# **1. Introduction**

Like other low-income countries, Rwanda has committed itself to reaching the Millennium Development Goals (MDGs). Rapid real GDP growth since 2000 (at an average annual rate of 7.8 percent) and concerted government efforts have led to progress in some important areas, like primary schooling and health. Nevertheless, Rwanda is likely to fall short of achieving most of the MDGs. In terms of MDG 1 (the objective of halving the headcount poverty rate of 1990 by 2015), Rwanda has only made marginal progress in recent years, reducing the rate from 60.4 percent in 2000/01 to 56.9 percent in 2005/06.<sup>1</sup> This reflects the fact that Rwanda faces severe constraints as it strives to accelerate its progress.2 As a small landlocked country with poor infrastructure, the high cost of trade is a critical constraint – the need to invest in infrastructure has consequently been identified as a priority in the Country Economic Memorandum completed in 2007 (World Bank, 2007). Another major constraint, the lack of skilled labor, hampers development of both the private sector and the efficiency of government operations. The urgency of making progress in education is highlighted by Rwanda’s Vision 2020, according to which the government has set itself the goal to transition to a knowledge-based economy. In the absence of any significant source of export earnings, foreign aid is a major source of foreign exchange inflows and government financing. In recent years, high-income countries committed themselves to major increases in aid to countries like Rwanda. However, as the global economic crisis has unfolded in recent months, the hope for more aid has been replaced by the fear of major aid cuts, making efforts to improve government efficiency ever more urgent.

Against this backdrop, this paper analyzes the effects of alternative scenarios for aid (with a significant scaling up and severe cuts as the two extreme cases), government spending allocations (between infrastructure, agriculture, and human development), and government efficiency. In terms of effects, we focus on the consequences for growth and the different MDG indicators.

An economically sound analysis of the above issues requires an economy-wide approach that in an integrated manner can simulate the effects on production, MDGs and other indicators from changes in aid, government spending, and government efficiency. With these analytical needs in mind, the World Bank has developed MAMS (Maquette for MDG Simulations), a tool for medium- to long-run development strategy analysis. The characteristics of MAMS are described in the following section; our analysis is focused on the period 2008-2020. In section 3, an overview of Rwanda’s economy is given to facilitate the results of the simulation scenarios, which are explained in section 4. A baseline scenario serves as benchmark for comparison of the other scenarios that assume: (i) an increase in aid, allocated to different sectors, i.e. human development, infrastructure, agriculture as well as split between these sectors; (ii) an increase in government efficiency; and (iii) a downturn of the global economy. Our conclusions are summarized in section 5.

> 1 Data taken from EICV 1 and EICV 2, respectively (EICV = _Enquête Intégrale sur les Conditions de Vie de ménages de Rwanda_ ). See also Oxford Policy Management (2007).

> 2 For a more detailed analysis, see World Bank (2007).

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