The largest investor in Sub-Saharan Africa

The article was originally published in the Rising Africa magazine, in Fall 2012. 

Coins, cell phones, cars and air- crafts and thousands other everyday items contain nickel and cobalt. Where do those materials come from and what does it take to get those materials out of ground? CCAfrica talked to Toronto-based Canadian company Sherritt International Corp. to find out.

Sherritt International Corp. has initiated and operates a massive nickel and cobalt mining enterprise in Ambatovy, Madagascar in collaboration with SNC-Lavalin, and Japanese and Korean investors. At a construction cost of approximately half of the GDP of Madagascar (measured in current US dollars), the 5.5 billion dollar project employing over 6,000 people at various stages of project is naturally the largest-ever foreign investment in the country. It is one of the biggest investments in sub-Saharan Africa and the Indian Ocean region, too.

Not only is the project very expensive but as the map on the next page shows, it is also located in multiple places in eastern Madagascar. Considering the massive volume of the project, both its value in dollars and the area it occupies, it is natural that project will have an impact on the surrounding land and its people. Designed to operate for at least 29 years, Ambatovy’s goal is to create lasting prosperity for all stakeholders and contribute significantly to sustainable development in Madagascar.

To contribute to local communities long term, for example, choice to refine nickel and cobalt in Madagascar was made, a rare decision in Sub-Saharan Africa. This way, the value added to economy is ensured, as the project will generate additional 1,000 high quality, well-remunerated jobs. Nickel will become Madagascar’s first export item, which in return will generate foreign ex- change for the country. Over its lifecycle, Ambatovy will contribute hundreds of millions of dollars to the Government of Madagascar in taxes, royalties, duties, and other payments.

To construct the Tailings Management Facility and the Plant site, Ambatovy worked for many years in collaboration with local stakeholders: government, civil society, media, local communities, and workforce and contractors to gain their trust, inputs and acceptance. While resettling people affected by project to appropriate, yet nearby, parcels of land, Ambatovy ensured that relocation was fair, transparent, and participatory, respecting local cultures and traditions according to Malagasy laws and international social performance standards, namely, IFC PS5.

To ensure its goal – lasting prosperity and sustainable development - Sherritt has employed a large corporate social responsibility unit employing 120 people to work together with the local people and helping to preserve the natural environment surrounding the construction and mining sites.

“In consultation with our archeology team, for example, it was discovered that a cellular tower at the Mine site was planned on a sacred hill. We removed the tower and facilitated a traditional ceremony to bless the site.”

Consisting of four divisions, Ambatovy’s CSR department deals with community relations, programs, projects, and support services. Sherritt makes every reasonable effort to ensure that the total impact on local communities is positive. Ambatovy’s communication manager Lalaina Randrianarivelo told Rising Africa: “Respecting human rights is a daily task that is undertaken by all our employees. In consultation with our archeology team, we made several important operation decisions in order to respect the traditional beliefs and culture of com- munities around our sites. For example, it was discovered that a cellular tower at the Mine site was planned on a sacred hill. As a result, we removed the tower and facilitated a traditional ceremony to bless the site.”

In the words of local people, Sherritt takes the corporate social responsibility seriously.

“Ambatovy has indeed shown some strong commitments towards transparency by complying with Extractive Industry Transparency Initiative principles, which encourages mining and gas companies that are investing in Madagascar, the

Malagasy government and other government-linked entities to disclose various in- formation; namely payments made by the extractive industries to the government,” says Mbola Andrianady, a Madagascar- native master student in international development who specializes in CSR in the mining industry.

Ambatovy is obliged to adhere to national and international standards. Ambatovy’s performance is monitored by Madagascar’s National Environment Office under the Investment and Environment Compatibility Act to ensure its compliance with environmental regulations set for in- vestments. With the support and assistance of the World Bank, Madagascar accepted a Large Mining Investment Law, under which Ambatovy project was certified in 2007.

Further, some of Ambatovy’s financing institutions are members of Equator Principles Financial Institutions, which pledge to take into account social and environmental criteria in the large-scale projects they finance. Equator Principles advise the institutions not to finance loans where the borrowers are not willing or able to comply with these criteria. As a result, Ambatovy’s financing agreements require that the Ambatovy nickel and cobalt mine uphold these principles.

With a view to achieving superior safety, environmental and social results, Ambatovy is also committed to the following voluntary measures that go beyond its legal obligations: Business and Biodiversity Offsets Program, International Council on Mining and Metals Principles, International Standard ISO 9001, and the EITI, as mentioned above.

Ambatovy aligns its reporting procedures with those of the Global Re- porting Initiative framework, one of the world’s most prevalent standards for sustainability reporting. Ambatovy also publishes sustainability reports, which provide an overview of how Sherritt manages different sustainability issues in this mining site. These publicly available reports discuss why health and safety, training, biodiversity and reclamation, stakeholder engagement, and community investment are important to the business.

Further, Ambatovy provided training to its security personnel on human rights related to security practice. Respecting the human rights of the employees through sound policies on collective bar- gaining and non-discrimination, in 2011 progress was made on the collective bar- gaining agreement. While not all aspects were finalized, parties were able to complete and sign 6 of the 15 sections. Additionally, Ambatovy also makes sure its employees and local communities are aware of Ambatovy’s zero tolerance policy on child sexual exploitation. Ambatovy continued to educate both local communities and our own employees in this matter.

Ambatovy project clearly states its values publicly. When CCAfrica asks whether this is a unique approach in mining industry, Ms. Randrianarivelo responds: “This approach is often shared by companies with a responsible approach. The only difference in Ambatovy is that we take the culture of the host country also into consideration. In Madagascar, for example, the spirit called “Fihavanana” which translates a set of solidarity, tolerance and brotherhood is very active in the community. Ambatovy considers himself a full-fledged member of the community that hosts them.”

As part of its social investments and partnerships Ambatovy’s Local Business Initiative makes sure that people have a capacity to provide goods or services to the project. Training and audits have been implemented so that the quality can meet the requirements of the mining project. In 2010, 500 companies and corporations have benefited from contracts and markets with Ambatovy.

Central agency for agricultural produce (the Central d’Achat de Madagascar) is a Malagasy-run agency that serves the Toamasina area to provide a central point for farmers to sell their agricultural produce outside their villages and to help supply the Ambatovy project food requirements. The agency has been successful, prompting the establishment of a second center in Moramanga, near the mine site.

The Ambatovy has also set up agricultural training center in the Toamasina area not far from the Ambatovy refinery site. This training center is focused on pro- viding skills to workers who are completing their contracts but it is also available to others from communities that have been affected by the project. Note that nearly 18,500 employees worked for the construction of Ambatovy and at the end, Ambatovy assisted its employees and its subcontractors to move to new generating potential opportunities. This program is not only completely new in Madagascar, but also unique in a sense that no other private company has implemented such a program before.

As the species-rich location sets additional constraints on operation, Ambatovy adheres to stringent environmental standards. Considering that local people are dependent on natural resources for their livelihood, Sherritt has initiated many conservation programs, which aim to en- sure no net loss, and preferably a net gain, of biodiversity while ensuring socioeconomic benefits for local populations.

Ambatovy’s social investments include sponsorships, charitable donations, educational and health programs, vocational training and professional development, and a wide variety of other sustain- able development projects. Ambatovy built 296 new houses, a health center, schools and water facilities and sanitation projects for the people impacted by the project. Villagers were able to select their preferred housing model and each household received a parcel of land for agriculture and grazing. Social development program aims the autonomy of those villages. The objective is to ensure a better quality of life than before.

On the surprising side, the construction work opened the door to archaeological discoveries. Investigations led to the collection of 4,851 objects such as pottery, ceramics, tumblers, stones, metals, bones, plastics and botanies, writes Africa Review. It adds that archaeological discoveries are expected to promote Malagasy culture and scientific knowledge.

Canada – 6th largest donor at the African Development Bank!

My interview with Mr. Montador, published in The Rising Africa magazine, 2012

For a while Bruce Montador was our man in Tunis: from 2007 to 2011, he represented Canada at the African Development Bank as an Executive Director. Having travelled to 28 countries in Africa either for work or fun, he shared his thorough Africa-insights with The Rising Africa.

First of all, how does the development work of AfDB differ from the one of World Bank (and the planned development bank by the BRICs)?

The AfDB has fewer resources than the World Bank has for the African region, so it needs to focus. It tries to limit its programming to a relatively few areas – infrastructure, private sector, governance and higher education. Infrastructure is critical, particularly for things like electricity, regional integration and water. The private sector is taking off – there are ever more references to Africa in the mainstream business press, but there are still many challenges facing both African and foreign entrepreneurs.

It is hard to comment on the proposed BRICs development bank, since as far as I know it is not yet operational. There is a tendency to announce projects like that without them ever doing very much for a range of practical reasons.

How does Canada participate and finance the bank? Is the contribution from Canada growing or the opposite?

Canada supports the Bank in two ways. As a shareholder, Canada’s capital pledges allow the Bank to borrow at good rates on the market, to on-lend to middle income countries and the private sector. As one of the few remaining AAA credits, Canada’s pledge is important to the Bank, particularly since Canada is already a big shareholder for our size (about 10 percent of the non-regional share).

Moreover, during the financial crisis, there was a need to increase the Bank's capital, and the temporary pledge of capital Canada made at the Pittsburgh G-20 meeting in 2009 allowed the Bank to continue to serve its members.

The other way we, Canadians support the Bank is through the budgetary grants to the African Development Fund to allow for loans and grants to low-income countries and for regional public goods. We currently give 108.5 million dollars a year – it will be up for renegotiation next year for the cycle starting in 2014. We are the 6^th largest donor, and our contribution has grown with each replenishment.

Canada is seen as an important partner – though for African Development Fund, the big players are really the Europeans – the UK, Germany and France. Canada also supports some multi-donor trust funds that do additional work – in areas like preparatory work for regional infrastructure projects and water, and for Aid for Trade.

What can Canadian companies and NGOs do to benefit from the AfBD? Please share recommendations...

Canadian consulting companies do quite well from AfDB contracts. Firms that are interested should be in touch with the Embassy in Tunis, which can help keep them informed of opportunities. Companies with bigger investment interests should check with the Bank's private sector department to see if there are possible synergies. Some NGOs may find consulting opportunities, and some of the thematic trust funds, like the Congo Basin Forest Fund, have approved projects from Canadian NGOs. AfDB does not do as much outreach to NGOs as at the World Bank, in part because NGOs have not typically paid a lot of attention to the AfDB.

What are the trends affecting the AfBD and how does it affect Canadian companies and NGOs?

The AfDB is bolstered by the growing Afro-optimism, and companies and NGOs will see growing opportunities. However, the tight fiscal environment in donor countries will probably limit growth of the concessional window, the AfDF, and thus limit growth in the Bank Group's operations in least developed countries. There may be fewer Bank contracts available in traditional areas of health and basic education. Finally, there will probably be more competition from African firms in the markets for Bank procurement.

Can you share your personal opinion on Africa’s development; say from 2007 to 2011, on the example of one or two countries of your choice?

Since my work in AfDB largely coincided with the financial crisis – I can say that Africa was doing quite well before the crisis, and was not directly touched by the financial crisis. The only country that was really integrated into the international financial system, South Africa, has a sound banking system. However, like Canada, the continent was adversely affected by the economic downturn created by the financial crisis in the US and Europe.

In addition, the nervousness of international lenders led them to pull back from marginal markets with which they were less familiar, a description which basically fit the whole of Africa. 

Fortunately, the relatively rapid recovery in Asia, and in commodity prices, as well as a return of Asian investors looking to secure supplies of commodities, helped Africa to get back on to a solid growth path relatively quickly.

That is an overview, obviously situations vary. A country like Ghana, where governance and economic reforms were well underway, and where new oil production is adding to growth, is a very positive story. Tunisia, where political uncertainty has devastated the tourist sector, has actually not done badly in terms of sustaining exports despite the weakness in the euro-zone, its main market. The East African Community has been showing fairly solid growth, based on resources but also the gains from growing integration.

Professor of economics at the London School of Economics and Political Science Alwyn Young has claimed in his research paper ‘The African growth miracle’ that Sub-Saharan living standards (as measured in ownership of durable goods, the quality of housing, the health and mortality of children, the education of youth and the allocation of female time in the household) have been growing three and a half to four times the rate indicated in international data sets.

It is an interesting analysis, and not inconsistent with the AfDB's estimates of a larger African middle class than might be expected.  However, it is still important to recognize that many of those people emerging from poverty are still relatively vulnerable; the trend is positive, but there is a long way to go. This of course also means that there is lots of scope for further strong growth.

In your view, is it justified to compare North African countries with Sub-Saharan countries – or should the stats and analysis be always separated, as two very different entities?

From the political perspective of African countries and the African Union, it is all of Africa that is the frame of reference. Obviously there are cultural and economic differences between North Africa and Sub-Saharan Africa but I don’t know if looking at the Middle East and North Africa together is a better framework. There are lots of differences between the Maghreb and the Mashreq.

We in CCAfrica often make country-based overviews of development (so called Monthly African Indicators), but perhaps there are other units (cities, nationality, culture etc) which would tell a better story?

With 54 countries the indicators become a sea of data, but the cities, cultures etc are open to interpretation. I would suggest looking at the five broad regions – North Africa, East Africa, Southern Africa, Central Africa and West Africa. There are one or two countries whose allocation is controversial or in flux, but broadly this approach produces relatively homogeneous (or less heterogeneous!) subsets. One story to tell in this context would be the relative success of regional integration in the different areas – best in East Africa and weakest, so far, in North Africa.

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“Africa is not a monolithic entity”

An interview with the CEO of CCC, published in 2012 in the Rising Africa magazine

The President and CEO of the Canadian Commercial Corporation (CCC), Mr. Marc Whittingham shared his views on African development with “The Rising Africa”. Was there a lost decade in Canada-Africa relationship? Our editor Marje Aksli asked the questions.

The mandate of CCC is “to assist in the development of trade between Canada and other nations.” How big share of your clients are currently from Africa nations?

Right now, African clients make up a relatively small share of our total business, but that small share is actually quite significant when we look at the types of projects that we are working on in Africa with Canadian companies – these are complex infrastructure projects. We are seeing a lot of potential in Africa; rapid urbanization in many countries on the continent is putting tremendous pressure on infrastructure. We are taking a very active role in engaging with clients from Africa to show them the solutions that Canadian companies can offer for their water, transportation and energy infrastructure investments.

Do you work with companies directly, or through their country governments only?

CCC has the authority to sign international contracts on behalf of the Crown for purchases destined for a foreign government. This provides foreign government buyers with the option of a government-to-government arrangement that can reduce the time, cost and risk of international tendering. It also offers a very practical mechanism for bilateral cooperation in key areas such as defence and infrastructure development.

How do you choose the countries CCC works in?

First of all, we never treat Africa as one entity; we look at each country individually. I was fascinated by the address by the dean of African diplomatic corps in Ottawa, Mrs. Chideya at the Canada-Africa Symposium when she said: “We are many different countries. Africa is not a monolithic continent.” And this is what companies in Canada need to understand, as well. The countries in Africa have individual resources, individual rules of law and individual talents and human capital.

What recommendations do you have for Canadian companies doing business in Africa?

Certainly there needs to be an increased awareness that there are opportunities, as the reality of Africa starts to be discussed in the media, and Canadian Council on Africa is doing an excellent job in that regards. The other thing to mention is that Canadian businesses look for opportunities where they believe there is a stable rule of law. I think you see this recognition in Africa that democracy and rule of law leads to economic development, which leads to social development. Almost in that order. I would advise the companies to know the country they are working in; to talk to Export Development Canada (EDC) about financing; to talk to Canadian trade commissioners, and to look at CCC if there is a possibility of government-to-government transaction. And certainly I would recommend that every company looking to work in Africa join CCAfrica. There are lots of opportunities in different countries of Africa to bring Canadian expertise to different areas.

Was there a lost decade in Canada-Africa relations?

Historically, Canada was doing more in developmental assistance programs and a lot of social development programs. I don’t think we had a lost decade from the business perspective, I think we were never really there from a business perspective. And maybe Africa was not ready for us and maybe we were not ready for Africa. Another reality in Canada is that for many years, Canada’s business was done with Canadians and with Americans. It’s a big market there. Today, our trade is shifting from almost all trade going to the U.S. two decades ago to include other markets: Latin-America, definitely Asia, and now increasingly Africa. I think it is wonderful that Canadian International Trade Minister Fast is leading trade missions to some African countries.

CCC currently has an active project in Ghana in the energy field. Why and how was this project selected?

First of all, Ghana is a country where democracy has prevailed, and the rule of law is prevailing. As the late President Mills mentioned many times the rule of law is necessary as it attracts the investment. In terms of our project there, the Ministry of Energy needed to increase the energy capacity of the country significantly as a part of a long-term strategy to support the power demands of the growing middle class in Ghana. This meant more power plants throughout the country in a relatively short period of time. CCC first got involved in the Ghana power project when we were contacted by our trade partners at the High Commission of Canada in Ghana to assist a Canadian company, Orenda Aerospace Corporation, and its partners in negotiations with the Government of Ghana. Both parties recognized a key facilitation role that CCC could play in the transaction for a 132-Megawatt power generation plant.

Do you see room or availability in your capacity for other companies to follow a similar route?

The opportunities for companies to follow a similar route are countless. African leaders have told me that compared to companies from other countries the Canadian businesses have the advantage of coming with quality products, with a long term perspective and high degree of Corporate Social Responsibility (CSR). Obviously, environmental concerns are paramount in anything we do, but also community engagement, local employment, knowledge and technology transfer to locals. I spoke earlier about rapid urbanization in many African countries and increased demands on infrastructure, we see that most of these demands are for reliable energy and adequate housing. Our goal is to come up with the best-possible Canadian solution to meet countries’ needs.

How do you do that?

The model we put forward is attractive to governments as it presents the Government of Canada as a partner in the country for what can be a very complex process. It is a collaborative approach that includes CCC, Canadian companies, and often the Trade Commissioner Service and Export Development Canada, working with governments to assure them of a credible and ethical process. We started doing public-private partnerships (PPP) in the late 80’s. During the long learning process we realised that the key to a PPP is to make sure that the risk is shared in a right way: public sector should not take private sector’s risks and vice versa. It means that both should take the risk where they are able to manage it properly. Once you do that then you are able to establish a good project that will be efficient for the communities. You need a very strong public sector that is able to negotiate a good risk sharing model with the private sector.

How strong is the public sector in African countries?

African public sectors are of varying strengths. If they do not have enough capacity, you need to back them up. This is where government-to-government contracting can be of help. As a Canadian government entity in contracting, we can provide the capacity and will make sure that the risks are shared in a way that makes sense for everyone. CCC guarantees for both parties that there will be full transparency and it will be in accordance with our Code of Business Ethics. All our employees sign it every year, and the Canadian companies we work with have to comply with it as well.

What could be the positive lessons learned that other companies / governments can benefit from?

Foreign governments have now seen the value that CCC adds by filling the needs of governments to establish robust procurement practices, including due diligence practices to ensure fair, reasonable and ethical contracts in meeting the development needs of the countries. Canadian companies have experienced enhanced access to opportunities by having the power of the Government of Canada at their side in business transactions.

Much has been talked about the CSR and the lack of internationally agreed standards on what should CSR universally hold. What can you say about the CSR projects in the two sites in Africa, in Kenya and Ghana, in terms of their respect for local communities and civil society, environment, economy and governance?

CCC represents both the Government of Canada and Canadian companies in our transactions and CSR and good corporate citizenship are at the forefront of every decision that is made to enter into a contract. This means that we carefully consider all the implications of our business activities not only at home but also abroad. In keeping with the Government of Canada’s stance to encourage and expect all Canadian companies to meet high standards of CSR, we have developed our own guiding CSR principles outlined in our Code of Conduct, and the Code of Business Ethics, which I mentioned already. One element of CSR that we are committed to is the capacity building in the host country, which means that with our projects such as that in Ghana, much of the workforce is actually hired locally, leading to knowledge transfer to the local workforce. In Ghana, we had 94% local employment on the project, meaning that the jobs and skills are kept in country.

How active is the African diplomatic corps in taking advantage of your opportunities?

One of the many advantages of being headquartered in Ottawa is that we have access to the foreign diplomatic missions in Canada. One of the Corporation’s main strategies is to engage with the heads of missions from abroad to not only introduce CCC and our services, but to really educate officials with the government-to-government approach to business and the real benefits that Canada brings to projects, especially to complex infrastructure projects.

Do you think CCC will have a role in the increased trade between Africa and Canada as envisioned by the Minister Fast (his announcement on Oct 16) and the planned CSR hub in Western Africa?

Absolutely. I think CCC will continue to play a very unique role in the increased trade between Canada and countries in Africa. As Minister Fast noted at the Canada-Africa Symposium, Africa is one of the fastest-growing economic regions in the world, which not only means many new opportunities, but also increased competition from around the world. I think CCC, with the Government of Canada and Canadian companies, will be able to contribute greatly to the CSR initiatives that are taking place in Africa, and I believe that supporting ethical business practices is one of the cornerstones of a Canadian approach to trade.

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Recipes for economic growth, ingredients and all

Everyone knows that Africa’s economies have recently taken off. Rising Africa has become a cliché phrase in economic articles. But what does the rise exactly look like and what contributes to that? 

With the help of World Bank income data, it is easy to see that the Sub-Saharan Africa has indeed experienced over two-fold increase in incomes during the last decade. Below, I have marked with a blue line the Gross National Income (GNI) levels per capita during the first decade of 2000. We see that the income levels have increased significantly. In order to put income levels of last decade into context, I have added a red line marking the average GNI levels during the three previous decades, from 1962 to 1999, and a green line marking the previous peak income in 1979. See below: we can see that Sub-Saharan Africa has never seen so high GNI levels per capita before.

While it is true that income levels alone are not sufficient to illustrate the economic situation of the entire continent consisting of 54 countries, we can nevertheless conclude few things from that chart below: first, despite the complaints of Africanists and African scholars against The Economist’s simplistic labelling, the simple comparison of Sub-Saharan income levels indeed seems to justify tagging Africa “hopeless” in 2000, “rising” in 2011.

Now, it is much more difficult to say what exactly contributes to the growth. In an attempt to narrow my focus in Africa further down, I have chosen only one country – Rwanda – for my economic analysis, for which I have used 1984-2009 data from World Bank. 

But data alone are not enough. One also needs some models regarding how to use that data. If you wish, economic growth models can be considered like recipes for economic growth, each with particular ingredients. Regression analysis, which can be considered as cooking (again, to bring a lousy parallel) allows me to make a causal claim about how these ingredients in those recipes condition the outcome. Or – what recipe with what ingredients best cooks the economic growth?

All three models, which I picked: namely the Rostow’ stages of growth, the Harrod-Domar model, and neo-classical model – attempt to give the best formula for the economic development. As you see below, they have slightly different ingredients, and different number of ingredients, as well.

Which one of them offers the best recipe for growth? 

Rostow’ stages of growth	The Harrod-Domar model	Neo-Classical Model
1.    Savings, 2.    Investment, 3.    Population growth;	1.  Level of savings, 2.  Productivity of capital (or national capital–output ratio, in inverse relationship);	1.  Capital accumulation (in other sources savings rate), 2.  Population growth (or labour growth), 3.  Productivity, and 4.  Technological progress.

One problem was to find correct, matching data for all those ingredients. Although World Bank offers a wide range of data – starting from the classic GDP to the number of mobile cellular subscriptions and to the number of newborns protected against tetanus to the rate of condom use among youth, I nevertheless had difficulty finding exactly matching (and consistent) data. Like trying to cook exotic cuisine at home, I had to replace some ingredients.

For example, while preparing an old-fashioned Rostow’ stages of growth, which required savings, investment and population growth, instead I used ‘gross domestic savings’, and ‘foreign direct investment’, both measured in current US dollars. I also used size of the total population for the third ingredient: population growth.

As a result of running scatterplots and regressions analyses to explain how do these three ingredients contribute to the GDP growth, I found that savings, population and investment explain impressingly large share of the growth outcome: 91.8 per cent!

This means that countries seeking to boost their GDP should try to find ways to increase their level of savings and investment in addition letting their population grow.

I found this outcome quite surprising as the Rostow’s model is considered to be out-dated. Old-fashioned, as I said. Moreover, it must be mentioned that the single ingredients in this model did not quite correlate perfectly to the GDP. See, for example, how the graph above illustrates correlation of population size to GDP: it is not linear. There are periods, where GDP goes down while the population grows. This tells us that African 'demographic dividend' alone is not sufficient to guarantee economic growth.

Second model on my list, the Harrod–Domar model has only two ingredients. Will it beat the Rostow's model in explaining GDP growth?  Harrod-Domar model tries to explain economy's growth rate in terms of the level of savings and productivity of capital. Therefore, it only has two components. Again, I found it is hard to measure productivity. That is why I replaced ‘productivity of capital’ with ‘national capital / output ratio’, which was available in World Bank dataset. The peculiar thing about measuring capital / output ration is that - the its smaller value, the higher the productivity is: its value correlates negatively to the growth. 

For example, compare the 100-dollar-output produced by 1000 people (which is 10), with the same output worth of 100 dollars produced by fewer, 900 people. The outcome is smaller, 9. That can be shown on the graph below – the higher the productivity (the smaller the value), the bigger the GDP.

Compared to the previous recipe, the Harrod-Domar model explains much smaller share of GDP, as I found after running regressions with the two ingredients. My smart computer program SPSS calculated that only 73 per cent of economic growth is explained by those two ingredients. This tells us that one needs more ingredients (and likely another model) to cook a good economic growth.

And the last one...

Now, lets look at the last, neo-classical model as it is called. For this "recipe" there are different ingredients listed in different sources. It consists of productivity, population growth (or labour growth), capital accumulation (in other sources savings rate), and technological progress.  For consistency, I was using total labour force / GDP ratio as a proxy for productivity as I did with the previous model, and the same indicator for population growth as in Rostow’s model. But instead of required capital accumulation, I found a ‘gross capital formation’ indicator in the World Bank databank.

But how to measure the required ‘technological progress’? There is no exact indicator provided in the Worldbank data for Rwanda. I had to decide: which one is better replacement: the high-tech export, measured in current US dollars, or number of scientific and technical journal articles published annually in Rwanda?

In order to decide, I tested them in correlation to the GDP… How do they relate to eachother?

Since the slightly better match to GDP growth was offered by the number of scientific articles published in Rwanda (see below),  I choose this indicator for the fourth required ingredient of technological progress. (It is quite funny, if you think that the number of journal articles can have anything to do with economic growth.) My computer program did not laugh though – it liked all the ingredients in this recipe, and as a result of regressions, I can claim that together they explain an astonishing 98 per cent of economic growth (while the result is statistically significant)!

This means that based on Rwandan data from three decades, it can be suggested that the leaders who look for recipes for economic growth, could consider the guidance offered by neoclassical model. 

Therefore, capital accumulation (or rate of savings), population (or labour force) growth, productivity, and technological progress will most likely lead to the best outcome in economic growth.

Comparing the models and the outcomes, I realised that the recipe with more ingredients will explain the outcome in GDP growth the best. Neo-classical model has four variables and it provided the highest percentage of GDP growth explained. Therefore, we can conlcude that there is no single magic bullet for prosperity – instead, improvement in a wide variety of factors is necessary.

But is it possible to claim which of those ingredients or independent variables is most powerful?  Yes, based on regression analysis, the rise in productivity seems to be contributing to the GDP growth the best – every unit reduced in labour force /GDP ratio seems to be contributing the biggest rise in GDP growth of all other independent variables. Therefore, it seems clearly: the higher the productivity, the higher the GDP growth. 

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