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Contribution of small and medium enterprise to the economic development of Rwanda

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par Valens NYANDWI
Universite Nationale du Rwanda - Licence 2013

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2.3.3. Economic development 

Generally refers to the sustained, concerted actions of policy makers and  communities that promote the  standard of living and  economic health of a specific area. Economic development can also be referred to as the quantitative and qualitative changes in the economy. Such actions can involve multiple areas including development of  human capitalcritical infrastructure, regional  competitivenessenvironmental sustainabilitysocial inclusionhealthsafetyliteracy, and other initiatives.

Economic development, according to Harvard Professor Michael E. Porter is the "long-term process of building a number of interdependent microeconomic capabilities and incentives to support more advanced forms of competition." These capabilities and incentives, which were originally identified in Porter's The Competitive Advantage of Nations, 1990, include the nature and extent of the inputs required by firms to produce goods or services; the rules, incentives and norms governing the type and intensity of local rivalry; the quality of demand for local services; and the extent and quality of local suppliers and related industries.

Economic development differs from  economic growth. Whereas economic development is a  policy intervention endeavor with aims of economic and social well-being of people, economic growth is a phenomenon of  market productivity and rise in  GDP. Consequently, as economist  Amartya Sen points out: «economic growth is one aspect of the process of economic development.

Economic development can also be described as a process that influences growth and restructuring of an economy to enhance the economic well being of a community. In the broadest sense, economic development encompasses three major areas:

1. Policies that government undertakes to meet broad economic objectives including inflation control, high employment and sustainable growth.

2. Policies and programs to provide services including building highways, managing parks and providing medical access to the disadvantaged.

3. Policies and programs explicitly directed at improving the business climate through specific efforts, business finance, marketing, neighborhood development, business retention and expansion, technology transfer, real estate development and others.

The main goal of economic development is improving the economic well being of a community through efforts that entail job creation, job retention, tax base enhancements and quality of life. As there is no single definition for economic development, there is no single strategy, policy or program for achieving successful economic development. Communities differ in their geographic and political strengths and weaknesses.

Each community therefore, will have a unique set of challenges for economic development.

2.3.5. Growth and development

Dependency theorists argue that poor countries have sometimes experienced  economic growth with little or no economic development initiatives; for instance, in cases where they have functioned mainly as resource-providers to wealthy industrialized countries. There is an opposing argument, however, that growth causes development because some of the increase in income gets spent on human development such as education and health.

According to Ranis et al., economic growth and is a two-way relationship. Moreover, the first chain consists of economic growth benefiting human development with the rise in economic growth, families and individuals will likely increase expenditures with heightened incomes, which in turn leads to growth in human development. Further, with the increased consumption, health and education grow, also contributing to economic growth. In addition to increasing private incomes, economic growth also generates additional  resources that can be used to improve  social services (such as  healthcare, safe  drinking water, etc.).

By generating additional resources for social services, unequal  income distribution will be mitigated as such social services are distributed equally across each  community, thereby benefiting each individual. Concisely, the relationship between human development and economic development can be explained in three ways. First, increase in average income leads to improvement in  health and  nutrition (known as Capability Expansion through Economic Growth). Second, it is believed that social outcomes can only be improved by reducing income  poverty (known as Capability Expansion through Poverty Reduction).

Lastly, social outcomes can also be improved with essential services such as  educationhealthcare, and clean  drinking water (known as Capability Expansion through Social Services). John Joseph Puthenkalam's research aims at the process of economic growth theories that lead to economic development. After analyzing the existing capitalistic growth-development theoretical apparatus, he introduces the new model which integrates the variables of freedom, democracy and human rights into the existing models and argues that any future economic growth-development of any nation depends on this emerging model as we witness the third wave of unfolding demand for democracy in the Middle East.

He develops the knowledge sector in growth theories with two new concepts of 'micro knowledge' and 'macro knowledge'. Micro knowledge is what an individual learns from school or from various existing knowledge and macro knowledge is the core philosophical thinking of a nation that all individuals inherently receive. How to combine both these knowledge would determine further growth that leads to economic development of developing nations.

Yet others believe that a number of basic building blocks need to be in place for growth and development to take place. For instance, some economists believe that a fundamental first step toward development and growth is to address property rights issues, otherwise only a small part of the economic sector will be able to participate in growth. That is, without inclusive property rights in the equation, the informal sector will remain outside the mainstream economy, excluded and without the same opportunities for study.

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