The Rwanda Economic Update (REU) reports on and synthesizes recent economic developments and places them in a medium term, regional, and global context. It analyzes the implications of these developments and policies for the outlook of Rwanda’s economy. These reports attempt to make an analytical contribution to the implementation of Rwanda’s national development strategy. Each edition includes a special feature on a selected topic. The report is intended for a wide audience, including policy makers, business leaders, other market participants, and the community of analysts engaged in Rwanda’s economy.

Overview

Despite an adverse external environment stemming from a slowdown of the Chinese and European economies, Rwanda has maintained steady growth in the first three quarters of 2015. Gross Domestic Product (GDP) growth remained steady at 6.9 percent during this period. Thus far, the decline in commodity prices has been favorable for Rwanda – a net importer of energy products. Macroeconomic stability measured by inflation and exchange rates has been maintained.

However, downside risks have been increasing, both externally and domestically. A deteriorating external environment has led the World Bank to revise down its global and regional growth forecasts in early 2016. The global growth forecast was revised down by 0.4 percent to 2.4 percent for 2015, and by 0.4 percent to 2.9 percent for 2016. The growth forecast for Sub-Saharan Africa (SSA) was 3.4 percent in 2015, down from 4.6 percent in 2014, mainly due to the region’s reliance on fuel, minerals and metals, and agriculture commodities. On the domestic front, risks are on the horizon, including delayed execution of the budget and inadequate financing for development. Put together, both external and domestic risk has led the World Bank to adjust its growth projections for 2015 (7.1 percent), 2016 (6.8 percent), and 2017 (7.2 percent).

The special topic of this edition focuses on jobs in particular the employment dynamics of the past decade. The focus on jobs is motivated by two observations. First, the inter-sectoral shift of labor from agriculture to non-agriculture has been particularly fast in Rwanda and has been a main driver of poverty reduction and economic growth. The extent to which Rwanda can sustain this shift will determine in part whether the country can keep up its pace of growth and poverty reduction. Second, as Rwanda moves gradually towards a middle-income status and the labor force continues growing rapidly, jobs, especially in the non-farm sector, will become increasingly important as a transmission mechanism between aggregate growth and household living standards. The special topic will dissect and revisit the main employment trends between 2001, 2006, and 2011 (more recent data is not available yet); formulating firm recommendations on job creation going forward is outside the scope of this report.

Rwanda at Work

The 2011 Snapshot: Agriculture and informality define Rwanda’s employment landscape

Despite firmly positive trends over the past decade, employment in Rwanda in 2011 remained characterized by agriculture, informality, and low earnings. In 2011, about 70 percent of workers had their main job in agriculture, with the remaining 30 percent engaged in a myriad of non-farm activities. Farm self-employment, or people working on their own on their family’s farm, accounted for almost 60 percent of employment, followed by farm wage employment, which accounted for 12 percent. In the nonfarm sector, self-employment in small enterprises dominates, closely followed by wage employment in the informal sector. The private formal sector provides employment to four percent of working Rwandans, while the public sector absorbs three percent of workers. Taken together, the modern wage sector accounts for seven percent of total employment.

For the majority of the population, earnings are low. In 2011, median monthly earnings from all jobs amounted to Rwf 18,175 (in 2011 prices), meaning that half of workers earn Rwf 18,175 per month or less (amounting to US$31 using the official exchange rate and US$74 using the purchasing power parity (PPP) adjusted exchange rate)5 . 90 percent of workers earned less than Rwf 65,000 per month (US$263 in PPP terms), and less than six percent earned Rwf 100,000 per month or more (approximately US$405 in PPP terms). One third of workers are engaged in so-called low-earning jobs, meaning that their labor earnings place them below the national poverty line.

The Trends: A move to non-farm employment and higher earnings

Among the most salient of recent employment trends has been the move to non-farm occupations. In 2011, 30 percent of employed Rwandans had their primary job outside agriculture, up from 23 percent in 2006, and 11 percent in 2001. The move towards non-farm occupations as a main source of employment understates the true extent of the shift: considering all jobs, regardless of whether it is the primary or secondary occupation, the share of workers with an occupation outside agriculture increased from 30 percent in 2006 to 45 percent in 2011. Farmers are increasingly taking up non-agricultural secondary jobs next to their primary occupation on the land.

The move to non-farm occupations has been driven by the youth, in particular young men. The share of young men with a job in agriculture sharply dropped between 2001 (89 percent), 2006 (69 percent), and 2011 (55 percent), indicating that more and more young men are abandoning agriculture altogether. Middle-aged and older men do not abandon agriculture as readily, but are increasingly likely to have their main occupation outside farming (while keeping secondary occupations in agriculture). The shift to non-farm employment as the primary occupation is the result of two complementary dynamics: on the one hand, young people are abandoning agriculture altogether and moving to non-farm occupations, while on the other, older workers increasingly shift their main occupation outside farming but maintain a strong foot on the farm (as a secondary occupation).

Within agriculture, farm wage labor is on the rise, and this is driven by young women. The share of workers employed as unpaid labor on the family farm dropped from 38 percent in 2006 to 29 percent in 2011, while the share of wage farmers increased. The move to wage farming is also driven by the youth, and in particular by young women. Although there is no panel data, the net job additions in agriculture between 2006 and 2011 are indicative of young women (aged 16-30) moving from unpaid farming on the family farm to paid farming on somebody else’s farm. The employment transitions are significantly gendered: while young men tended to move out of agriculture towards non-farm occupations, young women have shifted employment dynamics within agriculture.

Though still low, individual labor earnings increased substantially since 2006. Median earnings from all jobs increased by 66 percent between 2006 and 2011, and the share of workers with earnings that placed them below the poverty line (defined as “low earners”) decreased from 54 percent to 33 percent. Agriculture led the earnings increase: Earnings of independent farmers almost doubled while those of wage farmers and unpaid farm workers increased by half. As a result, the low earnings rate in agriculture dropped from 59 percent in 2006 to 37 percent in 2011. Low earnings are increasingly a consequence of underemployment: of all low-earners, almost 60 percent would not be low earners if they could increase hours worked to reach full-time employment.

Diversification into non-farm occupations has been most closely correlated with the increase in earnings. In a decomposition framework, 12 percent of the increase in median earnings can be accounted for by the higher share of workers with an occupation outside farming. There are a number of interesting differences in the correlates of earnings growth between lower earning and higher earning workers. Taking up additional jobs has been particularly important for earnings growth of low-earners, while diversification into non-farm occupations – both as main and secondary occupations – explains the largest part of the earnings increase for higher earners. Poor workers have increased earnings by working more jobs, while better-off workers have boosted their earnings by progressively moving to non-farm activities.

Going Forward: The employment outlook for Rwanda

Rwanda, as with many African countries, is faced with a substantial jobs challenge. Between 2015 and 2020, the working age population is projected to grow by 220,000 every year, outpacing the rate of job growth between 2006 and 2014 (158,000 jobs a year). The Second Economic Development and Poverty Reduction Strategy (EDPRS 2) aims to create 200,000 off-farm jobs every year – double the rate of non-farm job creation between 2006 and 2014 (103,000 jobs per year). While the formal private sector is growing quickly, its low base means that the majority of labor market entrants over the coming five years will need to seek employment in the informal non-farm sector or in agriculture. Assuming that formal private sector employment keeps on growing at over 16 percent per year (the observed growth between 2006 and 2011), its employment share will remain low over the coming five to ten years.

Going forward, Rwanda appears to need a two-pronged jobs strategy. First, given that agriculture will remain the main employer for the majority of workers over the coming five to ten years, increasing earnings from agriculture remains the most direct way to improve economic conditions for the bulk of the population. This is especially important given the apparent stall in the move to non-farm employment in recent years (the share of workers with a main job in the non-farm sector stood at 30 percent in 2013/14, only marginally higher than the 28 percent in 2010/11). Increasing earnings from agriculture entails not only further increasing productivity, but also having the required infrastructure in place to reduce post-harvest losses and facilitate access to markets. Second, new labor market entrants are increasingly likely to find or create employment in the non-farm sector. While a small share of those new workers will manage to get a job in the public or formal private sector, the bulk will be employed in the informal sector. A key policy question is how the business environment in the informal sector can be improved to allow informal activity to blossom, at least in the short to medium term when the formal sector will not yet be large enough to absorb the rapidly growing labor force.