an Eldis Resource
Constraints to Economic Growth in Malawi
Export revenues propping up the Malawian economy
Authors:
L. Nicholas; L. Hanmer
Publisher:
Policy Research Working Papers, World Bank, 2009
This paper applies a growth diagnostics approach to identify the most binding constraints to private-sector growth in Malawi. The authors find that growth in Malawi has been primarily driven by the domestic multiplier effect from export revenues. The multiplier effect is particularly pronounced due to the high number of smallholder farmers, which produce Malawi’s main export crop, tobacco, and consequently results in the widespread and rapid transmission of agricultural export income. Furthermore, despite changes in the structure of agricultural production from estate to smallholder farming and liberalisation of prices and finance, a longstanding relationship persists between exports in real domestic currency and overall gross domestic product. This central role of exports in creating domestic demand highlights the importance of the real exchange rate in Malawi’s growth story, which directly increases the strength of the export multiplier.
The most pressing constraint to growth in Malawi continues to be the regime of exchange rate management. Despite good progress, there is compelling evidence that the rate is still substantially overvalued. Furthermore, it is also likely that the inflow of foreign aid - in excess of 50 percent of exports - contributes to the overvaluation through its large component of recurrent expenditures. The study concludes that economic growth is further contained by the factors outlined below. Easing these constraints will require a combination of policy reform, regional negotiation and public investment:
- the lack of reliable power deters new investment in manufacturing and mining and lack of rural electrification exacerbates deforestation
- high overheads have created high real lending rates which constrain investment (and smallholders, who have very limited access to formal finance, are further excluded)
- quality of and access to education is extremely weak
- growth is constrained by administrative barriers to trade and the unpredictability of interventions in agricultural - price interventions are likely to have increased traders’ perception of market risk in Malawi, discouraging participation and increasing trader premiums, lowering farm income.
