assistance is that it has supported the expansion of exports to all key markets. A trade preferences scheme can at best stimulate exports to a particular market. In fact in the case of Rwanda, preferences have played no role in the recent expansion of exports. Coffee, which has been the source of export growth, is subject to zero tariffs in both the US and the EU.<sup>21</sup> It is worth putting the importance of coffee to Rwanda in context. Agriculture is the dominant activity for the 90 percent of the population living in rural areas. The industrial sector is very small. According to the 2002/3 survey of enterprises, total employment in the industrial sector was just 36,000, most of it in the public sector enterprises. This is a very small industrial base in relation to the almost half a million farmers who grow, at least some, coffee. So, in the short-run policies that enhance returns to coffee and other traditional exports and support farmers to shift out of subsistence activities into commercial production (those employed in producing traditional commercial crops for export tend to be less poor than farmers involved in non-market production) will have the greatest impact on poverty. Access to transport, for example, is a key factor affecting the propensity to shift into commercial production. Nevertheless, for sustainable long-term growth, it is necessary to complement such a strategy by pursuing diversification. Rwanda is typical of many poor countries in Africa, where poverty reduction in the short-term is inextricably linked with the export of traditional agricultural products.

**Box 2: Rwandan Coffee – challenges, opportunities and the role of aid for trade**

Coffee is a key export crop in Rwanda. In 2003, an aggressive strategy was developed to both increase total exports of coffee and move the industry into the high quality, specialty end of the market. This was estimated to require an investment of $69m: $24.75m from donors/NGOs, $23m from the private sector, and $21.25m from the Rwandan government. Two long-term, donor-funded projects have been assisting producers in developing buyer-seller relationships and assisting growers in upgrading quality. Aid projects have also helped farmers to form cooperatives to meet the requirements of “fair trade” coffee or to experiment with organic or shade grown coffees (all of which earn a substantial premium over regular coffee). This together with increased access to washing stations has also led to increases in farmer income by up to 55 percent. Washing and grading the coffee cherries has enabled those of higher quality to earn higher prices, giving farmers an incentive to increase quality. Regulatory reform has also allowed individual Rwandan cooperatives or private owners to negotiate directly with specialty roasters in the US and Europe, enabling them to sell to specialty markets at more than twice the market rate.

The quality and the image of Rwandan coffee have improved markedly. Rwandan exports to the US in 2005 were 140% higher than in 2003. This reflects a substantial increase in exports of coffee, Rwanda’s primary export. This increase in the value of exports was driven by a 37% increase in quantity and a 115 percent increase in the average price for Rwandan coffee exported to the US since 2003. Rwandan exports of coffee to the EU (the principal market with exports in 2004 being around 5 times larger than to the US - 18.2 million euro versus $4.5 million) were 50 percent higher in 2005

> 21 It is worth noting here that coffee is subject to duties, sometimes high, in other developing countries. For example, coffee faces a duty of 100 percent in India, 40 percent in Thailand and over 14 percent in China. The current multilateral trade negotiations are the mechanism by which Rwanda can improve access to these markets and increase opportunities for Rwandan exporters. In addition, for traditional commodities, such as coffee, even if the reduction in tariffs in Asia does not lead to new exports there could be a positive impact on Rwanda through the impact on world prices. Reductions in tariffs in India and China that raise the demand for imports could lead to higher world prices for coffee.

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