Abstract
This study investigates the determinant of economic growth in Rwanda, using time series data for the period 1990-2017. These data have been analyzed and interpreted using statistical, analytical, synthetic methods as well as an econometrical approach. The economy of Rwanda represents the research gap about the components and determinants of economic growth as instrument policies to alleviate poverty and rise out production. The objective was to test the trends and relationship between capital formation, foreign direct investment and economic growth in Rwanda. This research tested and confirmed the following: gross capital formation and foreign direct investment are the main determinants of economic growth in Rwanda for the period under study. R-square, the overall measure of goodness of fit indicates that the explanatory variables included in the above model explain 89.3% of the variation of the dependent variable (GDP growth) for the long run regression model and 97% for the error correction model. The error correction model shows that the speed back to equilibrium is 86.4% that is when a shock happens in the previous period it decreases by 86% in the current period. This indicates that there is a significant short-run relationship as it was shown by the coefficients of the error correction model which are significant. Based on the existence of a long-run co-integrating relationship and the short-run interactions, the researcher tested and confirmed that there was a short-run and long-run positive relationship between capital formation, foreign direct investment and economic growth in Rwanda during the research period. The study reveals that capital formation has a significant positive effect on gross domestic product in the long run. The policy-makers should formulate policies by looking at the determinants of growth as they are crucial in the process of economic growth and have a positive remarkable role in the economic acceleration.
Highlights
Rwanda is one of the Sub-Saharan East Africa nations; it is a developing country with a higher density of population among Sub-Saharan African countries and is landlocked with few natural resources and low levels of industrialization
This study investigates the determinant of economic growth in Rwanda, using time series data for the period 1990-2017
The error correction model shows that the speed back to equilibrium is 86.4% that is when a shock happens in the previous period it decreases by 86% in the current period
Summary
Rwanda is one of the Sub-Saharan East Africa nations; it is a developing country with a higher density of population among Sub-Saharan African countries and is landlocked with few natural resources and low levels of industrialization. During the pre-Tutsi genocide phase, Rwandan economy was characterized by a low level of living standard, poor socio-political structure and low level of infrastructure. For Rwanda to achieve all its development programs there is a need to evaluate the contribution of Gross Capital formation, and foreign direct investment on Rwandan economic growth. Rwanda experienced a low level of foreign direct investment during the period of ninety’s due to the political environment which was not favorable for investors. Researches on the role of gross capital formation and foreign direct investment on economic growth are scarce in literature. Such gaps occurred in a country like Rwanda which faced Genocide, there is a need to do such research and bridge the gap. This paper is organized as follow, there is materials and methodology, section three is the research findings, and section four present the discussion, conclusion and policy recommendations
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