Some quick thoughts on Rwanda

Tonight is my last night in Kigali. I’ve had the immense pleasure of spending a week here with a team from the Legatum Institute studying Rwanda’s unique political-economic experience over the last 15 years. We will be producing a snappy report detailing some of what we learned, including possible lessons for other sub-Saharan African countries, but I feel as if my brain will explode if I don’t get some of my thoughts written down as soon as possible.

When we arrived in Kigali last week, I was immediately astonished by the condition of the roads. This looks like Latin America, I thought, only cleaner. The cognitive dissonance was severe. I knew that Rwanda’s per capita GDP is less than $600, 20 times less than that of Brazil. The roads should have been made of dirt and covered in litter. Instead, the main roads were paved and well maintained, and I’m not sure I saw a single piece of litter on the whole trip.

It is not just road construction that the Rwandese government has taken seriously. Seemingly through acts of sheer political will, the Kagame government has undertaken bold reforms. In 2011, Rwanda ranks 58th on the World Bank’s Doing Business index; that’s up from 70th in 2010. There is some way to go, and there is more to development than the Doing Business index, but the rate of reform is truly impressive.

Rwanda’s model, made explicit by the government, is another rapid reformer, Singapore. Singapore’s fingerprints are all over Rwanda. At the Rwanda Development Bank, we inadvertently discovered printouts of some powerpoint slides from a presentation given earlier in the week by Singaporean civil servants. In Singaporean fashion, these were taken from us; it was claimed that they contain confidential information. Singaporean boldness and authoritarianism are on display in Rwanda’s ongoing effort, impressively successful so far, to change one of its national languages to English from French.

Despite Rwanda’s bold and technocratic reform, growth takes time. As I’ve indicated, Rwanda is an extremely poor country. It takes more than effective laws to generate wealth. One major challenge, raised by almost everyone we talked to (and in any case, abundantly apparent to us), is the enormous skills deficit that Rwanda faces. The level of incompetence is staggering. And though the government is focusing on educating the public, it’s not clear what they can do to address the real problem, which is a lack of a sort of tacit kind of human capital. Most Rwandese lack a certain kind of savoir-faire; they have no idea how the world works or what is expected of them, and they appear afraid to take initiative (which makes the boldness of Rwanda’s government even more startling).

Another severe challenge for Rwanda is its landlocked position. It is practically impossible to manufacture anything in Rwanda because transporting goods to the nearest port means paying bribes in neighboring countries. By regional standards, there is minimal corruption in Rwanda itself, but its neighbors are a different story. On Sunday, we took an impromptu trip to the DRC, only to be turned away when we refused to pay the $285 per person the Congolese border guard demanded to let us in (I’m not sure what the legit visa fee is). Non-tariff barriers to trade are seriously hampering investment opportunities in Rwanda.

A third major problem for Rwanda is energy. Everywhere you go in Rwanda, the lighting is incredibly dim. At a market that I went to today, during daylight hours, I could barely see the produce on sale. Electricity is expensive due to extremely limited supply. The government has plans underway to increase energy production by a factor of ten (!) as soon as possible.

One reform that is badly needed is a tax overhaul. Rwanda has three main taxes: an 18 percent VAT, a personal income tax, and a 30 percent corporate income tax. A complaint we heard many times is that the tax system is poorly administered. For instance, tax liability accrues upon invoicing, not upon receipt of payment. So if you are a contractor who bills the government $1 million, you immediately owe taxes on that $1 million, even if the government takes its sweet time in paying up. Business taxes must be paid in person and are subject to a 100 percent late penalty. We hear that the government is in the process of fixing this; I’d be willing to bet that by this time next year, the administration of taxes will be substantially more sane.

What we did not hear from the people we talked to, but which I nevertheless believe to be true, is that the rate of taxation is counterproductively high. The government aims to be increasingly independent of budgetary aid, and this means raising more revenue. But the Rwandese government deviates very far from optimal tax theory; given its technocratic approach to governing, this error was glaring. First, the VAT and the income tax are to a large extent duplicative. Every franc spent and taxed as consumption is a franc earned and taxed as income. Spending and earning are two sides of the same coin; it doesn’t make sense to tax both, and the cumulative marginal rate when both taxes are added together is quite high.

Second, and more seriously, a 30 percent corporate tax rate is completely inappropriate. The correct rate is probably close to zero. In the US, you frequently hear exaggerated claims about how lowering tax rates can increase revenues at the federal level. The evidence cited for this is that some local and state politicians have successfully done it. Of course, the reason this arguably works at the local or state level is that investment is much more elastic as those levels. Supply-side economics is relatively important when investment is highly elastic. Investment in Rwanda is extremely elastic. It is a small, unproven market on a risky, poor continent. If I had some influence, I would urge the government to eliminate the corporate and personal income tax and bring in revenue with a VAT on a bigger base.

The government also needs a way to increase the skills of its people. Some of this will happen organically with greater investment, but I wonder if they could not improve the situation by brokering the employment market for Western-educated foreigners. It should be as easy as possible for a college-educated American or Brit, say, to find a private-sector job in Rwanda. If they worked side-by-side with Rwandese workers, some of the tacit skills that I mentioned above might transfer to some degree. If Rwanda continues to reform and grow, there will be some serious profit opportunities for skilled workers, and the government should do what it sensibly can to import skills. Also, I will reiterate my call for open borders in the West; limitations on student visas in particular are truly monstrous.

Enough policy talk. I must tell you that Rwanda is a very beautiful country. Though located near the equator, it is at altitude, so it does not get unbearably hot. Our drive through the mountains to the Congolese border was picturesque. We did not get to see the gorillas, but I am already contemplating a vacation to do so; I’ll stay at a beautiful hotel on Lake Kivu at which we ate lunch. I’ll add also that I really enjoyed the Rwandese; when our truck got stuck on a steep, rocky path down which we unadvisedly drove, an entire village and their goat came to help us up the hill. Video of this event is forthcoming once I get to a faster Internet connection. (UPDATE: here it is).

The main thing that most people in the world know about Rwanda is that a genocide occurred there. The genocide undergirds much of what happens here, even if people don’t like to talk about it. If you ask, the Rwandese are willing to tell their stories, but they seem—understandably—uneasy, profoundly sad, and ashamed of their country while also recognizing that the story needs to be told. We visited a few of the numerous genocide memorials that honor the 800,000 dead. The events remain unimaginable to me. One exhibit that nearly moved me to tears showed large, blown-up pictures of smiling children. Underneath each photograph was a plaque that recalled characteristics of each child: favorite foods, personality traits, best friends, and so on. Each one also recounted the cause of death. One child’s last words were “UNAMIR will come for us.” Cause of death: tortured to death.

In 1994, Rwanda—its people, its capital, its institutions—was destroyed. Some of the culture survived, but to an extent that is at least exceedingly rare, Rwanda was starting from zero. Fans of Paul Romer’s charter cities would do well to study Rwanda. Like a city, it is small and dense—the densest country in Africa—and like a charter city, there is at least a sense in which it is starting from scratch. It is in the newness of Rwanda that both its opportunities and dangers lie. Can they lay new foundations, and prevent old tensions from resurfacing? It is illegal to refer to Hutus and Tutsis in public; I see the good sense of this policy, but I wonder if it prevents an ultimate reconciliation. At the days of remembrance, are Hutus who did not participate in the genocide made to feel unduly ashamed? If so, what can they do with their shame? And is Rwanda prepared for its first major political transition under its new institutions? Kagame seems to be both feared and—truly—loved. He says he will not run again in 2017. This gives Rwanda six years to manage a transition between personal leadership and institutional leadership. I am more optimistic than pessimistic, but a lot is riding on the next six years.