Business and Economics

Yogesh Kumar Gupta ‘28, an International Studies and Economics Major,  presented “Thinking Outside the Box: How Rwanda and Tanzania are using Industrial Policy to Foster Structural Transformation” during the summer Undergraduate Reasearch ACRoss Luncheon in the Pelletier Library.  Under the guidance of faculty mentor, Professor of Economics, Stephen Onyeiwu, Yogesh explored the economic data on these two countries, and the options they have to develop economically.

To learn more about this research, we asked Yogesh to explain the background for this project:

Yogesh: Rwanda and Tanzania face socio-economic challenges that include low GDP per capita, high poverty rates and lack of structural transformation. Both countries have set ambitious goals designed to transform their economies, from low-productivity and subsistence agriculture to more diversified industrial economies. They have undertaken a plethora of industrial development initiatives during the past 15 years or so to foster inclusive economic growth and structural transformation. 

This paper discusses how Rwanda and Tanzania have pivoted from the classic Import-Substitution Industrialization (ISI) strategy, to strategies that build on their respective dynamic and static comparative advantages. While Rwanda has sought to develop dynamic comparative advantage in knowledge and technology products, Tanzania has focused on leveraging its static comparative advantage in natural resources and minerals. In both strategies, the overarching goal is to achieve international competitiveness, contrary to their previous ISI strategy. The paper presents preliminary evidence about the outcomes of these industrial development strategies and offers some policy recommendations.

How did you arrive at your research question?

Yogesh: My initial stage in the research involved analyzing the socio-economic challenges facing Rwanda and Tanzania. This meant examining data on their development gap, including per capita income, which sits below the Sub-Saharan Average (SSA), and poverty rates, which are higher than both the world average and East Asian Countries. In both countries, subsistenceagriculture accounts for a significant share of employment, and 90% of employment is in the informal sector. This pointed to a clear conclusion: overcoming these challenges requires structural transformation, a shift from low-productivity subsistence agriculture toward higher-productivity industry and services. But how could this be achieved? While there are multiple pathways to structural transformation, our research focused specifically on the role of industrial policy as an impetus for it. To make sense of industrial policy, I began a literature review and found newer policy approaches outlined in World Bank reports. Industrial policy, as defined by the World Bank, is a strategic government action aimed at increasing a targeted business activity.

This was not the first time these countries had turned to industrial policy. They did so from the 1960s to the mid-1980s, when they adopted Import Substitution Industrialization (ISI), in which foreign investors and donors were expected to play a major role. Protective measures, including tariffs and other measures were put in place to shield domestic firms from foreign competition. This did not prove effective due to weak implementation, resulting in heavy government subsidies and protection the government could not sustain. As a result, state-owned enterprises collapsed, and foreign firms exited due to unfavourable business and regulatory environments.

To shore up their industrial performance, Rwanda and Tanzania implemented structural adjustment programs in the 1990s that included a reversal of the statist industrial policies of the 1960s-1980s. The liberalization of trade and investment characterized this era. Many of the restrictions on foreign investment were either eliminated or relaxed. But their industrial performance hardly improved. Despite those reforms, Rwanda and Tanzania found themselvesin a bind; they needed industrial development to achieve structural transformation, but market-based neoliberal reforms did not deliver it.

This bind didn’t go away; it just took a new shape. Beginning in the 2000s, both countriesreturned to industrial policy, but not the version that had failed them before. Rwanda, pursuingits goal of becoming an upper-middle-income country by 2035, and Tanzania, pursuingsustained economic growth, each adopted more selective, outward-oriented approaches: targeting specific sectors for export competitiveness, and often tying government support to firm performance, rather than offering blanket protection as before. This shift mirrors a broader global trend. Countries worldwide are returning to industrial policy; China, for instance, is using it to become a leader in semiconductors and vehicles, and the United States is enacting the CHIPS Act to counter global supply chain vulnerabilities, reduce reliance on foreign manufacturing, and strengthen national security.

But a return to industrial policy is not the same as a solution. The 1960s- 80s experience already showed that industrial policy can fail, not for lack of ambition, but through weak implementation and unsustainable burden. This raised the question I could not ignore: If industrial policy is once again the tool of choice, is it actually built to work this time, and howwould we know?

That question shaped my research:

1. What tools of industrial policy are African countries using to foster industrial development?

2. How effective have those tools been in promoting industrial development and structural transformation?

What surprised you once you got into your topic?

With similar starting conditions and economic structure, I expected Rwanda and Tanzania to pursue similar paths toward structural transformation. But this wasn’t the case, as their approaches to industrial policy were positioning the countries differently for the future.Rwanda’s industrial policy centred on building a knowledge-based ecosystem that has set the country on a faster path to structural transformation and gaining a dynamic comparative advantage. Tanzania appeared to pursue a more static comparative advantage, anchored in resource-based strategies to what it already has, rather than what it could build. This mattered more than I expected: Rwanda’s approach seemed to position it to tap into the fourth Industrial Revolution (4IR) and attract more forward-looking FDI, a notably ambitious strategy for a developing economy. At the same time, Tanzania’s strategy risked reproducing the same resource dependency it had once tried to escape.

How accessible was the data that you required to answer your research question given the history of violence in Rwanda in particular?

Data for Rwanda was more accessible than for Tanzania. With its strong bureaucratic structure, Rwanda has invested heavily in building a robust statistical and data-reporting system as part of its broader development strategy. We drew data from the World Bank country reports and the IMF, and conducted our statistical analysis using World Bank development indicators. Since our research specifically focused on industrial policy and structural transformation, we did not engage with materials related to Rwanda’s history of violence, as that fell outside the scope of our analysis.

Summer Research at Allegheny

Allegheny’s curriculum of developmentally appropriate undergraduate research experiences serve as the spine of our award winning research program. The Office of URSCA further supports and engages students outside of the classroom by funding collaborative Student-Faculty Research (SFR) projects during the summer. 

ACRoSS

ACRoSS has become a flagship summer experience for all students and faculty members that are on campus during the summer. ACRoSS is an interdisciplinary forum for the presentation of summer research projects developed by students and faculty at Allegheny College.