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Growth through Trade – Malawi’s Hope for Poverty Reduction

Lilongwe, October 30, 2008 -- Malawi has a better chance than ever before to accelerate economic growth! A team of development partners and the Government are collaborating in carrying out analytical work to establish a basis for policy options that will help Malawi build on recent gains in growth and economic management. These policy recommendations for economic growth will be delivered early in 2009 in what is called a Country Economic Memorandum (CEM).

Since 2006 Malawi has had remarkable growth rates averaging 7.5 per cent, compared to an average of about three percent during the early years of the decade. The projection for 2008 is for 8.7 percent growth. Growth is good. It increases wealth and income, which in turn help alleviate poverty.

The team of development partners working on the CEM includes the African Development Bank (AfDB), the UK’s Department for International Development (DFID), the Millennium Challenge Corporation (MCC) and the World Bank (WB). The Ministry of Finance is leading Government teams in the CEM work, with the Ministry of Economic Planning and Development and the Reserve Bank of Malawi as key local partners.

“The overarching focus of the CEM will be on providing advice on putting in place a policy and institutional environment collaborated with supportive expenditure programs that will enable the continuation and even   acceleration of the current strong growth momentum through trade,” says Jos Verbeek, the World Bank’s lead economist for Malawi.

To achieve its objective, the CEM will review the current sources of growth, the policy actions that led to the growth, and the role that trade has played. It will also suggest how the current growth can be sustained through either intensifying what is already happening or diversifying the sources of growth.        

Growth is the most desirable source of additional public resources. Given that how government spends these additional resources is important for growth, the CEM will also provide useful insights to  the Government and other interested partners  on how best to use any additional revenue to sustain if not accelerate Malawi's growth spurt.

Government is looking forward to the CEM. “It will help us further operationalize the Malawi Growth and Development Strategy by assisting with the prioritization of those policy actions and expenditure programs that will have the biggest impact on growth, and hence  poverty reduction,” said Randson Mwadiwa, secretary to the treasury
at the Ministry of Finance.

Growth through trade

The CEM is aptly titled Seizing Opportunities for Growth through Trade.

The Malawi Growth and Development Strategy (MGDS) (2006-2011) aspires for the transformation of the economy, from being predominantly importing and consuming, to being predominantly manufacturing and exporting. Trade is key to the fulfillment of this vision. Trading and retailing activities account for a significant part of the distribution sector. It is estimated that approximately 22 percent of Malawi's GDP comes from the distribution sector. For Malawi to sustain high growth rates, it will have to trade more.

“We believe the way out of poverty is through growth and trade,” says Lucia Hanmer, a DFID senior economic advisor. “Successful strategies for growth and trade are ones that are attuned to country circumstances.”

So, in order to recommend what can help Malawi’s growth improve and be more sustainable through trade, the CEM team will focus on establishing the extent of potential for Malawi to expand its non-traditional exports, and identifying the constraints that need to be removed in order to exploit this potential. The hypothesis is that market access might not be a binding constraint, given that Malawi is currently not fully utilizing existing preferential trade arrangements. Therefore, Malawi needs to look at other factors that could be preventing expansion of non-traditional exports, such as production related constraints (including lack of scale economies, inability to meet quality standards, energy constraints) and marketing costs (including high transportation costs, border related costs, and limited information about available markets). Further, given the long distances to Malawi’s overseas markets, trade with regional partners will be critical.   

The role of infrastructure

Key to trade is transport infrastructure. The MGDS recognises that Malawi’s poor infrastructure limits the country’s productivity and affects internal and external trade efficiency. At 53 percent of export value in 2007, transport costs remain high compared to other countries in the region.

“Reducing trade logistic cost inside as well as outside Malawi's border is critical to bring down the high trade logistic cost of Malawi's exports and make Malawi more competitive regionally as well as globally,” says Joao Mabombo, the AfDB’s infrastructure specialist.

The CEM will outline the status of internal and regional transport infrastructure within the development corridor framework, and identify key constraints in the transport sector that if addressed can spur economic growth. Using GPS technology, the CEM team is also identifying where in Malawi public investment could have the biggest impact on private activities and thus, growth.

Agriculture as a key sector driving growth

Agriculture generates over 90 percent of export earnings and 35-40 percent of GDP in Malawi. It is the main source of livelihood for the majority of Malawians, most of who are smallholder farmers living in rural areas.  A preliminary analysis of the sources of growth shows that agriculture has been one of the main drivers of high real growth rates registered since 2006, although much of this growth represents a re-bounding of the sector’s performance following a severe drought in 2005. The analysis further shows that productivity in the sector remains low which implies that there is still great potential for agriculture to continue driving growth in Malawi. The sector is therefore receiving particular attention in the CEM work.

In 2007, the main agricultural commodities with positive volume growth were tobacco (53 percent), sugar (nine percent), tea (nine percent), cotton (three percent) and edible nuts (four percent).  The CEM will assess the country’s competitiveness in key agricultural commodities so as to provide evidence on the potential investments and policies needed to improve and sustain higher growth in the sector. Two complementary analytical approaches are being used to achieve this: (i) quantitative value-chain analysis of selected commodities (ii) a detailed constraint analysis to identify key challenges affecting Malawi’s agricultural competitiveness.

Partnership behind CEM

In the spirit of the Paris Declaration, development partners are collaborating on the CEM.

“Working together is helping to build a shared understanding of what constrains growth in Malawi,” said DFID’s Growth Team Leader David Woolnough. “Supporting the government, we can use this knowledge to support future growth and ensure the economy goes from strength to strength.”

The development partners are so far applauding the collaboration as being highly positive in bringing together thinking and ideas from a number of individuals with different experience and skills, particularly around new approaches to growth and growth diagnostics.

“We do not believe in duplicating efforts, but in taking advantage of the pool of knowledge that is available here and abroad,” said the MCC’s Alex Gomani.

The experts from the donor institutions are partnering in producing the key sections of the CEM according to their expertise. DFID and the World Bank are working on the first section on general economic environment supportive of growth. All the partners are contributing to the second section on general cross-cutting economic policies to broaden and sustain economic growth; as well as analyzing issues of trade (WB, DFID, AfDB), infrastructure (WB, AfDB), and the financial sector (WB, RBM) in a growing economy. The third section looks at the most promising sectors that can broaden growth mainly agriculture and other high potential sectors such as agro-processing and manufacturing in general (WB). The final section will analyze how all the issues raised in the different sections fit together in order to make policy and strategy recommendations to the Government on how it can sustain and build on the current growth momentum.




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