Proximate Determinants of Sustainable Economic Growth in Rwanda : -An empirical investigation

Sammanfattning: This study analyses proximate determinants of sustainable economic growth in Rwanda. The study asks whether growth of agriculture, foreign aid and change in climate conditions are drivers of a sustainable economic growth experience in Rwanda. The Solow growth model is used as theoretical framework and TFPG is derived as the Solow residual. The study specified TFPG and GDP value added functions, and crop production growth, temperature, and rainfall changes, as well as foreign aid growth and the square of foreign aid growth as explanatory variables. Both foreign aid growth and foreign aid growth squared are included in the two models to take account of positive but diminishing marginal returns to foreign aid in developing countries. The results from the study’s empirical analysis showed that crop production and foreign aid growth are sources of aggregate productivity growth in Rwanda. The study concludes that agricultural growth and foreign aid growth are determinants of sustainable aggregate output growth rates and as well as of TFPG rate. The study recommends that agriculture with its present structure contributes to aggregate productivity in Rwanda and hence sustainable growth rates. Moreover, initiatives to hedge against aggregate productivity losses from climate shocks potentially due to effects on agricultural growth should form a core part of the agricultural development policy in Rwanda. It is also important that policy initiatives on engendering aggregate productivity growth should address adverse effect of climate shocks on the contribution of foreign aid to productivity.