Discuss policies, other than import tariffs, that the Rwandan government could use to develop its manufacturing industries

Edexcel A-Level Economics Paper 2 June 2021 Extract

Discuss policies, other than import tariffs, that the Rwandan government could use to develop its manufacturing industries. (15 marks)

One policy the Rwandan government can use to develop its manufacturing industries is lower corporation taxes. This means that firms can keep more of their profits. Firstly lower corporation taxes would incentivise more firms to set up in Rwanda. This can promote foreign direct investment (FDI) which is when multinational corporations (MNCs) set up in a new country and take control of capital. MNCs can bring knowledge and experience with them, which can lead to greater productivity in the manufacturing sector. More importantly, lower corporation taxes allow all firms to invest more into capital, and the more capital that firms own, the more they can increase productivity (output per unit of input). This can lead to growth in the manufacturing sector. Extract A Line 18 mentions that firms were being undercut by cheap imports, but lower corporation taxes can lead to greater competitiveness in Rwanda over time.

However, there is an opportunity cost to lower corporation tax rates, as the government need to carefully consider the next best alternatives. As tax revenue may fall, this would lead to an increase in the budget deficit and therefore an increase in national debt. The government would need to consider whether it is worth reducing corporation taxes if this means cutting spending elsewhere or increasing other taxes. For example, a cut in spending on healthcare or education could be detrimental to Rwanda’s development. Extract B mentions the significant improvement in access to services, which the government would not want to cut down on.

Another policy that the Rwandan government could implement is increased spending on infrastructure. For example, they could spend more to improve roads and transport links. Extract A Line 22 mentions issues of collapsiing infrastructure in African countries. As the government increases spending and improves transport links, it allows firms in the manufacturing sector to transport goods faster. This would lead to greater productivity, which means that the value of goods in the manufacturing sector can increase, and therefore there is growth. 

However, one downside of this policy is a potential time lag between the time in which the government starts the project until the time in which there is any significant development in the manufacturing sector. Examples of infrastructure spending in other countries like the UK prove this, as HS2 has taken over 10 years and is still not complete. It is important that the Rwandan government continue to improve infrastructure and transport links but they should not rely on this improving the manufacturing sector in a short amount of time, as this depends on the project being completed.

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