    8. Due to the inflow capital assets, foreign investment promotes capital accumulation in LDCs.

    9. Foreign investments help in the exploitation of idle resources in LDCs thus promoting economic growth and development.

    10. They increase consumer choice due to production of wide variety of quality products due massive productions.

    11. FDIs increase the exploitation of domestic infrastructure e.g. transport facilities, communication facilities etc.

    12. They accelerate industrial growth through manufacturing and provision of services.

    13. They promote international cooperation hence increase the volume of imports and exports.

    14. Local firms become efficient through competition.

    15. They fill the manpower gap through importation of expatriates’ manpower.

    7.3.2 Disadvantages foreign direct investments

    Below are the disadvantages of foreign direct investments

    1. It leads to profit repatriation and capital outflow thus worsening the balance of payment deficits in LDCs.

    2. FDIs increase government expenditure in form of provision of basic facilities like land, power and other basic facilities as well as tax concessions, tax holidays, subsidised inputs etc.

    3. They 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.

    4. 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 loss of autonomy in the
    recipient country.

    5. They bring about instabilities in the recipient country due to reallocation of their investments into other countries.

    6. Foreign countries use capital intensive technology which creates technological unemployment thus may not help in solving the problem of unemployment.

    7. They increase demonstration effect in the recipient country due to increased number of foreigners who impose life style of developed countries in LDCs thus start copying the consumption habits and
    lifestyle of the foreigners.

    8. Most of the private foreign investments are urban based and this creates the problems of rural urban migration and its negative effects.

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

    10. FDLs causes dumping through importation of outsider or low quality equipment.

    11. FDIs may lead to loss of markets of products from indigenous enterprises.

    12. FDIs may lead to irrational and exhaustion of domestic resources.

    7.3.3 Measures of attracting foreign investors in Rwanda

    Activity 7

    As an economics student use the knowledge, understanding, skills, values and attitudes gained on various economics issues, to advise the Rwandan government on how to attract foreign investments into the country.

    Facts

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

    • In 2006, the Government of Rwanda (GoR) 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 liberalised. 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 emphasising 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 minimises 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 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 Privatisation 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 the 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 3 million USD, duty exemption on
    equipment, and a favourable 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 publicising 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 Privatisation 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 privatise State-Owned Enterprises
    (SOEs), to reduce the government’s non-controlling shares in private
    enterprises, and to 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 programme to insure 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 Labour Organisation (ILO) conventions protecting worker rights. Policies to protect workers in special labour conditions exist, but enforcement remains inconsistent.
    The government encourages, but does not require, on-job-training and technology transfer to local employees.

    7.3.4 Hurdles and constraints of FDIs in Rwanda

    The following are the hurdles and constraints of FDI’s in Rwanda:

    • Rwanda suffers from a shortage of skilled labour, including accountants, lawyers, and technicians.

    • Some firms have reported occurrences of petty corruption in the customs clearing process, but there are few or no reports of corruption in transfers, dispute settlement, regulatory system, taxation, or
    investment performance requirements.

    • Political instabilities and insecurities with in and in the neighbouringcountries, e.g. fighting in the eastern Democratic Republic of Congo (DRC) between Congolese armed forces (FARDC) and the M23 has
    scared most investors, especially in the areas of Gisenyi and Rubavu. Grenade attacks aimed at the local population have occurred on a recurring basis over the last five years in Rwanda. Four attacks
    occurred in Kigali in 2013 and early 2014, killing five and injuring 48 persons all which reduce confidence of investors in the security of the country.

    • Some investors claim that the RRA unfairly targets foreign investors for audits. In recent years, several investors raised concerns that RRA breached Rwandan law by auditing corporate financial statements that had already exceeded the statute of limitations for review.

    • Some investors complain that the strict enforcement of tax, labour, and environmental laws impede investment. In 2009, the government updated the labour code to simplify labour recruitment and facilitate
    the hiring, firing, and retention of competent staff.

    • Some investors have complained that the application process for work permits and extended stay visas has become onerous (burdensome). Immigration authorities frequently request extra documentation
    detailing applicants’ qualifications and, at times, have taken several months to adjudicate cases.

    • Some investors have complained that coordination between RDB and Rwanda Revenue Authority (RRA) is limited, resulting in assessment by RRA on duties or taxes on registered investments despite RDB’s assurance that such investments qualified for tax-exempt or taxincentivised status

    • There are no laws requiring private firms to adopt articles of incorporation or association that limit or prohibit foreign investment, participation, or control.

    • A 2012 report by Rwanda’s office of the Auditor General cited continuing problems with inappropriate procurement methods, but
    said violations had reduced significantly from years past.

    • Rwanda’s judicial system suffers from a lack of resources and capacity, including functioning courts. The Heritage Foundation’s Economic Freedom Index has cited the judiciary’s lack of independence from
    the executive. Investors cite the Government of Rwanda’s casual approach to contract sanctity and say the government fails to enforce court judgments in a timely fashion.

    • Despite RDB’s investment facilitation role, some foreign investors say they face difficulty in obtaining or renewing work visas due to the government of Rwanda’s demonstrated preference for hiring local or
    EAC residents over third country nationals.

    • Investors have also cited the inconsistent application of tax incentives and import duties as a significant challenge to doing business in Rwanda. Under Rwandan law, foreign firms should receive equal
    treatment with regard to taxes, and access to licenses, approvals, and procurement.

    • Potential and current investors cite a problem of high transport costs, which reduces their profit margin.

    • A small domestic market due to prevalent poverty levels in Rwanda, limited access to affordable financing and high interest rates on borrowing that increase costs of production.

    • Inadequate infrastructure in form of roads and communication network, power facilities, water etc.

    • Ambiguous tax rules which normally scare investors away thus reducing the would be social and economic benefits from.

    7.4 Global Financial Systems and Institutions

    Activity 8

    Use the library or the internet or any other economics resource, to research and share with others in class about the following:

    (i) What global financial system is.

    (ii) The role of International financial system.

    (iii) What are the components of International financial system?

    Facts

    7.4.1 Meaning of International monetary systems

    International monetary systems are sets of internationally agreed rules, conventions and supporting institutions, that facilitate international trade, cross border investment and generally the reallocation of capital between nation states. They provide means of payment acceptable to buyers and
    sellers of different nationality, including deferred payment. To operate successfully, they need to inspire confidence, to provide sufficient liquidity for fluctuating levels of trade and to provide means by which global imbalances can be corrected.

    The global financial system is the worldwide framework of legal agreements, institutions, 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 globalisation, its evolution is marked by the establishment of Central banks, multilateral treaties, and intergovernmental organisations aimed at improving the transparency, regulation, and effectiveness of international markets.

    In the late 1800s, world migration and communication technology facilitated unprecedented growth in international trade and investment. At the onset of World War I, trade contracted as foreign exchange markets became paralysed by money market liquidity.

    Countries sought to defend against external shocks with protectionist policies and trade virtually halted by 1933, worsening the effects of the global Great Depression until a series of reciprocal trade agreements slowly reduced tariffs worldwide. Efforts to revamp the international monetary system after
    World War II improved exchange rate stability, fostering record growth in global finance.

    A country’s decision to operate an open economy and globalise its financial capital carries monetary implications captured by the balance of payments. It also renders exposure to risks in international finance, such as political deterioration, regulatory changes, foreign exchange controls, and legal
    uncertainties for property rights and investments. Both individuals and groups may participate in the global financial system. Consumers and international businesses undertake consumption, production, and investment. Governments and intergovernmental bodies act as purveyors of international
    trade, economic development, and crisis management. Regulatory bodies establish financial regulations and legal procedures, while independent bodies facilitate industry supervision. Research institutes and other associations analyse data, publish reports and policy briefs, and host public
    discourse on global financial affairs.

    While the global financial system is edging towards greater stability, governments must deal with differing regional or national needs. Some nations are trying to orderly 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.

    7.4.2 Bretton Woods Conference

    The Bretton Woods Conference, formally known as the United Nations Monetary and Financial Conference, was the gathering of 730 delegates from all 44 Allied nations at the Mount Washington Hotel, situated in Bretton Woods, New Hampshire, United States, to regulate the international monetary and financial order after the conclusion of World War II.

    The conference was held from July 1–22, 1944. Agreements were signed that, after legislative ratification by member governments, established the International Bank for Reconstruction and Development (IBRD) and the International Monetary Fund (IMF).

    The Bretton Woods Conference had three main results:

    1. Articles of Agreement to create the IMF, whose purpose was to promote stability of exchange rates and financial flows.

    2. Articles of Agreement to create the IBRD, whose purpose was to speed reconstruction after the Second World War and to foster economic development, especially through lending to build infrastructure.

    3. Other recommendations for international economic cooperation. The Final Act of the conference incorporated these agreements and recommendations. Within the Final Act, the most important part in
    the eyes of the conference participants and for the later operation of the world economy was the IMF agreement. Its major features were:

    • An adjustably pegged foreign exchange market rate system: Exchange rates were pegged to gold. Governments were only supposed to alter exchange rates to correct a “fundamental disequilibrium.”

    • Member countries pledged to make their currencies convertible for trade-related and other current account transactions. There were, however, transitional provisions that allowed for indefinite delay
    in accepting that obligation, and the IMF agreement explicitly allowed member countries to regulate capital flows. The goal of widespread current account convertibility did not become operative
    until December 1958, when the currencies of the IMF’s Western European members and their colonies became convertible.

    • As it was possible that exchange rates thus established might not be favourable to a country’s balance of payments position, governments had the power to revise them by up to 10% from the
    initially agreed level (“par value”) without objection by the IMF. The IMF could concur in or object to changes beyond that level. The IMF could not force a member to undo a change, but could
    deny the member access to the resources of the IMF.

    • All member countries were required to subscribe to the IMF’s capital. Membership in the IBRD was conditioned on being a member of the IMF. Voting in both institutions was apportioned
    according to formulas giving greater weight to countries contributing more capital (“quotas”).

    The conference conducted its major work through three “commissions.”

    1. Commission I dealt with the IMF

    2. Commission II dealt with the IBRD

    3. Commission III dealt with “other means of international financial cooperation” It was a venue for ideas that did not fall under the other two commissions.

    7.4.3 International monetary fund (IMF)

    Activity 9

    Basing on the research carried out in Activity 8 of this unit, discuss amongst yourselves about the following:

    (i) What led to the establishment of IMF.

    (ii) The objectives of IMF.

    (iii) Its functions and criticisms.


    Facts

    The IMF is an institution that was officially established on 27 December 1945, when the 29 participating countries at the conference of Bretton Woods signed its Articles of Agreement, the IMF was to be the keeper of the rules and the main instrument of public international management. The
    Fund commenced its financial operations on 1 March 1947. IMF approval was necessary for any change in exchange rates in excess of 10%. It advised countries on policies affecting the monetary system and lent reserve currencies to nations that had incurred balance of payment debts. The International Monetary Fund (IMF) is an Organisation of 188 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 188 countries that make up its near-global membership.

    Why the IMF was created and how it works

    The IMF, also known as “the Fund”, was conceived at a UN conference in Bretton Woods, New Hampshire, United States, in July 1944. The 44 countries at that conference sought to build a framework for economic cooperation to avoid a repetition of the competitive devaluations that had
    contributed to the Great Depression of the 1930s.

    The IMF’s responsibilities: 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.

    Objectives of IMF

    1. To have a system with stable exchanges rates and avoid competitive devaluation.

    2. To work towards the removal of forex control which hinders the growth of the world trade by establishing a multi-lateral system of payment in respect to carrying out transactional between member
    countries.

    3. To ensure there is sufficient international liquidity and total means of payment acceptable for international payment.

    4. Give advice to countries with balance of payment difficulties without resulting into measures destructive to national and international prosperity by making funds or resources available to them under adequate safe guards.

    5. To facilitate extension and balanced growth of international trade and to contribute to the promotion and maintenance of high levels of employment and development of productive resources of all
    member countries.

    6. To stabilise prices so as to increase the rates of economic growth and development among poor countries.

    7. To increase the global co-operation through participation in international trade.

    8. To harmonise policies pursued by different countries so as to create peace among member nations.

    Functions of the International Monetary Fund

    1. It gives technical advice to its member countries on monetary and fiscal policies in order to help member countries ensure economic stability.

    2. Conduct some training services on fiscal and monetary as well as balance of payment issues for personnel from member nations through its Central banking service department.

    3. Conduct research studies about member countries and publish the statistics about the balance of payment and other macro-economic statistics through the bureau of statistics and the IMF institutions.

    4. IMF monitors the policies being adopted by the member countries. International payments and tariffs and ensure that no member country imposes restrictions on making that payment or trade restrictions without the approval of the IMF.

    5. It ensures stable exchange rates by the member countries. I.e. it provides machinery for the orderly adjustments of exchange rates.

    6. It helps member countries to offset BOP deficits by providing SDRs (special drawing rights) and the stabilisation fund to member countries faced with balance of payment problems.

    7. It increases international liquidity by introducing the special drawing rights which can be used to finance deficit or surplus of balance of payment.

    8. 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.

    9. It functions as a short-term credit institution.

    10. It is a reservoir of the currencies of all the member countries from
    which a borrower nation can borrow the currency of other nations.

    11. It is a sort of lending institution in foreign exchange. However, it grants loans for financing current transactions only and not capital transactions.

    12. 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.

    13. Assist countries to restructure their economies through SAPs facility.

    Special drawing rights (SDR)

    This involves book entries credited to member states in proportion to their quotas. It is a paper asset also known as paper gold created by IMF to increase international liquidity. As stated earlier, SDRs are merely international reserves used to settle a BOP deficit. It is, therefore, an account added to a
    member country’s reserves.

    Use of SDRs

    (i) SDRs are used to purchase members’ own currency.

    (ii) Overdrawing from SDRs will call for special IMF advice to countries concerned; which countries are faced with inflation and after the advice is devaluation.

    (iii) It is used to settle international debt obligations by transferring credit to creditors. Countries with BOP surplus can receive SDR, in exchange for their own currency as an incentive to hold SDRs as the guaranteed interest.

    It should be noted that SDR unit is mainly influenced by the US Dollar, the Pound Sterling, the French Franc, the Swiss Franc, the German Mark, and the Japanese Yen etc.

    Criticisms of IMF

    The IMF faces a number of criticisms some of which are discussed below

    • The IMF has put the global economy on a path of greater inequality and environmental destruction; The IMF’s and World Bank’ structural adjustment policies (SAPs) ensure debt repayment by requiring
    countries to cut spending on education and health; eliminate basic food and transportation subsidies; devalue national currencies to make exports cheaper; privatise national assets; and freeze wages.
    Such belt-tightening measures increase poverty, reduce countries’ ability to develop strong domestic economies and allow multinational corporations to exploit workers and the environment.

    • The IMF serves wealthy countries and Wall Street; Unlike a democratic system in which each member country would have an equal vote, rich countries dominate decision-making in the IMF because voting power is determined by the amount of money that each country pays into the IMF’s quota system. It’s a system of one dollar, one vote. The U.S. is the largest shareholder with a quota of 18 percent. Germany, Japan, France, Great Britain, and the US combined control about 38 percent. The disproportionate amount of power held by wealthy countries means that the interests of bankers, investors and corporations from industrialised countries are put above the needs of the world’s poor majority.

    • The IMF forces countries from the Global South to prioritise export production over the development of diversified domestic economies; Nearly 80 percent of all malnourished children in the developing world
    live in countries where farmers have been forced to shift from food production for local consumption to the production of export crops destined for wealthy countries.

    The IMF also requires countries to eliminate assistance to domestic industries while providing benefits for multinational corporations — such as forcibly lowering labour costs. Small businesses and farmers
    can’t compete. Sweatshop workers in free trade zones set up by the IMF and World Bank earn starvation wages, live in deplorable conditions, and are unable to provide for their families. The cycle of poverty is
    perpetuated, not eliminated, as governments’ debt to the IMF grows.

    • The IMF is a secretive institution with no accountability; The IMF is funded with taxpayer money, yet it operates behind a veil of secrecy. Members of affected communities do not participate in designing loan
    packages. The IMF works with a select group of Central bankers and finance ministers to make polices without input from other government agencies such as health, education and environment departments.
    The institution has resisted calls for public scrutiny and independent evaluation.

    • IMF policies promote corporate welfare; To increase exports, countries are encouraged to give tax breaks and subsidies to export industries. Public assets such as forestland and government utilities (phone, water and electricity companies) are sold off to foreign investors at rock bottom prices.

    • The IMF hurts workers; The IMF and World Bank frequently advise countries to attract foreign investors by weakening their labour laws
    — eliminating collective bargaining laws and suppressing wages, for example. The IMF’s mantra of “labour flexibility” permits corporations to fire at will and move where wages are cheapest.

    • The IMF’s policies hurt women the most; SAPs make it much more difficult for women to meet their families’ basic needs. When education costs rise due to IMF-imposed fees for the use of public services (socalled “user fees”) girls are the first to be withdrawn from schools. User fees at public clinics and hospitals make healthcare unaffordable to those who need it most. The shift to export agriculture also makes it harder for women to feed their families. Women have become more exploited as government workplace regulations are rolled back and sweatshops abuses increase.

    IMF Policies hurt the environment; IMF loans and bailout packages are paving the way for natural resource exploitation on a staggering/ amazing scale. The IMF does not consider the environmental impacts of lending policies, and environmental ministries and groups are not included in policy making. The focus on export growth to earn hard currency to pay back loans has led to an unsustainable liquidation of natural resources.

    • The IMF bails out rich bankers, creating a moral hazard and greater instability in the global economy; The IMF routinely pushes countries to deregulate financial systems. The removal of regulations that might limit speculation has greatly increased capital investment in developing country financial markets. More than 1.5 trillion USD crosses border every day. Most of this capital is invested short-term, putting countries
    at the whim of financial speculators. Bailouts encourage investors to continue making risky, speculative bets, thereby increasing the instability of national economies.

    • IMF policies imposed as conditions of these loans are bad medicine, causing layoffs in the short run and undermining development in the long run. This has sparked recessions in some countries by raising
    interest rates, which led to more bankruptcies and unemployment.

    IMF Conditionalities

    Activity 10

    The IMF gives conditions to its member countries incase it is to give foreign aid to them.

    (a) What conditions are they?

    (b) How have these conditions impacted Rwanda’s economy?

    Usually before the IMF advances loans to its member countries, receiving the IMF loans, member countries must accept the conditionalities as prescribed in the structural adjustment programmes (SAPs). These IMF conditions have also been sometimes labelled as the Washington Consensus.

    7.4.4 Structural Adjustment Programmes (SAPs)

    Structural adjustment programmes (SAPs) refer to a package of policies which should be implemented in order to restructure and transform the economy of the country accepting loans from the IMF and the sister institution World Bank.

    Structural adjustment programmes (SAPs) consist of loans provided by the International Monetary Fund (IMF) and the World Bank (WB) to countries that experienced economic crises. The two Bretton Woods Institutions require borrowing countries to implement certain policies in order to obtain
    new loans (or lower interest rates on existing ones). The conditionality clauses attached to the loans have been criticised because of their effects on the social sector.

    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
    stabilisation policies and the WB is in charge of adjustment measures.

    SAPs 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. Through conditions, SAPs generally implement “free market” programmes and policy. These programmes include internal changes (notably privatisation and deregulation) as well as external ones, especially the reduction of trade barriers. Countries that fail to enact these programmes may be subject
    to severe fiscal discipline. Critics argue that the financial threats to poor countries amount to blackmail, and that poor nations have no choice but to comply.

    The IMF conditions comprise of typical stabilisation and Long-term adjustment policies. They include among others the following:

    1. Balance of payments deficits reduction through currency devaluation. i.e. member countries should devalue their currency to increase competition of home produced goods to increase foreign exchange earnings.

    2. Privatisation or divestiture of all or part of state-owned enterprises: A country should privatise its large inefficient public enterprise which requires a lot of government funding leading to high
    government expenditure.

    3. Budget deficit reduction through higher taxes and lower government spending, also known as 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 has a balanced budget.

    4. Retrenchment of the civil servants and demobilisation of the army in order to reduce on the size of the work force and government expenditure as well as ensure efficiency.

    5. Increase on tax collection revenue to avoid deficit financing by simply printing more money.

    6. Introduction of policies that attract both foreign and domestic investors, e.g, reduction in borrowing rates and having an open economy.

    7. Infrastructural development in order to improve productivity thus promoting economic growth and development.

    8. Emphasises the improvement of productivity through research and adoption of modern technology.

    9. Market liberalisation to guarantee a price mechanism in order to avoid government control of prices which lead to inefficiency and to allow private producers to compete.

    10. Market expansion through economic integration in order to increase export earnings.

    11. Ensure political stability and security in the economy.

    12. Raising food and petroleum prices to cut the burden of subsidies.

    13. Forex liberalisation and granting autonomy to the central bank to pursue on appropriate monetary policy.

    14. Focusing economic output on direct export and resource extraction.

    15. Improving governance and fighting corruption.

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

    17. Increasing the stability of investment (by supplementing foreign direct investment with the opening of domestic stock markets).

    18. Creating new financial institutions.

    Applicability of SAPs in Rwanda

    Some Structural Adjustments have been applied in Rwanda and these include among others the following:

    • There has been improvement in tax correction through expanding the tax base by introducing new direct and indirect taxes.

    • Trade liberalisation has been practiced in Rwanda e.g. markets have been opened for foreign imports especially manufactured commodities.

    • Privatisation: Rwanda has privatised some of her public enterprises as one of the requirements of SAPs.

    • There has been a reduction in public expenditure e.g. on social overhead expenditure like health, education social security etc. through cost sharing.

    • As one of the IMF recommendations, there has been increased production in agricultural sector.

    • Retrenchment of workers and demobilisation of the army.

    Criticisms/impact of the SAPs conditionalities

    The following are the criticisims or impacts of the SAPs conditionalities

    1. Cost sharing has been introduced in institutions of higher learning leading to reduced enrolment in schools there by perpetuating illiteracy.

    2. Cost sharing in hospitals has led to poor services hence poor health conditions leading to weak work force thus low output.

    3. Removal of subsidises especially on food has deepened misery and suffering of the poor masses because they cannot afford basic necessities thereby destroying the workforce.

    4. Life expectancy has dropped and the infant mortality rate has increased due to malnutrition and poor standards of living.

    5. The SAPs policies have widened the gap between the rich and the poor e.g. through retrenchment hence increasing poverty among the majority of the poor.

    6. The policy of devaluation has made imports expensive yet imports for LDCs have inelastic demand thus high forex expenditure or out flow worsening the balance of payment position.

    7. The conditionalities have led to wide spread unemployment due to retrenchment and privatisation.

    8. SAP’s policies have led to the widening of the informal sector where the operator can try evading the taxes that the government has been forced to introduce.

    9. The ruling parties and government in power have become unpopular because the implementation of these policies which are seen as being anti-people has at times led to strikes, riots and high crime rates.

    10. SAPs threaten the sovereignty of national economies because an outside organisation is dictating a nation’s economic policy.

    11. When resources are transferred to foreign corporations and/or national elites through privatisation, the goal of public prosperity is replaced with the goal of private accumulation.

    12. SAPs are held responsible for much of the economic stagnation that has occurred in borrowing countries. SAPs emphasise maintaining a balanced budget, which forces austerity programmes. The casualties of balancing a budget are often social programmes yet they are already underfunded and desperately need monetary investment for improvement. e.g. education, public health, and other social safety nets.

    7.5 International Bank for Reconstruction and Development (IBRD)- the World Bank

    Activity 11

    Basing on the research carried out in Activity 8 of this unit, discuss
    amongst yourselves about the following:

    (i) What led to the establishment of the World Bank?

    (ii) The objectives of World Bank, its functions and criticisms.


    Facts

    The International Bank for Reconstruction and Development (I.B.R.D) better known as the World Bank was established at the same time as the International Monetary Fund to tackle the problem of international investment in 1944. Since the I.M.F was designed to provide temporary assistance in correcting balance of payments difficulties, there was need of an institution to assist long term investment purposes. Thus I.B.R.D was established for promoting long term investment loans on reasonable terms.

    The World Bank as an inter-government institution corporate forms the capital stock of which is entirely owned by its member governments. Initially only nations that were members of the I.M.F could be members of the World Bank but the restriction on membership was subsequently released. The World Bank advances loans to member countries primarily to help them lay down the foundation of sound economic growth. The loans made by the bank either directly or through guarantees are intended for certain specific projects of reconstruction and development in the member countries.

    Members of I.B.R.D/WB

    The International Bank for Reconstruction and Development (IBRD) has 189 member countries, while the International Development Association (IDA) has 172 members. Each member state of IBRD should also be amember of the International Monetary Fund (IMF) and only members of IBRD are allowed to join other institutions within the Bank (such as IDA)

    a) Objectives of I.B.R.D/WB

    The objectives of I.B.R.D as incorporated in the Articles of Agreement are
    as follows:
    1. 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.

    2. To encourage the development of productive resources in developing countries by supplying them investment capital.

    3. To promote private foreign investment through guarantees and participation in loans and other investment made by private investors.

    4. To supplement private foreign investments by direct loans out of its own capital for productive purposes.

    5. 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.

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

    7. To help in raising productivity, the standard of living and the conditionsof labour in member countries.

    b) Functions of I.B.R.D/WB

    The principal functions of the I.B.R.D are set forth in Article (1) of the Agreement as follows:

    1. To assist in the reconstruction and development of the territories of its members by facilitating the investment of capital for productive purposes.

    2. 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.

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

    4. 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.

    c) Projects supported by World Bank in Rwanda

    Moving forward, the World Bank Group is expanding its support to Rwanda, helping it shift its growth trajectory that has the private sector at its vanguard. This requires much investment in infrastructure, service delivery, accountable governance, regional integration, boosting agricultural
    productivity, etc. To help Rwanda respond to these challenges, the World Bank Group has built its current portfolio of a net commitment of almost 887 million USD for 11 national projects and six regional projects with a national commitment of 204 million USD. These projects include:

    • Rwanda Pilot Programme for Climate Resilience.

    • Third Social Protection System Support (SPS-3).

    • Rwanda Urban Development Project.

    • Rwanda Electricity Sector Strengthening Project.

    • Transformation of Agriculture Sector Programme Phase 3 for Rwanda.

    • Rwanda Public Sector Governance Programme for Results.

    • Landscape Approach to Forest Restoration and Conservation
    (LAFREC).

    • Second Demobilisation and Reintegration Project—Additional Financing.

    • Rwanda Feeder Roads Development Project.

    • Rwanda Third Rural Sector Support Project Additional Financing.

    • Land Husbandry, Water Harvesting and Hillside Irrigation.

    • Third Rural Sector Support Project.

    • Rwanda Electricity Access Additional Financing. Criticisms of the IBRD/WB

    Below are the criticisims of the IBRD/WB:

    • The World Bank would promote world inflation and “a world in which international trade is state-dominated”. The so-called free market reform policies that the bank advocates for are often harmful to economic development if implemented badly, too quickly (“shock therapy”), in the wrong sequence or in weak, uncompetitive economies.

    • The World Bank has been criticised on the way in which it is governed. While the World Bank represents 188 countries, it is run by a small number of economically powerful countries. These countries (which also provide most of the institution’s funding) choose the leadership
    and senior management of the World Bank, and so their interests dominate the bank.

    • In the 1990s, the World Bank and the IMF forged the Washington Consensus, policies that included deregulation and liberalisation of markets, privatisation and the downscaling of government. Though
    the Washington Consensus was conceived as a policy that would best promote development, it was criticised for ignoring equity, employment and how reforms like privatisation were carried out.
    The Washington Consensus placed too much emphasis on the growth of GDP, and not enough on the permanence of growth or on whether growth contributed to better living standards.

    • The World Bank and other international financial institutions focus too much on issuing loans rather than on achieving concrete development results within a finite period of time

    • It has been criticised on the grounds that traditionally, WB has always been having Americans head the bank because the United States provides the majority of World Bank funding.

    Unit assessment

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

    (b) What structural adjustment programmes have been implemented in your country?

    2. (a) What are foreign Direct Investments (FDI’s)? Give examples in Rwanda?

    (b) Examine the contribution of FDI’s in the development process of Rwanda.

    (c) Examine the barriers to FDI inflows in Rwanda.

    3. (a) Explain the roles of World Bank.
      
    (b) Identify different sectors supported by World Bank in Rwanda.
     
    Glossary

    ཀྵཀྵ Globalisation: A process by which most economies around the world have become more interdependent, especially to increased integration of financial market.

    ཀྵཀྵ International Bank for Reconstruction and Development
    (World Bank) (IBRD
    ): Established in 1945 to serve as a vehicle for making loans to less developed countries. Loans are made from the bank’s capital, created by the subscriptions of members and by the sale of bonds.

    ཀྵཀྵ International Monetary Fund (IMF): Established by the Allied Nations in 1944 to stabilise exchange rates and encourage world trade by reducing exchange restrictions. It lends
    money to nations with balance of payments deficits. It affects international monetary reserves through the creation of Special Drawing Rights (SDR’s). Over 100 nations belong to IMF.

    ཀྵཀྵ Special Drawing Rights (SDRs): International monetary reserves created by IMF and made available to its members. It is also called paper gold

    Unit summary

    • Global business organisations

    • Meaning of globalisation

    • Characteristics of globalisation

    • Causes of globalisation

    • Effects of globalisation

    • Multinational corporations (MNCs)

    • Foreign Direct Investment (FDIs)

    • Global Financial Systems

    • Bretton Woods Conference

    • International Monetary Fund (IMF)

    • International Bank for Reconstruction and Development (IBRD) / the World Bank (WB)

    • Structural Adjustment Program







    Unit6:Economic IntegrationTopic Area 5: Development Economics Sub-Topic Area 5.1: Economic Growth and Development Unit 8: Economic Growth, Development and Underdevelopment