(f) Case study - diversification
Conflict and diversification: the cases of Burundi and Rwanda
The cases of Burundi and Rwanda offer a clear illustration of conflict undermining economic diversification. These countries have experienced several episodes of civil wars: the most devastating being the 1994 genocide in Rwanda and the war that erupted after the bloody military coup of October 1993 in Burundi. These two countries illustrate the extent to which conflict not only causes an immediate collapse of the production base, but also has severe long-term negative effects on the country's diversification process.
Conflict undermines diversification through various channels. Firstly, conflict destroys economic activity in all sectors, especially trade-oriented activities and those that are heavily dependent on skilled labour and technology, such as manufacturing. In both Burundi and Rwanda, the manufacturing sectors suffered large declines in the conflict years: a staggering 39.7 per cent in Rwanda in 1994 and 18 per cent in Burundi in 1993. The already narrow production base was severely eroded follwoing the conflict.
Secondly, conflict retards the diversification process by destroying public infrastructure. During conflicts, not only existing infrastructure is destroyed (or not maintained), but also the capacity of the government to invest in new infrastructure is severely curtailed.
Thirdly, conflict creates a fiscal crisis by causing government revenue to shrink, and by displacing public expenditure from productive investment (including infrastructure) with military and security expenditure. In Rwanda, government revenue as a share of GDP, declined by 56.8 per cent in 1994. Most of this decline came from trade taxes, which dropped by 72 per cent (as a percentage of total trade). In Burundi, government capital expenditures declined by 9.5 per cent in 1993. The resulting fiscal crises explain the severe shortages in public infrastructure, water, and energy supply that the countries experienced in the post-conflict eras. These shortages constitute a severe constraint to investment in new activities.
Fourthly, by increasing uncertainty, conflict causes investors and lenders to shy away from long-term investment, such as in the industrial sector, and instead focus on short-term and speculative activities, such as commerce. In Burundi, the share of industry in total credit declined from 16 per cent in 1980-94 to 3.8 per cent in 2003-05, while that of commerce increased from 43 per cent to 72 per cent during the same period. At the same time, the share of long-term bank credit declined systematically from 17 per cent of total credit in 1993 to a meagre 2.5 per cent in 2004. The shift of resources away from long-term activities retarded economic diversification, undermined post-conflict economic recovery, and made it harder for the countries to achieve and sustain high rates of economic growth.
Sources: Ndikumana 2004; Bank of Burundi (various reports).
Taken from http://www.oecd.org/dataoecd/53/47/38975872.pdf