MCA-Malawi - Final Constraints Analysis

MILLENNIUMCHALLENGEACCOUNTMALAWI
TableofContents
1.0 EXECUTIVESUMMARY.. .. .. .. .. .. .. 2.0 SITUATIONANALYSIS .. .. .. .. .. .. 2.1 OverviewofLongTermEconomicTrends .. .. .. 2.1.1 GDP/CapitaGrowthDynamics .. .. .. .. .. 2.1.2 GDPCompositionandGrowthDynamics .. .. .. .. 2.1.3 ExportTrendsandComposition .. .. .. .. .. 2.1.4 InvestmentRatesTrends .. .. .. .. .. .. 2.2 UnderstandingwhyFoodSecurityisnumberonepriorityinMalawi 2.3 ConclusionontheSituationAnalysis .. .. .. .. 3.0 CONSTRAINTSANALYSISMETHODOLOTY .. .. .. 3.1 GrowthDiagnostics .. .. .. .. .. .. .. 3.2 RoleofDiagnosticSignals .. .. .. .. .. .. 3.2.1 DirectEvidence .. .. .. .. .. .. .. 3.2.2 IndirectEvidence .. .. .. .. .. .. .. 3.2.3 WhyTargetGrowth .. .. .. .. .. .. .. 4.0 CONSTRAINTSANALYSIS .. .. .. .. .. .. 4.1 Innovation .. .. .. .. .. .. .. .. 4.2 Whatyouexportmatters .. .. .. .. .. .. 4.2.1 Howtocomputeexportsophistication .. .. .. .. 4.3 Geography .. .. .. .. .. .. .. .. 4.3.1 Degradationofuppercatchments .. .. .. .. .. 4.3.2 GeographyLocation .. .. .. .. .. .. 4.3.3 SummaryoftheinitialconstraintsandConclusion .. .. 4.4 Infrastructure .. .. .. .. .. .. .. 4.4.1 TransportInfrastructure .. .. .. .. .. .. 4.4.2 RoadInfrastructure .. .. .. .. .. .. .. 4.4.3 Rail .. .. .. .. .. .. .. .. .. 4.4.3.1MalawiLakeServices .. .. .. .. .. .. 4.4.4 InfrastructurePower .. .. .. .. .. .. 4.4.5 InfrastructureWaterandIrrigation .. .. .. .. 4.5 HumanCapital .. .. .. .. .. .. .. 4.6 Finance .. .. .. .. .. .. .. .. 4.7 MacroRisks .. .. .. .. .. .. .. .. 4.8 MicroRisks .. .. .. .. .. .. .. .. 5.0 CONCLUSION.. .. .. .. .. .. .. ..
DraftFinalAnalysisofConstraintstoEconomicGrowth
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Annexes
Annex1 AnnexII
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Acronyms/Abbreviations
AERAnnualEconomicReport BATBritishAmericanTobacco CEARCentralandEastAfricaRailways EIUEconomistIntelligenceUnit IFSInternationalFinanceStatistics ICAInternationalCometitivenessAssessment MEPDMinistryofEconomicPlanningandDevelopment MLSMalawiLakeServices MOAMinistryofAgriculture MRMalawiRailways WDIWorldDevelopmentIndicators WEFWorldEconomicForum

DraftFinalAnalysisofConstraintstoEconomicGrowth Page2
1.0
EXECUTIVESUMMARY
TheConstraintsAnalysisStudyisanattempttoaccomplishacomprehensiveanalysisofconstraints that impede sustainable economic development and poverty eradication in Malawi. It analyses a largevarietyofpotentialproblemsrelatedtoissuesgeneratedbythegeographicalpositionofthe country, the status of infrastructure components, the situation in the area of human resources supply, difficulties in accessing financial resources, innovation skills as well as to the problems related to macroeconomic risks and investment climate. It also analyses the effects of the constraintsidentifiedonfoodsecurityandexportdiversification.Animportanttoolusedtoidentify the potential constraints is the comparison of Malawis performance with the achievements attainedbyothercountries,especiallybythosefromSubSaharanAfrica. The study comes with the conclusion that power, feeder roads and international corridors waterandirrigationandaccesstocapitalrepresentthemostbindingconstraintsforeconomic growthatthemoment.Thestudyfurtheridentifiedotherequallybindingconstraints,namely: anovervaluedexchangerate,administrativebarrierstotradeandregularhumancapital.
which is compounded by low export sophistication, in which Malawi ranks amongst the least sophisticatedcountries. Thecountryisalsoadverselyaffectedbyregionalcoordinationfailuresto achieve transport and energy network efficiencies and reliability. However Malawis inability to innovatecanbeaddressedbythemostbindingconstraintsmentionedabove. Regardinggeographytheanalysisarrivedatanumberofconclusions.Firstitwasnotedthatrainfall is a major driver of maize yields and subsequently of GDP per capita growth. The country also suffersfromseriousfloodingintheLowerShireandotherpartsofthecountrywhichdestroycrops and livestock. Besides flooding and frequent droughts, further exacerbated by low levels of irrigation,oneoftheotherchallengesinthissectoristhedegradationofwaterresourcesthrough deforestation and sedimentation that negatively impacts businesses and individuals as well as othersectorssuchashealth,powergenerationandthetransportnetwork. However controlling for rainfall variability reduces the standard deviation of GDP per capita growthfrom5.6%to4.4%,whichisstillhigherthanmostofthecountriesGDPpercapitavolatility andassuchrainfalldoesnotexplainallGDPvolatility.SecondwelookedatMalawisgeographical position compared to other countries among the comparators as one of the drivers for GDP per capita growth. The analysis noted that Malawi is landlocked and is over 900 kilometers from the sea but so are many other countries, some even are much further away (over 2000kms away). Distance only explains a third of the very high transport costs in Malawi, for instance, transport costsareestimatedatbetween15%and37.67%dependingonwhetheroneisexportingtobacco whichbenefitsfromvolumediscountsfromthetruckingindustryornontraditionalexportswhich dont. This makes access to external markets more costly for nontraditional exports as well as sugarandthereforetheanalysishadtolookattherootcauseofthehightransportcosts.Thesugar industryisforcedtoshipsugarvia Beira at acostof 44.5% astheyusethe more expensiveroad transport although it costs them 27.5% of value if they used the Nacala line. However the unreliability of the Nacala line forces the sugar industry to route 40% 0f their sugar through the moreexpensiveBeiraportbyroad.
In arriving at the above conclusions the study looked at all the potential problems beginningwithMalawisabilitytoinnovateasaconstraintandendingupwithmacroand microrisks.TheanalysisoninnovationnotedthatMalawihasahighlyconcentratedexportbasket
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Theanalysisthereforelookedatthestateofinfrastructureandinthiscasethefirsttobeanalyzed was state of transport infrastructure. The analysis noted that road density is good by regional standards.However,whereasmanyofthepavedroadsareingoodorfaircondition,76%ofroads areunpavedandnearly 50%ofthemareinpoorconditionandaccessduringtherainyseason is very difficult. More importantly access to ports is problematic and there are costly delays occasionedbythe77kilimetresstretchbetweenCuambaandEntreLagosontheNacalarailwayline whichreducestrainturnaroundtimesforcingshipperstousethelongeralternativeroutesbyroad to Durban and Dar es Salaam. In addition there have been considerable delays in repairing the BlantyreLilongweraillinetherebyforcingshipperstoswitch tothemoreexpensiveroadhaulage therebyexacerbatingthealreadyhightransportcosts. The poor state of the power infrastructure is clearly a major constraint on returns to investment withintheprivatesectorforbothexistingandnewinvestors.Thiswillbediscussedinfullinsection 5.2. As a result, the risk of lower returns limits diversification into nontraditional exports and particularly undermines manufacturing output and investment. The third infrastructurerelated constraint was water. This also reduces employment and wage income for both unskilled and skilled people, restricts growth in demand for primary products and small enterprise output and services. Regardinghumancapitaltheanalysisnotedthatreturnstotertiaryeducationarehighcomparedto thosethatdonotcompletetertiaryeducationandinconsequenceMalawiansmakegreateffortsto study in overseas universities. Primary school completion rates are low and tertiary education is highlycontracted.Mostofthemembersoftheprivatesectorciteshortageofhighlyskilledworkers asthenumber8thconstraint.Someofthereasonsforthisshortagearethought tocomefromthe mismatch between school and tertiary institutions curricula and what is required by most businessesaswellastechnicaltraininginstitutionsnotfunctioningproperly. NotwithstandingtheresultsoftheICA2006feedbackwhichrankedmacroeconomicinstabilityas thenumberoneconstraintforthebusinesscommunityitshouldbenotedthatlevelofinflationhas droppeddramaticallyinrecentyearsandMalawisfiscalbalanceisnowbetterthanaverageforthe region;ahugeimprovementsincetheearly2000s.Neverthelesstheworseningtradebalanceand theresultingdeteriorationinthecurrentaccountisofmostconcernastheincreasinglyovervalued exchange rate has led to loss of competitiveness in world markets and periods of chronic forex shortages experienced in recent years has hurt both exporters and importers. Donor inflows are helping cushion these imbalances. On microrisks the overall the business climate in Malawi comparesrelativelyfavourablywithSSApeersalthoughMalawihasbeenconsistentlyfallinginthe rankings in recent years as other countries reform at a faster rate. However, given the non administrativebarrierstotradementionedinprevioussectors,thishighadministrativeburdenon exportersisextremelyunhelpfulinpromotinganexportorientedeconomy,especiallyasMalawiis sohighlyreliantontrade. BasedontheICA2006survey,businessesquotecostoffinanceandaccesstofinanceashighly important constraints. Analysis shows that whilst real lending rates have been decreasing since 2004, real interest lending rates and nominal spreads remain very high compared to peers. Paradoxically, the prevailing negative real deposit rates imply the absence of private savings constraint. Hurdles to economic growth still remain in the financial sector notably in financial intermediationandinaccessingventurecapital.
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SummaryofthefindingsoftheConstraintsAnalysis
Highcostof finance LowSocialreturns Lackofcomplementaryfactors Lowappropriability Governmentfailures Exanterisks Badlocal finance 1)Highreal lendingrates 15%. 2)Spreads muchhigher than comparators 3)High overheads drivesspread. Limited investment opportunities. 4)Nowde regulated.# banks increased from2in 1994to9 today 5)Baserate of15% indicating possible savings constraint 6)Negative realdeposit rates implyingno privateS savings constraint. (**)Finance Human Capital 1)Returns to education 14.5% medium highbut dropto 9.5%once trainingis accounted for(ICA) 2) Possible high returnsto tertiary education (40%IHS) Geography 1)Rainfall agricultural growth highly dependent onrainfall. 2) Landlocked trademust passthrough neighbors ports. 4)High population density leadingto pressureon landandloss offertility Infrastructure 1)Regional trade infrastructure: Transportcost higherthan distancetoport warrants. 2)Importers willpaya premiumfor timeliness. 3)Power:losses frompower outageshighest inregion Uraniummines boughtdiesel generators. 4)Airports, airlines(open skies)affecting cutflower exports 5)Watersupply problems especiallyIn Blantyre Lowutilization ofirrigation potential Land 1)Scarce, small average landsize of holdings compared toother countries. 2)Small holder supply response diversify tocash crops oncemore estates land available (Perceptions) 1)Expectation ofchangesof tradebarriers andminimum pricing 2)Expectation ofmacro instability(#1 inICA) Expostrisks Legal, Tax,reg Property Labour,FX rightsetc 1) 1)Regular Governance, changesof traderulesand ruleoflaw, political pricesetting stability, (leadingto marketfailure) voiceand accountability ontrend. 2)Poor customs: documents requiredfor exportis highestof comparators. 3)Overvalued exchangerate 4)Longstart upperiod against comparators. Multiple licenses? Coordination/ Marketfailures
LowR&D, selfdiscovery 1)Indexof export sophistication (EXPY)ison trendbutata minimumpoint. Innovationin profitablesectors (Makwachacard) 2)Regionalco ordination failuresto achieve transport/energy network efficienciesand reliability
(*) Tertiary education
(**)Natural Resources Management
(**)Trade corridors (**)Electricity (*)Water& Irrigation
(*)Exante riskofmicro andmacro policy
(*)Exchange rate (*) Unpredictable price/trade controls,poor customs documentation
Note(**)Meansthemostbindingconstraint.
2.0
2.1
SITUATIONANALYSIS
OverviewofLongTermEconomicTrends
2.1.1 GDP/CapitaGrowthDynamics Malawi remains one of the poorest countries in the world. According to the 2008/09 World EconomicForum(WEF)GlobalCompetitivenessReport,outofthe134countriessurveyedMalawis GDPpercapitawasranked131,significantlybehindotherneighbouringSSAcountries TheWEFreportalsoshowsawideninggapbetweenMalawiseconomicgrowthandSubSaharan Africaasawhole.
Fig.1
Source:WEF2008/09Report Fig.2Fig.3
Source:WDI However, Malawis very recent economic growth has been more encouraging. In 2007, Malawi rankedsixthoutoftheelevenSubSaharancountriesintermsof growthrate(8.5%)andexports grewfrom$550mto$720mbetween2006and2007,drivenbyincreasesinagriculturaloutputand worldcommoditypriceincreases. Investmentlevelshavereboundedsince2001andMalawinow outperformstheSSAaverageinreal%terms.
MILLENNIUMCHALLENGEACCOUNTMALAWI 2.1.2 GDPCompositionandGrowthDynamics

Fig.4GDPCompositionandDynamics
Despite these recent improvements, considerable challenges remain. Agriculture still dominates GDP with the share of industry steadily declining from 25~30% in 19871992 to 17%~20% in 20022006. BAT the cigarette manufacturing plant stopped production and moved the plant to othercountries,Unileverceasedtheproductionofmostofitssoapanddetergentlines,BATAshoe companyclosedshop,DavidWhiteheadandSons,atextilecompany,simplyhandedovertheplant toGovernmentasagift,theexamplesareendlessincludingPEW,acoachbuildingconcernwhich manufactured bodies for buses and trucks for export to the region and local bus operators. Job lossesinthesehighpayingindustrieswereenormousandcounteredalleffortstoreducepoverty. HistoricallythisrelianceonagriculturehasbeenoneofthefactorsleadingtohighvolatilityinGDP growth as poor harvests coupled with regular droughts have significantly impacted agricultural outputaverageandhenceGDPgrowthespeciallybetween1981and2006(fig5refers).Whilstthe GDP volatility is driven by agriculture which has remained highly volatile since 2004 Malawi has overthepastdecadeexperiencedincreasedvolatilityacrossallsectors.
Fig.5AverageGDPGrowthbySector
1968-1980 GDP Services Industry Agric. 0 2 4 6 8 10 GDP Services Industry Agric.
1981-1993 GDP Services Industry

17.2
1994-2006
Agric. 0 2 4 6
16.7
8 10
8 10
Average growth Standard deviation
Source:WDI
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MILLENNIUMCHALLENGEACCOUNTMALAWI ExportTrendsandComposition Figure 8 shows that nominal exports have grown from between US$350 and US$450 million per annum to around US$600 million per annum in 2006. However, in real terms export growth has fallen below the SubSaharan Africa average (fig. 7). Whilst the majority of its comparators have morethandoubledtheirexportsinrealtermsinadecade,Malawihasonlymanagedtoincreaseits exportsbyalittleoverathirdduringthesameperiodwhichisindicativeofthefactthatMalawihas not been able to take advantage of the various opportunities at its disposal including African Growthand OpportunityAct(AGOA).Malawiisanopeneconomy andtherefore exportgrowthis vitalifthecountryistosustainthehighergrowthlevelsneededtoreducepoverty.
Fig.6Fig.7ExportsofGoodsandServices
Real exports % increase, 1996-2006 Burundi Mozambique Rwanda Tanzania Lesotho Zambia Uganda Botswana Ghana South Africa Malawi Kenya SSA 0 100 200 300 400 500
600 500 400 300 200 100 0
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
2.1.3
Exports of goods and services, constant 2005 US$ Terms of Trade, 2000=100
Thegraphbelowshowsthattobaccoisstillrunningtheshow.Theshareoftobaccotototalexports isstillaround55%.Justfourcrops(Tobacco,tea,sugarandcotton)accountfor75%ofexports (downfrom85%around1998).Thetobaccosectoremploysdirectlaborersandtherearealso tenantfarmersaswellassmallholderfarmersengagedinthesector.Cottongrowingis predominantlyasmallholderaffairwhilstteaandsugarcanegrowinghaveseensignificant smallholderparticipation.

Fig.8
Exports, m illion constant 2005 US$ 600 500 400 300 200 100 0
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
Tobacco
Tea
Sugar
Cotton
Other
2006
Source:EIU
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MILLENNIUMCHALLENGEACCOUNTMALAWI 2.1.4 InvestmentRatesTrends Since 1980 investment rates have been low and falling. Share of gross capital formation in aggregatedemandhasbeentrendingdownsince1980.Investment flowshavebeenthelowestin the region by far and the collapse in the terms of trade since 1979 seems to coincide with contractinginvestmentsaccordingtotheregressionlinesbelow.Howeverinvestmenthasstarted trending up with gross fixed capital formation reaching 24% of GDP in 2006 and most likely the Kayelekerauraniumminescouldbeoneofthemajordrivers.
Fig.9GrossCapitalFormationFig.10
1200
Millions constant 2000 US$
48
Gross Capital formation, Millions constant 2000 US$
1000 800 600 400 200 0

1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006
40
% of GDP
1000 900 800 700 600 500 400 300 200
Gross Capital formation, Millions constant 2000 US$
1979 R = 0.625 2006
1000 900 800 700 600 500 400 300 200
1979 R = 0.629 2006
32 24 16 8 0
1994
1994
Gross capital formation (constant 2000 US$) Gross capital formation (% of GDP)
75 100 125 150 175 200 225 T-o-T (2000=100)
75 100 125 150 175 200 225 T-o-T, lagged (2000=100)
Source:WDI
2.2 UnderstandingwhyFoodSecurityisnumberonepriorityinMalawi
Foodsecurityseemstobetoppingeverysinglegovernmentstrategy.Untilrecentlythecountryhas beenstrugglingtosupplyitsownmaizebothatanationalandhouseholdlevel.Oneofthereasons isthatfarmersarenotinsulatedfromweathershocks.Droughtsarecommonashasbeendepicted bythefigurebelow.Farmerscannotaffordirrigationandfeelthefullimpactofweathervariability.

Fig11
Source:MOA/WorldBank Maizeyieldshaveremainedstagnantsince1963atjustoveratonperhectarewhichisfarbelow the world average of 5 tons per hectare and is still below Malawis comparators and that of the wholeofAfricaaverageat1.8tonsperhectare.Thefertilizersubsidyprogramismakingapositive impact on yields but the impact on net agricultural profitability/productivity is unclear and the
MILLENNIUMCHALLENGEACCOUNTMALAWI mediumtermsustainabilityisstillanissueasdonorsupportforthesubsidyiscrucialatthisstage. Additionally, land is scarce, there is low penetration of hybrid varieties of maize and there is underuseoffertilizer,irrigationandotherinputsandthistranslatesintolowyields.Asaresultin droughtyears,maizeoutputisinsufficienttofeedthecountry.
Fig.12Fig.13
Maize yield kg/ha, 5-yr moving average 5000 4000 3000 2000 1000 0
1963 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005
Maize yield, tonnes/ha South Africa Ethiopia Nam ibia Zam bia Kenya Tanzania Uganda Malawi Burundi Mozam bique Rwanda Lesotho Zim babwe Swaziland World Africa 0 1 2 3 4
Malawi
South Africa
World
Source:MOA/WorldBank By African standards, Malawi is a densely populated country with one of the lowest urbanization levelsintheworldas83%ofpopulationliveinruralareas.AsresultMalawihaslittlearableland perruralinhabitant.Landisoverusedandunsustainablymanaged,whichdepressesyieldsfurther andasaresultsoilfertilityisdecliningatarateof60kgofNPKperhaperyear
Fig.14
Arable land, ha/rural inhabitant, 2005 Zam bia Mozam bique Rwa nda Uga nda Ta nza nia South Africa Botswa na Kenya Ma la wi Burundi 0 0.2 0.4 0.6 0.8
2006
Average 2000-06
(Source:GoMandWBMalawiPVA)
Fromtheforegoingitisnotedthatfarmersarenotinsulatedfromweathershocks,yieldsarelow andlandisscarce.Asaresultindroughtyears,maizeoutput insufficienttofeedthecountry.But international trade economics tells us that this should be irrelevant as long as Malawians can import maize food security should not suffer because according the figure below Malawi should produceatthetangencyoftheproductionpossibilitiesfrontierandworldpricelineandconsumeat thetangencyofworldpricelineandhighestindifferencecurveduringagoodharvest,assumingno barrierstotrade.Duringaveryseveredroughtyearasdepictedbytheredproductionpossibilities
MILLENNIUMCHALLENGEACCOUNTMALAWI curve, through imports the nation is still able to produce at a tangent between the production possibilities curve and the world price line and consume at the tangent between the highest indifferencecurveandtheworldpriceline.AssuchMalawicantradethedifferenceinagoodyear andinadroughtyearMalawicanimportfood.Howeverthehigh costofimportingandexporting makesitrationalforMalawianeconomicactorstoproducemoremaizeandthereforelessofother cropsthanitwouldifthecostsofinternationaltradehadbeenlower.Toputitsimply,duetothe high cost of transportation Malawi fails to maximize the benefits arising from a good harvest by taking advantage of export opportunities as export values net of the cost of transportation fall belowworldmarketpricesandontheotherhandMalawifailstominimizetheimpactofdroughts through maize imports as import prices after factoring in exports are well above world market prices. As a result the country experiences wide swings in maize prices during drought years, normalyearsanddroughtyears.
Fig.15
One of the reasons why the international trade story does not work in the case of Malawi is that output of maize and output of export commodities are correlated. However output of traditional exports is also affected by droughts as tobacco which also depends on rain fed agriculture represents over 60% of export value. The graph below shows that there is a direct relationship between maize output and tobacco output with a correlation coefficient of 70%. Nevertheless it shouldbenotedthatthereisnostatisticalsignificantrelationshipbetweenmaizeoutputandexport revenues because Malawi is not a price taker especially in as far as burley tobacco is concerned. This implies that expansion in production may not necessarily have a proportionate increase in burley export revenues. It should be noted however that for low income countries like Malawi, peoplelookuptoGovernmentforsupportbutduetoforeignexchangeconstraintsoccasionedbya dropinexportearningsfromtobaccotheGovernmentisforcedtolookuptodonorsforsupport. OtherwiseinorderfortheGovernmenttoimportmaizeinadroughtyearthecountrymustexport othergoodsinorderforittohavesufficientforeignexchangetoimporttheproduct.Ofcoursethe roleofgovernmentwouldnotmatterifpeoplecanborrowandsave,aswellastrade,i.e.,savein goodyearsoftobaccoproductionandtobuymoremaizeabroadinayearofpoorharvest.

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Fig16
Source:MOA/WorldBank
Maizeyieldshaveremainedstagnantsince1963atjustoveratonperhectarewhichisfarbelow the world average of 5 tons per hectare and is still below Malawis comparators and that of the wholeofAfricaaverageat1.8tonsperhectare.Thefertilizersubsidyprogramismakingapositive impact on yields but the impact on net agricultural profitability/productivity is unclear and the mediumtermsustainabilityisstillanissueasdonorsupportforthesubsidyiscrucialatthisstage. Second Malawi has a problem in regard to transport costs which are higher than those obtaining within its comparator group as the table below shows. Transport costs create a large wedge between world prices and those faced by domestic agents as relative price of maize with no transportcostswouldbeasdepictedbelow: P=Pwmaize/Pwother=PW Howeverwithunittransportcostct(fornow,assumedequalforimport/exportofallgoods): Ifthecountryexportsmaizethen: PX=Pwmaize(1ct)/Pwother(1+ct)<PW Ifthecountryimportsmaizethen: PM=Pwmaize(1+ct)/Pwother(1ct)>PW Ifctishighitmeansthatduringayearofrelativeabundancethecountryseconomicagentsexport atareducedreturnbecauseofhightransportcostsandduringleanyearsthecountrywillhaveto payahighpricetoimportduetohightransportationcosts.AswillbenotedlaterMalawihasoneof thehighesttransportcostsintheworldfornontraditionalexportsandcertainimports. AstheCEMAgriculturechapternotesDuetothehighcostsoftransportfromSouthAfrica,import paritypricesarecommonlyUS$100toUS$150abovedomesticretailprices.Whenthereissevere drought across southern Africa, clogged transport systems raise the costs of import dependence evenfurther.InlandtransportcostsalonecanriseashighasUS$180perton.Itthereforedoesnot
MILLENNIUMCHALLENGEACCOUNTMALAWI comeasasurprisethatmaizepricesinMalawifluctuatewidelyasthepossibilityofgreatertrade wouldsmooththesewidefluctuations. The figures below depict two production possibilities curves for lean years and those of good harvests.Ifctwerelowerthanwhatitisnowthecountryshouldbeabletoexportmaizeandthe countrys welfare would be higher as depicted by the dotted indifference curve on the right. HoweverbecauseofthehightransportcostsMalawiexportslessandthecountrymovestoalower indifference curve where consumption is restricted to what the country is able to produce and is unabletotakeadvantageofbenefitsfrominternationaltrade.
Fig.17
In summary a failed harvest removes the principal source of consumption for rural households. Capacity to replace lost production through imports is limited by foreign exchange earnings and lackoffarmdiversification.Thissituationiscompoundedbythehighcostoftransportationwhich limits the benefits of maize exports during years of a good harvest and makes imported maize beyondthereachofthemajorityofMalawians.Increaseddemandontheformalmarketduringlean yearsgreatlyraisesfoodpricesmakingithardertosubstitutelostsubsistenceproduction.Theend resultisthatMalawiexperienceshighpricevolatilityandthefarmerispushedintoacorner.Price volatilitycreatesadisincentivetodiversifysincethefarmercannotguaranteehouseholdaccessto maize without a significant cash crop production.This underscores the need to find solutions to enableMalawitotransitiontowardsamorebalancedproductionportfolioandbalancedgrowthin nonagriculturalsectors.
2.3 ConclusionontheSituationAnalysis
Economicperformancehasimprovedoverthelastfewyearsbutthegainsmadesofarneedtobe consolidated and sustained. However GDP per capita growth is volatile and that volatility has increased in the recent past. Investment flows are improving but still below most comparators. Nevertheless Malawi needs to sustain investment levels that are equal to or higher than those experiencedintherecentpastifGDPpercapitagrowthratesaretobesustainedatlevelsneededto
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MILLENNIUMCHALLENGEACCOUNTMALAWI substantially reduce the high poverty levels and also to be closer to achieving the poverty MDG1. The recent gains in terms of Malawis export performance are encouraging. These gains are howeverfarbelowmostofMalawiscomparatorsandasanopeneconomyexportperformanceis vitalforsustainedandrapidgrowth. Despite the fertilizer subsidy program which has resulted in maize surpluses the food security situation still remains tenuous due to the countrys overreliance on rainfed agriculture. This problem is compounded by lack of export diversification as 5560% of Malawis export basket is accountedforbytobacco.Thisisfurthercompoundedbycolinearitybetweenfoodcropoutputand tobaccooutputbothofwhichareaffectedbyrainfall. Weatherrelated risk, low incomes and the high cost of importing food are responsible for food insecurityandthelackofdiversificationoutofmaizeproduction.Thisproblemiscompoundedby land pressure which results in low productivity and as such farmers are pushed into a corner situation. What next? Malawi needs to comprehensively address the problem of food insecurity. To do this the country needs to remove constraints to economic growth and export diversification and achieve a balanced growth in both agriculture and nonagriculture sectors, so as to alleviateruralandurbanpoverty.Inthisregardthestudysetsouttoidentifyandisolatethe mainbindingconstraintstothecountrysdevelopment.
1Halvebetween1990and2015,thepopulationofpeoplewhoseincomeislessthan$1aday.
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3.0
CONSTRAINTSANALYSISMETHODOLOGY
GrowthDiagnostics
3.1
The study follows the growth diagnostics methodology proposed by Haussmann, Rodrik and Velasco (Kennedy School of Government Harvard University) 2. The main premise for the methodology is that different countries do not necessarily face the same set of problems and, certainly, the relative severity of these problems varies widely. Consequently, one size fits all policieslikethesetofrecommendationscollectivelyknownas theWashingtonconsensuswillnot necessarily spur growth. Therefore, a successful growth strategy has to be contingent on the economicenvironmentathandandfocusononeortwomainconstraints.Consequently,thestudy aimstoidentifytheconstraintsthatarebindingtoMalawiseconomicgrowth,andwhichshouldbe targetedintheframeworkoftheMCCprogramandtheMalawiGrowthandDevelopmentStrategy MGDS. The HRV approach is based on fundamental results of neoclassical growth models, according to which growth is proportional to the private return to assets, net of cost of financing it. In other words,growthfollowstheubiquitousEulerequation: & & c k = = [r (1 ) Growth= ] c k Whererisrateofsocialreturns,(1)istherateofappropriability,andisthecostofcapital.The rateofappropriabilityrepresentstheshareofreturnsthatarepassedtotheprivatesector,i.e.what isleftafter, interalia,taxes,corruption,regulatorydelays,expropriationthroughchangesinlaws andthejudicialsystem. This equation provides the general answer to the question what constrains growth? It must be causedbyatleastoneofthethreefactors:socialreturnsarelow,therateofappropriabilityislow orthecapitalistooexpensive.However,tohaveapolicyrelevantanswer,weneedtodisaggregate theequationevenfurther: If it is low returns, is it insufficient investment in complementary factors of production (humancapital,technicalknowhoworinfrastructure)? If it is poor appropriability, is it due to high taxation, poor property rights and contract enforcement,laborcapitalconflicts,orlowproductivity,incompleteinformationandother marketfailures? If it is poor finance, are the problems to do with domestic financial markets or external ones? Wecanorganizethesepossibleoptionsinadecisiontree,whichispresentedinbelow.
2Haussmann,Ricardo,DaniRodrik,andAndresVelasco,2005,"GrowthDiagnostics,"Kennedy
SchoolofGovernment,HarvardUniversity(Cambridge,MA). DraftFinalAnalysisofConstraintstoEconomicGrowth Page15
Growthdiagnostics
Whatconstrainsprivateinvestments? Lowreturnstoeconomicactivity Highcostoffinance
Lowsocialreturn
Lowappropriability
BadIntl.finance
Badlocalfinance
Poor geography
Lowhuman capital
Govt. failures
Market failures
Fiscal rigidity
Low savings
Poor intermediation
Poor infrastructure
Micro risks
Macro risks
Self discovery
Coordination externalities
Corruption, Financial, monetary,fiscal taxes, propertyrights instability
Inconformitywiththisrepresentation,thereportanalysesthefollowingpotentialconstraints: Scarcityoffactorsofproduction:geography,humancapitalandinfrastructure. Failures in innovations and competitiveness. Low productivity (effectiveness with which the factors of production are combined) can be explained by inability to introduce better technologiesatexistingproductionsorinabilitytodiscoverproductsthatarebettersuited tothecountrysconditions. Thehighcostoffinance Lowappropriabilityofreturns(1): Macroeconomic risks. Potential reasons of macroeconomic nature that result in low appropriateness include macroeconomic instability and volatility, tax regime and unfavorabletermsoftradeshocks. Investment climate. Potential reasons for microeconomic risks and terms for doing businessincludefiscalpractices,corruption,propertyrightsandaccesstojustice. In order to determine the most binding constraints the answer can be extracted from the neoclassical production function, in which all factors are complements. This is a safe assumption, given that rich countries are abundant in everything: from physical and human capital to infrastructureandinstitutions. 3.2 RoleofDiagnosticSignals 3.2.1 DirectEvidence A binding constraint can be determined if the return to the scarce factor is pushed up and the return to the other factors is much lower. For example, if access to capital is a problem, interest ratesshouldbehigh.Ifthereisapaucityofhumancapital,theskillspremiumshouldbehighand unemploymentamongskilledlaborlow.Ifthebindingconstrainttogrowthispoorinfrastructure,
MILLENNIUMCHALLENGEACCOUNTMALAWI then we should see bottlenecks and concentration of economic activity in areas with good infrastructure. A useful tool in analyzing the relative importance of constraints is benchmarking: comparing Malawi to a number of countries similar in size, level of economic development, past commonhistoryandphysicalproximity. 3.2.2 IndirectEvidence
The camels and the hippopotamus i.e. what do you observe, for instance, why are there no hippopotamusinthedesertandwhydocamelsthriveinthedesert?Ahippocannotsurvivewhere thereislittleornowaterandacamelisabletothriveinsuchenvironments.Whenconstraintsbind, they result in activities designed to get around them. High taxes result in high informality. When poorlegalinstitutionsaboundyouseehighdemandforinformalmechanismsofconflictresolution and contract enforcement. Poor financial intermediation results in internalization of finance throughbusinessgroups,informallending,etc. 3.2.3 WhyTargetGrowth
ThiscanbeansweredbyaquotationfoundinthearticlefromIFPRIForumofOctober/November 2007titledCuttingPoverty:LearningfromtheLeaders:
According to Alberto Valdes, a research associate at the Catholic University of Chile in Santiago,"Mostoftheworkbyeconomistshasshownthatrapideconomicgrowthisthemost effective way to reduce poverty because it creates employment and provides government revenuesthatareneededtoimplementsocialprograms.Thetaskishowtoachieveabalance between rapid growth and delivering the benefits of that growth to the poor." Broadly speaking then, most countries that have succeeded in dramatically reducing poverty have done so by promoting growth and then ensuring that the benefits of growth are reliably sharedwiththepoor.Butthedetailsofthisstrategyhowcountriesachievegrowthandpass itsbenefitstothepoorvarywidely. Asweexaminetheconstraintstoprivateinvestmentwewillbeginbyexaminingthecausesforlow returnstoeconomicactivity.HoweverinviewofthecomplexityofMalawisproblemstheanalysis willnotfollowthechronologicalorderaffordedbytheGrowth DiagnosticsTree.Theanalysiswill first look at whether or not Lack of SelfDiscovery/Innovation and/or Geography are the main culprits. Thereafter the analysis will then move on to infrastructure, human capital, macroand microrisksandfinance.
Page17
4.0
4.1
CONSTRAINTSANALYSIS
Innovation
As noted from the previous section it is not surprising that food security tops every government agenda. However, a country does not have to meet its own food requirements through local production.Foodsecurityatanationalandfarmlevelcanbeassuredifthecountryisableproduce other goods in sufficient quantity and export in order to earn foreign exchange. To do this the countryneedstoinnovatebecauserealtechnologicaladvanceusuallyresultsinproductivitygains whichtendtoapplytosimilarorrelatedgoods,and/oranenhancementofthequalityorvalueof existing products (sophistication). This process ultimately enlarges the list of goods produced by the country (diversification). Therefore the relevant question is whether or not Malawi is innovatinginsuchawayastobecomemorecompetitiveinmoreproducts.Inordertodetermine whether or not Malawi is innovating there is need for an understanding of Malawis export compositionanddynamics:WhatdoesMalawiexport?Howdiversifiedistheexportbasket?How sophisticatedareMalawisexports/products? ThegraphbelowshowswhereMalawiasapredominantlyagriculturalcountryisplacedanditis very clear that the majority of countries that are predominantly agricultural have a much lower GDPpercapitaincomparisontothosethathaveundergonestructuraltransformation.
Fig.18
70 60
Agriculture/GDP, %
50 40 30 20 10 0 100 500 2500 12500 GDP/capita 2004, PPP$ 62500
brandproduct,forexample,agourmetcoffee,andanonbrandproduct.Improvingproductqualitywill generatemorefarmincomefromthesamevolumeofproduction,andprocessingtheproductsinthe regionwillprovidemoreemploymentandimprovethelinkageeffectsbothwithintheproducing DraftFinalAnalysisofConstraintstoEconomicGrowth Page18 countryandtosomeextenttoneighboringAfricantradingpartnersAGeneralEquilibrium ExaminationofDemandSideConstraintsonAgriculturalGrowthinEastandSouthernAfricaIFPRI
Notwithstandingthecurrentcommodityboom,especiallynonpetroleumcommoditiesoneshould remaincognizanceofthefactthatworldmaizeyieldshaveonlybeenabletoincreaseby2.5times in40years.Assuchdiversificationbothatthefarmandnationallevelsisoftheessence. marketopportunitiesandhencegrowthcontributionsoftraditionalagriculturalproductscan significantlyincreaseifthequalityoftheproductscanbeimprovedoriftheproductscanbeprocessed (evenjustgothroughprimaryprocessing)withintheregion.Thereisasubstantialdifferencebetweena
MILLENNIUMCHALLENGEACCOUNTMALAWI Thegraphbelowshowsthattobaccoisstillrunningtheshow.Theshareoftobaccotototalexports is still around 55%. Just four crops (Tobacco, tea, sugar and cotton) account for 75% of exports (downfrom85%around1998).
Fig.19
Exports, million constant 2005 US$ 600 500 400 300 200 100 0
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Tobacco
Tea
Sugar
Cotton
Other
Source:EIU From the charts below Malawis export basket is highly concentrated based on the Hirschman HirfindahlindexofexportconcentrationFigure17ashowsthatMalawiisonlysecondtoBotswana in terms of export concentration but above the majority of countries among its comparators. However the comparison with Botswana demonstrates that concentration is not necessarily bad providedthatthereisvalueaddingevenatafarmlevel.Malawisexportconcentrationistrending up from 2004 after having trended down from 1991 and this is primarily due to an increase in tobacco export values and volumes. However figure 17b shows that there is some improvement oncetobaccoisfactoredout.
MILLENNIUMCHALLENGEACCOUNTMALAWI ChartsbasedonHirschmanHirfindahlindexofexportconcentration
Fig20Fig21
7000
Botswana Malawi Mozambique Rwanda Zambia Ghana Namibia Uganda Kenya 0 1000 2000 2006 3000 2002 4000 1997 5000 6000 7000
6000 5000 4000 3000 2000 1000 0
Source:UNComtrade,
4.2
AccordingtoHaussmann&Rodrik(2005)richandpoorcountries tendtoexportdifferentgoods. Richcountriesthatareatthetechnologicalfrontiertendtoexportmoresophisticatedgoods(those goodsembodyfrontiertechnologies).Poorcountriesexportgoodsthatembodybelowthefrontier technologies. A country that exports a basket of goods characteristic of a richer country has a relativelysophisticatedexportbasket(closertothefrontier).Countrieswithmoresophisticated export baskets tend to grow faster because they have achieved a level of competitiveness and an abilitytomoreconsistentlyadaptandapplytechnologicalchangetoraiseproductivity. There are two major reasons why rapid growth in traditional exports fails to increase real GDP substantially in this scenario. First, for most of the sample countries, the traditional export sector accounts for a small share of the total agricultural GDP, even though it accounts for a large share in its total agricultural exports. The second reason is that markets for the traditional export commodities involve relatively little domestic processing and therefore generate only weak linkage effects through the domestic market economy. Only the farmers cultivating these crops reap major direct benefits from increased exports, and their increased income and that from the directly related nonagricultural sectors cannot provide enough demand to stimulate further growth in broad agricultural and nonagricultural sectors. Calculated growth multipliers (real GDP growth induced by a one unit increase in the traditional export sectors value added) are quite small for most countries. The graphsbelowtellofaninterestingstoryofhowChinahasmanagedtoquintupleitsGDPpercapita injust20yearswhilstVietnamalsohasmanagedtomorethandoubleitsGDPpercapitainjust15 years and this has been done through structural transformation. In both cases the share of
Whatyouexportmatters
1990 1991 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
HHI Index HHI Index w/o tobacco
MILLENNIUMCHALLENGEACCOUNTMALAWI agriculturehasgonedownfrombetween33%45%tounder20%.However,inthecaseofChina, accordingtoDaniRodrikthishappenedthroughaStrategicandsequentialapproachtargetingone bindingconstraintatatime.Firstagriculture,thenindustry,thenforeigntrade,nowfinanceThe followingbyIFPRIcapturesthisadequately

Fig22
1400 1200 1000 800 600 400 200 0
1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003
China
35 30 25 20 15 10
600 500 400 300 200 100 0

1985 1987 1989
Vietnam
50 45 40 35 30 25 20 15
1991
1993
1995
1997
1999
2001
GDP/capita PPP$ Agriculture/GDP, % (right axis)
GDP/capita PPP$ Agriculture/GDP, % (right axis)
Theaforementionedisnotintendedtonegatetheimportanceofagricultureespeciallyforcountries likeMalawiwhereagricultureisconsideredanengineofgrowthandthekeysourceoflivelihood forthemajorityofMalawians.TheimportantpointistodeterminewhetherMalawiisattainingthe level of sophistication that enables it to export goods that are competitive by definition, or correspondtominimumqualitystandardsandthatthelistofgoodsproducedand/orexportedis enlarging. 4.2.1 Howtocomputeexportsophistication ExportsophisticationcanbecomputedbycalculatingPRODYandEXPYofacountry: PRODY:goodscanbeassociatedwithaGDP/capita(weightedaverageofGDPsofcountries thatexportthatgood):forinstanceproductionofwristwatchesisassociatedwithcountries with percapita incomes of $31651 (on average) while cotton and tea are respectively associatedwithcountriesthathavepercapitaincomesof$409and$402. EXPY: the average PRODY of products exported by the country, weighted by the share of eachgoodinthevalueoftotalexports. HavingexplainedastohowexportsophisticationiscomputeditisnotsurprisinglythatMalawiis whereonewouldexpectittobeasrepresentedbythereddot.
2003
Fig.23LevelofSophistication
32000 16000
EXPY 2003, $
8000 4000 2000 1000 500 1000 2000 4000 8000 16000 32000 64000 GDP/capita 2003, PPP$
Source:Hausmann&Rodrik(2005) Thegraphalsoshowsthatcountrieswithhigherlevelsofexportsophisticationhavehigherlevels of income per capita. Malawis export sophistication is stagnating although tobacco hides some recentprogress.ThegraphontherightbelowshowsthatoncetobccoisexcludedMalawisexport sophisticationincreasesafter2004followingasharpdeclinein1994.ModelsimulationsbyIFPRI conducted on a number of countries including Malawi indicate that agricultural growth will be limited without the growth of other sectors. This is aptly explained in the following caption from theIFPRIstudywhichalsodescribesthedriversofpovertyreduction.
Fig.24
EXPY and GDP/capita growth Mozam bique Zam bia Malawi Kenya Uganda 2000 0% 20% 40% 60% GDP/capita growth, 2002 to 2006 EXPY growth, 2002 to 2006 Malawi's EXPY dynamics
4500 4000 3500 3000 2500
1990 1991 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
EXPY EXPY excluding tobacco
Source:UNComtradedatabase
Page22
MILLENNIUMCHALLENGEACCOUNTMALAWI Figure 20 above shows that Zambia and Mozambique have been undergoing rapid structural transformation. Between 2002 and 2006 Zambia experienced EXPY growth of over 60% and MozambiquehadEXPYgrowthofover55%.CumulativeGDPgrowthpercapitaforbothcountries wasrespectivelyover15%and20%.OntheotherhandMalawisEXPYgrowthwasjustover5% overthesameperiodandnotsurprisinglyMalawiscumulativeGDPgrowthoverthesameperiod was just over 7%. Obviously other factors were also at play but there is a direct relationship betweenacountrysexportsophisticationandGDPpercapitagrowth. Malawispoorinvestmentperformance,occasionedbyapoorinvestmentclimateinthepastandin particularlowflowsofforeign directinvestmentcoupledwith pooreconomicinfrastructurehave conspiredtoleaveMalawibackwardintermsofinnovation. Malawiisalandlockedcountrywithanareaof118,484squarekilometers.BorderedbyTanzania, MozambiqueandZambia,itisanarrowterritorywithatotallengthofabout1000kmrunningfrom NorthtoSouth.TheNorthernhalfofthecountryisborderedintheeastbyLakeMalawi,whichis 570kilometerslongandoccupies24,800squarekilometersinMalawi. Malawiissurroundedbymuchbiggerneighborsanditssmalleconomydependsonitsneighbors foraccesstotheseaandinternationalmarkets.Forthisreason,Malawisufferedformorethantwo decades from the chronic instabilities in neighboring countries like the civil war in Mozambique andthepoliticalturmoilinZimbabwe. AgricultureisbyfarthemostimportantsectorintheMalawieconomyaccountingfor85percentof allemploymentandgenerating90percentofallexportearnings.Lowirrigationdevelopmentand poorwatermanagementcoupledwithpoorlandhusbandrypracticesarethekeyissuesunderlying the low productivity and profitability of Malawis agriculture. As earlier indicated the country experiencesunreliablerainfallcombinedwithextendedperiodofdryspellswhichadverselyaffect theproductivityofitsagriculture. DroughtsareendemictoMalawiandhavehaddevastatingeffectsoncropandlivestockproduction. Between1967and2003thecountryexperiencedsixmajordroughts.Theworstofthesedroughts was in 1993, which affected 7 million people; other significant droughts occurred in 1990, 1992, 1994and2002.Theimpactsofdroughtarefeltmainlybysmallholderfarmerswhoaregenerally amongthepoorest membersofthe population. Forexample,theimpact ofthecropfailureinthe 2001/2002growingseasonduetodroughtwasestimatedatbetweenUS$150andUS$180million (as estimated in the World Banks Emergency Drought recovery Project). As a result rainfall is a majordriverofmaizeyieldsand,subsequently,ofGDP/capitagrowth.

4.3
Geography
Page23
Fig25
15% 10% 5% 0% -5% -10% -15%
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
Trend + Population growth Residual Source:WDI,WorldBank
Rainfall (MMI) GDP/capita growth
EliminatingrainfallvariabilityreducesthestandarddeviationofGDP/capitagrowthfrom5.6%to 4.4%.EvencontrollingforMMI,GDP/capitagrowthvolatilityishighcomparedtoothercountriesin theregion(seethefiguresbelow).

Fig26Fig27
15% 10% 5% 0% -5% -10% -15%

1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006
Standard Deviation of GDP/capita growth, 1989-2006 Malawi Madagascar Mozambique Malawi (controlling for MMI) Rwanda (excl. 1994-95) Zambia Burundi Lesotho Botswana Namibia South Africa Tanzania Kenya Benin Uganda Swaziland Ghana 0 1 2 3 4 5 6 7
GDP/capita growth
GDP/capita growth controlling for weather
Source:WDI FloodsarealsocommoninMalawi.Eighteenmajorfloodshaveoccurredbetween1967and2003 (the most significant floods were in 1991, 1997 and 2001) killing 570 people, rendering 132,000 homeless and affecting a total of 1.8 million people. Total damage caused by flooding over this
2006
MILLENNIUMCHALLENGEACCOUNTMALAWI period is estimated at around US$700,000. Floods occur in the south, particularly in the Lower ShireareasofLakeMalawi,LakeMalombeandLakeChilwa.TheSouthernpartofMalawiisworst affected by floods particularly the Lower Shire. Floods also occur in the lower reaches of the Songwe River in the Northern Region. The main problems of flooding are damage to agricultural landsandcropdamage.Droughts,floodsandrainfallvariabilityalsoentrenchriskaversebehavior byfarmersandotherinvestorsinagriculturalindustriesandservices,slowingthediversificationof economicactivities. 4.3.1 Degradationofuppercatchments Devegetation, erosion and sedimentation are Malawis most serious environmental threats. Throughout most of the country a new dam is likely to fill with sediment within a few years of commissioning,thereforesedimentationposesthebiggestrisktothedevelopmentofwaterstorage structures.ThemostsignificantdamsarethehydropowerdamsontheShireRiver,whicharebadly affectedbysedimentation.SedimentationisparticularlyacuteintheNkulapondagewhichsupplies apowerplantandBlantyreWaterBoard(BWB).Withtheincreasedsoilerosioninthecatchment area,thesedimentloadcarriedbetweenLiwondeandNkulainthewetseasonisaccumulatingin the Nkula pondage affecting the power output and water supply in Blantyre. Deforestation is considered to be a major threat to surface water resources as it causes reduced base flows and higher flood peaks. The National Environment Action Plan, 1994 showed that deforestation reduced the forest cover from 67 percent in 1967 to 49 percent in 1992 and had a significantly negativeeffectonthecountryswaterresources.Thereisfrequentpowerinterruptionduetotrash and weeds resulting from unsustainable catchment management and noxious weeds. These frequently clog the generation intake screens, forcing the only power supplier in the country (ESCOM) to shut down machines in order to remove the trash. Industrial production and other socialservicesareadverselyaffectedintheprocess. 4.3.2 GeographyLocation In the previous section we learnt about how the effects of droughts coupled with limited export earning capacity is impacting on food security and lack of diversification at the farm level. International economics tells us that attaining food security at a national level should not be a problemprovidedthecountryisabletohavesufficientexportearningsandthereforewereachthe conclusion that export diversification is key to unlocking the food security problem. Recent data (MEPD AER 2008) suggests that only 14% of Malawis nonagricultural manufacturing output is exported, with the majority of manufacturing output focused on import substitution. Further analysissuggeststhatMalawislow exportpenetrationisduetotwokey factors(1)supplychain inefficiencies (according to studies conducted by Kadale) (2) low price competitiveness on the global market. Only exports that are not time and logisticscritical survive (tobacco, tea, sugar, cotton).

Page25
Fig.28Fig.29
Exports of flowers and live trees
Selected textiles exports 20

Million constant 2000 US$
Thousands Constant 2000 US$
1750 1500 1250 1000 750 500 250 0
16 12 8 4 0
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
Malaiwi's export failures
Cotton Fabrics
Unknitted Apparel
Knitted Apparel
Source:GoMNationalAccounts Malawi made various attempts at export diversification including encouraging flower exports but theresultshavenotbeenencouraging.Forinstancethecountrystartedexportingflowersin1994 with export values exceeding US$ 1.5 million but by 2007 this figure had dropped to zero. Transportlogisticshavebeenblamedforthisdismalperformanceintheflowerindustryandallthe flower farms whose products were destined for the export market ended up closing. Malawi has also had limited success with opportunities provided by AGOA as textile exports are timeand logisticscritical.Inthisexamplepoorlogistics(airtransportation)haveagainbeenblamedforthis exportinitiative.
Fig.30Fig.31
20 15 R = 0.010
15 R = 1E-05 10
GDP/capita growth, %
GDP/capita growth controlling for MMI
10 5 0 -5 -10 -15 -80 -60 -40 -20 0 20 40 60 80 Y-on-Y change in Terms of Trade
5 0 -5
-10 -15 -80 -60 -40 -20 0 20 40 60 80 Y-on-Y change in Terms of Trade
2007
Source:WDI
Further analysis shows that there is no correlation between GDP/capita growth and changes in termsoftrade.TheCorrelationcoefficientislowandnotstatisticallysignificant(tstataround0.5).
MILLENNIUMCHALLENGEACCOUNTMALAWI CorrelationbetweenGDP/capitagrowthandtermsoftradeisevenlowerwhenonesubtractsthe weather component from GDP/capita growth (tstat around 0.02). Identical results are observed for lagged values of ToT, % change of ToT, GDP growth or gross capital formation growth insteadofGDP/capitagrowth.Allthesepointtothefactthat Malawiisnotwellintegratedtothe restoftheworld. One of the reasons advanced for the high transport costs is that the country is landlocked. According to the table below total import and export transport costs as a share of the value of exports is in excess of 56%3 (according to the Ministry of Economic Planning Annual Economic Report(AER)2008,thisratiowasreducedfrom55%in2006to53%in2007butitishoweverstill thehighestintheworld).Abreakdownofthisfigureshowsthatexporttransportcostsasaratioof total exports earnings is 18% whilst the ratio of import transport costs on total export earnings amountsto38%.
Fig.32Fig.33
Alllandlockedcountries
Transport costs / value of exports Malawi
SubSaharanAfrica 0.6 Malawi

Transportcosts/exports
0.6 Malawi
Transportcosts/exports
Rwanda Chad Mali Uganda Burundi Niger Burkina Faso CAF Zam bia Botswana Zim babwe Lesotho Swaziland 0% 20% 40% 60%
0.5 0.4 0.3 0.2 0.1 0.0 0 1000 Distancetoport(km) R=0.185 2000
0.5 0.4 0.3 0.2 0.1 0.0 0 1000 Distancetoport(km) R=0.277 2000
Source:Fayeetal.
Figure29makesacomparativeanalysisbetweenMalawiandsubSaharanAfricancountriesaswell asalllandlockedcountriesintermsofitsoveralltransportcosts(onimportsandexports)asaratio ofthevalueofexportsandtheanalysisconcludesthatMalawiisanoutlierineithercase.Malawiis landlocked, but so are many other countries. Distance to nearest port is less than 900km and Malawistransportcostsshouldbeneartheregressionlineat23%.Assuchdistanceonlyexplains aboutathirdofthehightransportationcosts.

FayeetalandCalculationsbasedonthe2005TERAFinalReportputsthisfigureat58%in2003 Page27
Fig.34
Cost of trade per 22-ft container Rwa nda Uganda Botswa na Za m bia Ke nya Swazila nd Mala wi Na m ibia Ta nza nia Le sotho Ma da gas ca r Be nin Mozam bique Ghana 0 1000 2000 3000 4000 5000
Cos t to e xport. $/container
Cost to im port, $/containe r
Source:DoingBusinessIndicators2008
Furtheranalysisrevealsthatthecauseofthehightransportationcostsisnotbecauseofshipment costs.Figure30showstheaveragecosttoship20ftcontainertoaportoffinaldestinationandfrom aportoforiginforAfricancountries.Malawiisinthemiddleofthepackinthecaseofthecostof trade.Additionally,transportcostsformostexportcommoditiesarelowerthanimportcostsasa resultofthetradedeficit(Kadale2007),asMalawisimportsexceedexportsbyafactoroftwo.
Fig.35
Source:TERA2005 Shippingacontainermaynotbeexpensive,butneitherisitscontentsthereforeexportinglowvalue commodities means that transportation cost per dollar of the commodity is high. For instance transportcostsasaratioofcommodityvaluesshowthatthoseforsugararethreetimesthosefor
MILLENNIUMCHALLENGEACCOUNTMALAWI tobaccodespiteusingthesamerouteandmodeoftransport.In additionexportsandimportsare bothseasonal,butfallindifferentseasons(tobaccovs.fertilizer)resultingincontainersandtrucks runningemptyoneway.ThisfactoriscompoundedbythefactthatroutesliketheBeiracorridoris hardlyusedforimportationofothercommoditiesthanfertilizerandfuel.Forinstanceaccordingto TERA 2006 the report indicates that Beira handled 53.6 thousand tons of fuel and 50.7 thousand tonsoffertilizerandnothingelseotherthanthosetwo.Fuelwhichusesspecializedcontainersdoes notofferopportunitiesforbackhauls.
Fig36
Source:TERA2005 OntheDurbanroutehowever,exportersoftraditionalcrops(especiallytobacco)areabletotake advantageoftheemptybackhaulsthroughdiscountedtransportrates.Inadditionexportersdonot incurtransshipmentcostsforgoodsthatpassthroughtheportofDurbanandassuchinthecaseof tobacco the use of the Beira port by road does not offer a significant cost advantage. The figure below shows the transport cost buildup for tobacco and whilst inland costs to Durban are more thantwicethoseofBeirabyroad,higherhandlingcostsattheportofBeiraaswellasthecostofa feedervesselreducetheinlandcostadvantage
Page29
Fig 37 Fig
38
Source:TERA2005
Thestoryisdifferentinthecaseofsugarandtea.TeaisexportedthroughtheportsofDurbanBeira andNacalaandveryclearlyNacalaoffersaclearcostadvantagecomparedtothetworoutesdueto lowinlandtransportcostsandyetasof2003only10%ofteawaspassingthroughNacala.Sugaris exportedthroughthetworoutesofBeiraandNacalaandtheBeirarouteistwiceasexpensiveas Nacala.InlandcostsbyroadthroughBeiraaretwicethoseofNacala.Asregardsothercommodities inlandcostsalonearehigherthanthecombinedcostsofseafreightandrailforNacalaandyet27% ofexportsdestinedforoverseasmarketspassthroughNacala.

Fig39Fig40
MILLENNIUMCHALLENGEACCOUNTMALAWI Source:TERA2005
In spite of the cost advantages offered by the Nacala route 56% of Malawis exports go throughtheportsofBeiraandDurbanand38%ofthecountrys importspassthroughthe ports of Durban, Beira and Dar es Salaam which adds to the high cost of transportation especiallyforsugarteaandnontraditionalexports.AccordingtoTERA(2005)thehighcost of transportation for commodities is because of how [un]reliably Malawi ships its commodities.ShippingbyrailthroughNacalamaybecheaperthanalternativeroutes,butit isunreliable.ForinstanceTERA(2005)estimatesthattheLilongweBeirarouteis948km andtakes3daystransitbyroadwhilsttheLilongweNacalaroutebyrailis989kmandtakes 10daystransitbyrail.ThetablebelowrevealsthatfortheNacalaroute,mostusersindicatea Table1.TransitInefficiencybyCorridor
Corridor Nacala Beira DaresSalaam Durban Lackof Storage Medium Low Low Low
lowleveloftransitefficiency.Thisrouteshowspoorratingsfortwoofthefourcorridorconstraints (inadequateinfrastructureandinfrequentshipcalls).
Infrequent ShipCalls High Medium Medium Low Transit Inefficiency Rating Highmedium Low Low Low
Constraint Documentation Inadequate Problems Infrastructure Low High Low Low Low Low Medium Low
Source:EstimatesbyTERA. TheDurbanroutehasbeenrankedaslowintermsoftransitinefficiencyasitisreportedtobethe mostreliabletransportrouteandtheportisefficient.TheBeiraandDaresSalaamrouteshavealso been ranked as low in terms of transit inefficiency. Dar es Salaam and Beira ports both have the reputationofbeingefficientlyoperated. The table below shows that Nacala has the longest transit times. As a consequence large retail businessesstatethat:Ifadeliveryistimecritical,IrouteitthroughDar.
Table2.TransitTimes(Days)
Port LandTransport SeaTransport TotalTransport DaresSalaam 4 32 36 Nacala 10 30 40 Beira 3 28 31 Durban 7 25 32 Source:EstimatesbyTERA. According to the MEPD Annual Economic Report (AER) 2008 Government recognizes that: [...] logisticalandcapacityproblemswiththeNacalaraillineresultsinmostgasolinebeingimported throughotherroutes.Figure31showsthatfuelimportsviaNacaladeclinedtozeroby2006.
Page31
Fig.41
300 250 200 150 100 50 0
Fuel imports by route (million litres)
2000
2001
2002
2003
2004
2005
2006
Nacala
Beira
Dar-es-Salaam
Mbeya+Gweru
Source:MEPDAER2008
Assuch,comparedtoothercountriesMalawiisnotveryfarawayfromtheports.Howeverdueto other constraints, including high transit times on the Nacala route the country is forced to use longerroutestoDurbanandDaresSalaam.Beirabyroaddoesnotofferacostadvantageformost commodity exports due to limited backhaul opportunities for discounted transport offers like on theDurbanroute. 4.3.3 Summaryoftheinitialconstraintsandconclusion Theanalysishaslookedattheinitialconstraintsi.egeographyandinnovarion.Rainfallisamajor driverofmaizeyieldsand,subsequently,ofGDP/capitagrowth.Weatherrelatedrisk,lowincomes and insufficient savings (wealth) and the high cost of importing food are responsible for food insecurityandthelackofdiversificationoutofmaizeproduction.Thisproblemiscompoundedby land pressure which results in low productivity and as such farmers are pushed into a corner situation. A failed harvest removes the principal source of consumption for rural households. Capacity to replace lost production through imports is limited by foreign exchange earnings and lackoffarmdiversification.Thissituationiscompoundedbythehighcostoftransportationwhich limitsthebenefitsofmaizeexportsduringyearsofagoodharvest.Increaseddemandontheformal marketduringleanyearsgreatlyraisesfoodpricesmakingithardertosubstitutelostsubsistence production. Price volatility creates a disincentive to diversify since the farmer cannot guarantee household access to maize without a significant cash crop production. Eliminating rainfall variability reduces the standard deviation of GDP/capita growth from 5.6% to 4.4%. Even after controlling for rainfall, GDP/capita growth volatility is high compared to other countries in the region.Internationaltradetellsusthatfoodinsecurityneednotbeaproblembecauseacountrycan fillthegapthroughimports.HoweverthisisnotthecaseinMalawibecauseoflimitedintegrationto theworldeconomy. Devegetation, erosion and sedimentation are Malawis most serious environmental threats. Throughout most of the country a new dam is likely to fill with sediment within a few years of
2007
MILLENNIUMCHALLENGEACCOUNTMALAWI commissioning,thereforesedimentationposesthebiggestrisktothedevelopmentofwaterstorage structures.ThemostsignificantdamsarethehydropowerdamsontheShireRiver,whicharebadly affectedbysedimentation.SedimentationisparticularlyacuteintheNkulapondagewhichsupplies a power plant and Blantyre Water Board (BWB). As such Natural Resources Management is a bindingconstraint. ApartfromweatherasageographicalfactortheanalysisalsolookedatMalawisremotenessasa factor affecting GDP and export performance. Malawi is landlocked, but so are many other countries!Theanalysislookedatwhetherornotthisexplainsthehighcostoftradeandtheanswer wasNO.Malawisdistancetonearestportislessthan900km.Distanceexplainsonlyathirdofhigh transportationcosts. In addition the analysis looked at whether or not Malawi is inovating and the answer is that the country is at the lowest end of technological frontier but some advancement is being made if tobacco is excluded from the the export basket. However in view of the massive importance of tobaccointheeconomythesaidadvancementsaretoolittletoassureenoughforeignexchangeto providefoodsecuritythroughimportsindroughtyearsandenoughtodrivesufficientGDP/capita growththatwillreducepoverty. Malawineedstohaveanenlargedandstablesourceofforeignexchangeifitistoeffectivelyaddress the problem of food security both at the farm level and national level. It will also have to find solutionstotheglutsinmaizesupplyduringyearsofagoodharvest.Addressingthesefactorswill solvetheproblemofwildpriceswingsbetweenyearsofgoodharvestanddroughtyearsandhence address the risk aversion of Malawian farmers which is preventing them from onfarm diversification. In view of the discussion so far we will look at other factors that hinder growth and export diversification. These factors are infrastructure, human capital, finance, macro shocks and investmentclimate.
4.4 Infrastructure

.modelsimulationssuggestthatchangesoutsidethefarmsectoritselfreducedmarketingcostsand morerapidgrowthinthenonfarmeconomyarerequiredtoprovidesufficientmarketdemandto supportrapidagriculturalgrowth.Modelsimulationssuggestthatasharpreductioninmarketingcosts throughinvestmentsinmarketinginfrastructure(forexample,roadsandbridges,ports,storage facilities,electricity)anddevelopmentofmarketinstitutionscombinedwithagriculturalproductivity growthwouldraisepercapitaGDPgrowthbyapproximately2percentperyearinthesamplecountries. Simulationresultsalsosuggestthat,combinedwithnonagriculturalproductivitygrowth,productivity growthinagricultureresultsinpercapitaannualagriculturalrealincomegrowthof3.04.4percent. (IFPRI)
4.4.1 TransportInfrastructure Malawiisservedbyfourtransportmodesnamely,road,rail,lakeandairtransportwhichconsists ofaroadnetworkwithanestimateddistanceof15,451km;797kmofrailwaytrackfromMchinji border with Zambia to Nsanje boarder with Mozambique; 4 harbors on Lake Malawi that handle cargo mainly from Ntwara in Tanzania; and 5 commercial airports (two major international airportsinLilongweandBlantyre)including33aerodromes.
MILLENNIUMCHALLENGEACCOUNTMALAWI Transport infrastructure plays a major role to the Malawian economy in terms of distribution of exports and imports. The major trading blocs for Malawi comprise of the European Union (EU), Southern African Development Community (SADC), United States of America (USA) and the CommonMarketforEastandSouthernAfrica(COMESA).TheEUis thekeyexportdestinationfor Malawiaccountingfor35%ofMalawisexports,followedbySADC(29%)ofwhich16%goestothe RepublicofSouthAfrica(RSA),COMESA(19%),USA(9%)andrestoftheworld(ROW)accounting for9%.MalawismajorimportscomefromSADC(55%)particularlyfromtheRSAwhichaccounts for37%ofMalawisimports.GoodsfromtheEUaccountfor17%ofMalawisimportsandCOMESA account for 11% of the imports to Malawi4. Food items including agricultural and manufactured products constitute the bulk of imports from RSA. Figure 1 (see annex 1) outlines the trend of Malawiexportsandimportstomajortradingblocsandcountriesandtherestoftheworld. 4.4.2 Roadinfrastructure Malawian roads fall into five (5) classes of main, secondary, tertiary, district and urban roads. In addition to these classes nonstandard roads are estimated to cover a distance of approximately 10,000 km. Of the total road length, paved roads constitute 26% (4,038 km) and unpaved roads makeupthebalanceof74%.Thepavedroadsconstitutemainlymainroads(70%)andurbanroads (19%).Districtroadsserveasfeederroadsconnectingtomainroadsaswellascommunityroads. Theanalysissetouttofindoutifthehighcostoftransportationisduetobadorcongestednational roads.Theansweraccordingtothechartsbelowisthat,Malawisroadnetworkisdensebyregional standards.
Fig.42
Road density (km of road per 100 sq km of land area) Rwanda Uganda South Africa Zimbabwe Malawi Zambia Kenya Tanzania Botswana Mozambique 0 20 40 All roads Paved roads 60 South Africa Kenya Uganda Tanzania Mozambique Rwanda Zambia Zimbabwe Malawi 0
Road usage
50
100
150
200
Vehicles/km of paved road People/km of paved road
Source:MEPDAER
As a result of implementation of several projects by the Ministry of Transport and Public Works (MTPW)andtheNationalRoadsAuthority(NRA)roadconditionshaveimprovedsignificantlysince
ThesecalculationsareobtainedfromtheSADCTradedataobtainedatwww.sadctrade.org/tradedata Page34
MILLENNIUMCHALLENGEACCOUNTMALAWI 2004.In2007,33%ofthetotalroadnetworkwasingoodconditioncomparedto24%recordedin 2006.Itistooearlytojudgetheimpactarisingfromimprovementsintheroadnetworkbutsuffice to say that investment and export levels are trending up and GDP is quite high by SubSaharan Africanstandards. AlthoughthemainroadinfrastructurewithinMalawiisingoodconditionthisistheresultofactive donorssupport,notablythatoftheEuropeanUnion.TheMalawigovernmentwillhoweverneedto establish a sustainable maintenance policy as the road fund can only provide 25 percent of maintenanceneeds.Despitedonorsintervention,thebackloginperiodicmaintenanceisgrowing. The chart below shows that over 70% of paved roads were in good condition. This however representedaslightdecreasefromthe2006percentageofover75%.
Fig.43
Paved roads 2007 2006 0% 20% 40% 60% 80% 100%
Unpaved roads 2007 2006 0% 20% 40% All roads 2007 2006 0% 20% 40% Good 60% Poor 80% 100% 60% 80% 100%
Source:MEPDAER Ontheotherhandjustover20%ofunpavedroadswereingoodcondition.Oftheremainder,nearly 35%oftheunpavedroadnetworkwasinpoorcondition.Thishindersaccessbyagriculturalbuyers andsellersoffarminputs.Italsohindersaccesstoservicessuchastourism,education,healthand microfinance. It should be noted that more than 85% of Malawis population lives in rural areas andtheyaredependentonsecondaryandtertiaryroadsfortransportingtheirgoods.Thequality and funding of this network is problematic. These roads and the river crossings are not well maintained. This results in high transport costs and renders certain regions in the country inaccessible duringtherainyseason.Improvedruralinfrastructurecanprovideall yearaccessto keycollectionareastoconnectfarmerstomarketsandthereforeimprove,throughincreasedtrade, thelivingstandardsofsmallfarmers.Ruralaccessibilityandmobilityisseriouslycompromisedby thepoorconditionoftheruralroadnetworkDuringtherainyseasonaccessibilitytothecollection pointscanbeextremelydifficultanddeliveryorcollectionscanfaceupto5daysofvehicledelays. AccordingtoTERA5fewtransportoperatorswishtotaketheir510tontruckstoinaccessiblerural destinations, leaving only pickups operated or hired by intermediaries to deliver seeds and fertilizers at very high prices. These intermediaries also buy the produce at very low farmgate pricescitinghightransportcostsasthereasonforlowpricesoffered.
5
Fair
MalawiTransportCostStudybyTERAInternationalGroup.Inc,April2005 Page35
Table3TransportCostsforSmallholderTobacco(MalawiKwacha)
Description AverageperbaleEarnings PerhectareAverageProduction(kg) Averagenumberofbalesperhectare PerhectareInputCosts: NurseryStage Chemicals Fertilizers TransplantedStage Fertilizers Harvestinglabor Materialforbales TotalInputCostsperhectare TotalInputCostsperbale TransportCosts TotalCostperbale NetEarnings TransportCosts/TotalPrice TransportCosts/Earnings HighTransportCost 10,790 3,000 35
LowTransportCost 10,790 3,000 35 3,000 2,000 40,000 10,000 882 55,883 1,597 500 2,097 8,693 4.6% 5.8%
3,000 2,000 40,000 10,000 882 55,883 1,597 925 2,522 8,269 8.6% 11.0%
Source:TAMAandTERAestimates. TERAgivesanexampleoftwoareasonewithgoodinfrastructureandanotherwitharoughroadin theabovetable.AspresentedinTable,longerdistancetodepotandlowerroadqualitycanalmost doublethetransportshareofcostfrom4.6%to8.6%asashareofthetotalpriceperbale. ThelongcivilwarinMozambiquedisruptedmanyofthetraditionaltraderoutestowardstheopen sea,includingtheformerBeiraRailwayLine.Inalongandcostlyprocess,thecountryreorientated itstradelanesduringthe1980sand1990stoitspresentconfiguration.Theopeningofnewroads andtheavailabilityofimprovedtransportequipmentlastbutnotleasttheadventofthecontainer helped in this process, but also imposed some constraints, which today tend to cement trade routes,transportmodesandresultingcommercialhabits.However,consideringthatlongdistance truckingisbyfartheleasteconomicmodeoftransportandthusthemostexpensiveforthecountry, anyotheroptionbeyondtruckingshouldmeritatleastahardglance.
4.4.3 Rail The analysis looked at whether poor rail infrastructure is responsible for high transport costs. Malawis geographical location is one of the most favorable. Only Zimbabwe, Lesotho and
Swazilandareclosertotheirnaturalcoastalgateway.Thedistancebetweentheeconomiccenterof Malawi, Blantyre, and the closest port, Beira, is 560km (by rail), which is comparable to major inlandcitiesinEasternandSouthernAfrica(tablebelow).
Table4ComparativeDistancestoPorts
MILLENNIUMCHALLENGEACCOUNTMALAWI Centre Blantyre Harare Johannesburg Nairobi Port Beira Beira Durban/Maputo Mombasa Distance(km) 560(rail)/800(road) 560 570 485
Source:WorldBankMalawiTradeandTransportFacilitationAudit
economically by taking advantage of this proximity to a port and the efficient railway operations alongthetraditionalBeiraline.Unfortunately,thecivilwarinMozambiqueinthe1970sdisrupted thetraditionaltraderoutesandMalawihadtorelyonlongerroutesandessentiallyswitchtoroad transport.ThisiswhentheNorthernCorridor(DaresSalaamMbeyaMzuzuLilongwe)withatotal distanceof1663kmwasdeveloped.TheroutetoSouthAfricaviaZambiaandZimbabwewaseven longer(2900km). The war in Mozambique forced Malawi to reorientate its external trade and transport routes, as thenearestportsBeiraandNacalawerenotavailableanymore.SouthAfrica,beingbyfarthemain trade partner of Malawi, was accessible only by road, which implied the increased use of trucks. Thus, the trucking industry during the 1990s was much promoted and attracted much entrepreneurial initiative. It has developed into an important economic force and is said to even exert strong political influence. This is felt to be reflected in a preference for road traffic and the funding for maintenance of the roads. The established transport modes like railway and shipping on Lake Malawi have been unable to offer the same speed and efficiency as the road transport, reflectedinasteadydeclineoftheirperformances. Today, Malawi essentially relies on three relatively long land routes to access international gateways:theroadtoDurban(2300km),theroadtoBeiraandtherailroadtotheportofNacalain Mozambique,bothabout800km.TheSouthAfricancorridorisactuallyanetworkofroads,liaising southern Malawi via the border post of Mwanza through Mozambique to Zimbabwe and South Africa(seemapbelow).Thedistancesarearound600kmtoHarare,1,600KmtoJohannesburgand 2,000KmtoDurban.DurbanisthemainintercontinentalshippinghubofsouthernAfricaandfrom thereMalawicargodestinedtoEurope,AmericaandFarEastisshipped.Durbanisaccessiblefrom MalawieitherbylandtransportbytruckorbyfeedershippingthroughthecorridorportsofBeira andNacala.Therefore,Malawismainvolumesofcargoaremovedontheseroutesbytruck.
HistoricallytheBeirarailwaylineplayedanimportantroleinthedevelopmentofMalawi and is the shortest in terms of distance to the sea port. The country was able to develop
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The Sena railway line in Mozambique, coming up from Beira, is being rehabilitated by an Indian consortiumandwillhaveaconnectingspurintoMalawi,liaisingwiththeMalawirailwaynetwork atNsanje/Bangula.The Senarailwayisexpected tobeoperationalin2009andMalawimayonce againbemoredirectlyconnectedtoBeirabyrail.Howeverthe ChiromoBridgewaswashedaway andthetrackisinverypoorcondition. Untilthetrackandbridgehavebeen rehabilitated,theonlyconnectionisbyroadwhichstartsin Blantyre andpassesthroughtheborderpostofMwanzawhichis around800 Kmlong.The main exportcommoditiesmovingonthisrouteare:sugar(50,700tin2003),tobacco(31,700t)andtea (7,100t).Themainimportcommoditiesare:fuel(123,800tin2003)andfertilizer(33,900t).The transittimebetweensouthernMalawiandBeirabyroadisabout3days.Beiraoffersregularfeeder callsforDurban.
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Malawi has a total of 797 km singletrack within the countrys borders, of which 757 km is operational.TherailnetworkservestheSouthernhalfofthecountry,SouthofLilongwe.InNkaya, mid way between Blantyre and Salima, a branch goes east to the Mozambican border (Nayuchi/ EntreLagos)toreachtheNacalalineatCuamba. However, the 77km railway section from Entre Lagos to Cuamba is in a bad state and the Mozambicangovernmentthroughitsconcessionaireiscurrentlycarryingoutmajorrehabilitation works. Lead times using rail transportation has been affected by the condition of both the locomotives and the railway network. All locomotives operated by CEAR are old and dilapidated and this has increased operation and maintenance costs for the concessionaire. Furthermore, the frequent suspension of rail services has affected the condition of the rails of which most of them have deteriorated and need urgent upgrading. The major problem has been the 77km section in Mozambique from Entre Lagos to Cuamba that remained undeveloped due to civil conflicts. This lack of reliability has been one of the major reasons for low volumes of cargo and passengers utilizing this route a contributing factor to the uncompetitiveness of rail transportation against other transport modes such as roads. Improving this section in Mozambique is, therefore, of top priority. Rail infrastructure in Malawi is poor and is in need of major rehabilitation which comparesunfavourablytotheswiftrepairoftheroadlink.Thestateofrailinfrastructurereduces transportationoptionsanddrivescostsup.
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AccordingtotheTERAstudydelays,inmanycases,causetotallossofashipment.Manyproducts are perishable, such as horticulture products, tropical ornamental fish, and fresh food products. Both total trip time and reliability are critical. For products which are seasonal, delays can be as consequentialasforperishables,suchasproductssoldinanticipationof specificholidays.Where ship port calls are infrequent, delayed cargo may miss a critical shipping date and incur extra storagecostsandexposuretolossanddamage.Alternatively,ashipperwillhavetoplanforcargo toarriveinportsubstantiallyinadvanceoftheshipcalldate,simplytoavoidriskofdelays,with extracostofstorageanddelayinpayment.Ifdeliveryofafarminputsuchasfertilizerisdelayed and unavailable at planting, then the cost is enormous in terms of lost productivity, plus holding costsforusenextseason. Withtheconditionoftherailroadbeingpoorandtransporttimesveryinconsistentitisthereforeof nosurprisethatshippersofcommoditiesotherthantobacco,teaandsugarpreferthelongermore expensiveroutethroughtheportofDurban.Insummarytheproblemareasontherailroadare: InMozambique,a77kmsectionlocatedinafloodareabetweenCuambatoEntreLagoshas beeninverypoorcondition,causingmanyinterruptions.Itiscurrentlybeingrehabilitated ThetrackssouthofBlantyre(a209kmsection)areinapoorcondition.Themostsouthern section 80 km south of Machanga is no longer in use and needs rehabilitation as some sectionshavebeenwashedoutbyfloods.TheChiromobridgeisinneedofreconstruction. In2003awashedoutbridgeSouthofSalimapreventedoperationstoSalimaandLilongwe. ThebridgehasfinallybeenrepairedwiththesupportofaDFIDgrant. WhilstthelinebetweenBlantyreandSalimaaswellasthebranchfromNkayatotheborder isgenerallyingoodacceptableconditionalthoughitneedssomerehabilitationandrepair.
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MILLENNIUMCHALLENGEACCOUNTMALAWI Since the rail subsector is capable of transporting large volumes of goods at a low price and on time, the functionality of rail transport is of vital importance to Malawi. This becomes important when one considers terms of trade and competitiveness of agricultural products with Malawis tradecounterpartswithinandoutsidetheregion.Withtransportationcostsforsugarteaandnon traditionalupto44%oftheexportvalues,upgradingandrevivingrailtransportationisimportant forMalawiseconomicdevelopmentifitistoshiftfromapredominantlyconsumingandimporting countrytoonethatpredominantlymanufacturesandexports.
Whengrowthinagricultureiscombinedwithamoreefficienttransportsector,bothtotalGDPandfarm incomeincreasesharply:additionalGDPpercapitaannualgrowthrisestoclosetoormorethan1percent infiveofthecountries(allexceptMozambiqueandZimbabwe,Table4.2,partA,column7),andpercapita farmincomegoesupbyclosetoormorethan2percentinallsevencountries(TableA12,partB,column 2).Agriculturalexportsbenefitmorefromimprovingthetransportsectorsproductivity:totalagricultural exportsannuallyincreaseby4.176.18percentpercapitainsixcountriesandby8.43percentin Zambia(TableA12,partB,column6).Malawisagriculturalexportgrowthrateinthisscenarioismore thantwotimeshigherthanthegrowthrateinthescenariosofagriculturalgrowthalone.Forthe othersixcountries,agriculturalexportgrowthratesincreaseby30to90percent.
4.4.3.1 MalawiLakeServices Malawi Lake Services (MLS) was established as a division of Malawi Railways (MR) to provide essential transport services for freight and passengers along the 500 km length of the lake. MLS operatesafleetofabout10vessels.Shipservicesareprovidedto21landingpointsonLakeMalawi, four of which have freight and passenger handling facilities. With the increasing efficiency, speed and deregulation of road transportation, the lake transportation experiences similar problems as general freight carried by rail. Due to the lack of flexibility and the additional costs of transshipment, the activities of MLS have been gradually declining over the years, with the exceptionofrenewedinterestinthemid1970stothe1980s,whenaccesstoportsinMozambique, Nacala and Beira, were closed due to the civil war. During this time investments were made into port infrastructure and vessels, but problems were experienced with low lake water levels and accesstothekeyports.Thelakelevelshavesincerecovered,butthetrafficvolumesstillshoweda steady decline, leading to a decision in 1995 to separate MLS from Malawi Railways and to concessiontheoperationstoaprivatesectorenterprise. Water transportation on Lake Malawi is used to transport goods and services such as foods, fertilizers,constructionmaterials,dailycommodities,fuelandpassengers(bothlocalandtourists). Therearesix(6)majorportsalongLakeMalawi,namely:Itungi(Tanzania);Chilumba,NkhataBay, Chipoka, Monkey Bay, and Ngara ports. These are all in a dilapidated state thus affecting the efficientuseofwatertransportationinthecountry.Table1outlinessomeofthekeyconstraintsat selectedportsalongLakeMalawi. OnlyChipokaandChilumbaportsareequippedwithaquay/pier, loadingandunloadingfacilities, warehouse, repair yard and reserve tanks. There are only three ports at Nkhata Bay, Ngara and Monkey Bay equipped with floating piers. Only the Monkey Bay port was operated by a private company,theMalawiLakeServices,untiltheirconcessionexpiredin2008.ThepieratNkhotakota port is dilapidated and cannot be used. Since 2004 there have been changes in the use of marine services.Duringthisperiodpassengerserviceshavedecreasedby12%andthevolumeofcargohas increasedbymorethan300%.
MILLENNIUMCHALLENGEACCOUNTMALAWI ThelatterisattributedtotheopeningoftheNgaraportinDwangwathattransportsmainlycargo fromtheEthanolCompanyandtheDwangwaSugarCorporation.Howeverthepoorstateofmostof theportsalongLakeMalawihasresultedintheconcessionairemakinglossesonpassengertransit.
4.4.4 InfrastructurePower
Malawi currently suffers major shortages of power generation capacity and power outages but planned investment in KapichiraII hydropower plant and the interconnection of Malawis electricitygridwithMozambiquein2011shouldhelpreducecapacityshortagesandloadshedding andimprovesupplyreliability.Howeverdemandisgrowingrapidlyandisprojectedtoreach325 MW, 478 MW and 757 MW for years 2010, 2015 and 2020 respectively. Given the expected load growth, a continuation of current problems with the availability and reliability of existing hydroelectric power plants would, despite the planned investments and would lead to more load shedding, discouragement of business investment, and would undermine economic development
MILLENNIUMCHALLENGEACCOUNTMALAWI andeffortstoreducepoverty.Itwouldalsodamageattemptstowidenaccesstoelectricityamong Malawispopulation. The analysis performed shows that currently ESCOMs installed capacity is 302MW (95% hydro; 5%diesel)whilstavailablecapacityisonly265MWagainstforecastdemandof295MW.Withthe rehabilitation of Tedzani I and II and the expected decommissioning of one of the machines for purposes of rehabilitation an additional 20MW which was expected by the end December 2009 bringingtotalavailablecapacityto285MWwhichisstillbelowcurrentdemand.Withthisscenario load shedding is inevitable and the situation will continue to deteriorate as demand grows. It shouldbenotedthataccesstoelectricitycurrentlystandsat7.9%.
Fig.44
340 320 300 280

MW
260 240 220 200 180 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Installed capacity Available capacity Peak Demand
Source:MEPDAER2006&2008 A consequence of the capacity shortage is the deteriorating performance of existing hydropower plants since without spare capacity it has not been possible to take plant out of service to allow propermaintenanceandrefurbishment.Additionally,problemswithweedinfestation,siltationand debrisintheriverhavedamagedturbinesandgenerators.Theseproblemshavebeenaccentuated byunsustainablecatchmentmanagementandnoxiousweeds. Afurtherchallengewiththepowerinfrastructureistheoverloadedtransmissionanddistribution networks.Thisresultsinunreliableelectricitysupplywhichcausesandvoltagefluctuationscausing damagetoconsumers(householdsandbusinesses)electricityequipment. Theimplicationsoflowgenerationcapacitycoupledwithunreliabletransmissionanddistribution networks is that ESCOM cannot guarantee quality and sufficient quantity of supply to new and existingcustomers andthatthe countrycontinuestosuffer fromregular poweroutages.Thereis also a backlog of unconnected customers as well as potential customers that have deferred investmentormovedtoothercountrieswherepowerisnotaproblem.
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MILLENNIUMCHALLENGEACCOUNTMALAWI Thishasadverselyaffectedbothdomesticconsumersaswellasindustryandhasendedupdriving awayinvestors.Thefollowingexamplesservetoillustratetheadverseeffectofthestateofpower supply: ESCOM couldnt guarantee sufficient quantity of electricity to uranium mines which requireveryreliablepowersourcesandasaresultPaladinresortedtotheimportationof dieselgeneratorswhichisamuchmoreexpensiveformofenergyandresultsinincreased diesel imports. Importing diesel creates additional pressure on international transport as wellasforeignexchange.Thisproblemiscompoundedbyaweak transmissionlinetothe Northernregion. Heavy sands extraction never materialized because of the same inability to guarantee power supply. Heavy sands are used in the manufacture of titanium, a light and robust metal,whichis,interalia,usedinairframemanufacture.Malawilostoutonanopportunity todiversifyitsexportbaseandtheinvestorsmovedtoMozambiquewherepowerthenwas notaproblem.HeavysandscanalsominedonasmallerscaleandthereforeMalawimissed out on an opportunity to empower the majority of its citizens who could have benefited frombeinglinkedtoalargeproduceroftitanium. BAT quoted power outages as one of the reason for their departure from Malawi as each poweroutagecostthecompanyasignificantamountofmoney.Everytimemachinesstopas a result of power outages 50,000 cigarettes have to be thrown away as they cannot be recycled.Similarlythehighincidenceofpoweroutageshasaffectedthecompetitivenessof mostindustriesincludingUnilever,adetergentmanufacturerwhichhadtomoveitsmajor productionlinestoothercountriesincludingZimbabwe. Dairy industry cant provide consistent quality of milk (outages preclude maintaining constanttemperature)andasaresultlossesarehigh.Ruralhouseholdsinmilkshadeareas quotedlackofaccesstopowerasoneofthemajorimpedimentsgrowthofruralbaseddairy industries.Thislimitsimprovementsinrurallivelihoods. Plastics:Eachtimethereisapoweroutagethemachinesgetcloggedwithmoltenplastics and result in expensive cleaning operations of equipment. This adversely affects the competitivenessofthesubsectorandconsequentlytheexportpotentialislimited. SeveralpotentialtextileinvestorshaveconsideredinvestmentinMalawiinrecentyears. Textile manufacture, especially spinning, is a power sensitive operation which requires good quality power (in particular, a consistent power voltage to avoid uneven thread thickness).Thecostofunscheduledoutagescanoftenbedisproportionatetotheduration of the outage. For example, the Mapeto textile factory may lose between 300 and 500 metres of fabric in their finishing/dyeing operation, whenever there is a supply interruption.Anumberoftextilefactorieshaveclosedinrecentyears,withsomeofthem (e.g.HAPS)citingpowersuppliesasamajorreasonforclosure. Mediansaleslossesduetopoweroutagesareat10%thehighestwithinMalawiscomparators.In fact for companies without a generator, median sales losses are of the order of 20 percent comparedtothosewithageneratorwhoselossesareintheorderof5percent.Asaconsequence thenumberoffirmswithageneratorisat50%,oneofthehighestintheregion.
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MILLENNIUMCHALLENGEACCOUNTMALAWI PressCorporationhascitedpowerproblemsasthereasonforthepurchaseofthermalgeneration capacitywhichdivertedresourcesawayfromstartingnewbusinesses.

Fig.45
Median sales losses due to power outages Malawi Tanzania Madagascar Kenya Zambia Uganda South Africa SSA Low income 0% 2% 4% 6% 8% 10%
% of firms with generator Kenya Tanzania Malawi Zambia Uganda Madagascar South Africa SSA Low income 0% 20% 40% 60% 80%
Source:MalawiICA2006 In summary the state of power infrastructure is poor, impacting on returns to investment and constraining new investments in the country. It has prevented the countrys diversification into nontraditional exports (e.g. titanium and on farm processing) and a large number of companies haveheavilyinvestedingeneratingtheirownpower.Thisisa diversionofresourceswhichcould be used for investment in other ventures and also it does have an impact on Malawis competitiveness. In addition using own generators puts pressure on foreign exchange which is meager at the moment, raises the cost of transportation as larger fuel quantities have to be imported and eventually it has an adverse effect on the cost of other imports including fertilizer. Finally poor power quality and insufficient power quantity has led closures of a number of firms withtheresultantlossofjobsandhasinturnheightenedpoverty.Ithasalsoledtotheshrinkingof manufacturing output. It can therefore be concluded that power is a constraint to growth and povertyreduction.
Thestudynextlookedatwaterandirrigationinfrastructureasaconstrainttoeconomicgrowth.As far as meeting the water MDG is concerned, 74.2% of Malawians have access to improved water supply implying that the country is on course to attaining the water MDG. As for urban areas of LilongweandBlantyrethereisasignificantchallengeinmaintainingtheageingwatersystemasthe urbanpopulationincreases.WatershortagesareverycommonespeciallyinBlantyreandseriously affectbusinessoperations.Despiteabundanceofwaterresourcesirrigationdevelopmenthasbeen limited.Only27%oftheirrigationpotentialhasbeenexploited
4.4.5 InfrastructureWaterandIrrigation
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MILLENNIUMCHALLENGEACCOUNTMALAWI WatersupplyservicedeliveryinthecitiesofBlantyreandLilongweareoperatedthroughBlantyre Water Board and Lilongwe Water Board, respectively. The two water boards are commercial statutory corporations required to operate on a sound economic basis within their gazetted or designatedwatersupplyareas.Thedemandforwatersupplyandsanitationservicesintheseurban areas has been growing over the past decades due to population growth, urbanization and improvementsintheeconomicandsocialwellbeingofpeoplelivinginthetwomajorcitiesofthe country. Thewatersupplyandsanitationservicesarecurrentlycharacterizedbyinadequateandinefficient delivery of services. The most affected are the low income areas that incidentally make up an increasingproportionoftheurbanpopulation(currentlyestimatedat69%forBlantyreand70% forLilongwe).Theservicesbeingprovidedareunreliable,spurredbyhighwaterlosses(48%and 34% of unaccounted for water in Blantyre and Lilongwe Water Boards, respectively). This is a resultoftheinheritanceofoldwatersupplydeliverysystems andoccasionedbylackofadequate andtimelyinvestmentsforrehabilitation.Thishasanegativeimpactontheprivatesectorandthe overallnationaleconomicdevelopmentofMalawi. Ithasbeenprojectedthatwiththeexistingcapacity,LilongweWaterBoardwillbeabletomeetits demand up to 2010. With the growing demand as a result of rapid urbanization in the city (currentlyprojectedat7.1%),thecapacitiesandefficiencyofsomeoftheplantsystemscontinueto deteriorateandthereisneedtoaddmoreinfrastructurestomeetthegrowingdemandexpanding towards the borders of the city. Blantyre Water Board is responsible for the provision of water supplyservicesinthecityofBlantyreandinheritsawatersupplysystemthatisover45yearsold. ItswatersupplysystemdrawswaterfromtheShireRiverthrougha36kmtransmissionpipeline toBlantyrethathasanoverallpumpheadofapproximately800meters.Almost50%oftherevenue collectedisthusspentonelectricitycostswhichaffectthewaterboardoperationsandmaintenance activities.AsecondsourceofwatersupplyisthroughtheMudiDamwhichcontributes10%ofthe watersuppliedtothecity. TheintakearrangementsandtreatmentplantsoperatingontheShireRiverarelocatedatWalkers Ferryonwhichthewaterboardhasacompoundofoperatorsandtechniciansworkingattheraw water pumping station, water treatment plants and the highlift pumping station. The intake structure was constructed in 1963 and has expanded in line with increased abstraction requirementsfromthegrowingcity. The raw water pumping station is reported to have a design capacity of 106,000 m3/day and the treatmentplantandhighliftpumpingstationhavedesigncapacitiesof78,000m3/dayand83,000 m3/dayrespectively.ChilekahighliftstationandthepipelinefromWalkersFerrytoBlantyrehave designcapacitiesof83,000m3/dayand96,000m3/dayrespectively.Duetocurrentconditionofthe equipment,Walkersferrysystemiscapableofproducinganaverageof75,000m3/daytoBlantyre. Mudi system has a design capacity of 45,000 m3/day but due to degradation of catchment and hencepoorrawwatercondition,thecurrentproductioncapacityis8,000m3/day.Intotal,Blantyre Water Board has a production capacity of approximately 83, 000 m3/day against an average demandof87,000m3/dayandpeakdemandof95,000m3/day. In conclusion the following are major constraints in infrastructure: Energy and International corridors.Limitedirrigationinfrastructureandwatersupplyarealsoconstraintstodevelopment. Howeverwatersupplyismostlyaffectedbyavailabilityofpoweraswellaspoornaturalresources management which affect the capacities of the dams on which Blantyre Water Board depends.
MILLENNIUMCHALLENGEACCOUNTMALAWI Access to water has improved and Malawi is on course to attaining the water MDG by 2015, howeverwaterresourcemanagementisstillanissueandcouldconstraingrowth.
4.5
In the International Competitiveness Assessment (ICA) shortage of skills is ranked as 8th most constrainingfactorbybusinessesandthisabsenceofskillshaspreventeddevelopmentofhighskill businesses. One of the indicators of skills shortage is that Malawi has a high number of foreign workersinkeymanagement/technicalpostsinfirmsandNGOsandthatthereisahighproportion ofbusinessesownedormanagedbyforeignersinformalsector.
Fig.46RankingofConstraints
Macroeconomic instability Access to financing Cost of financing Electricity Tax rates Crime, theft and disorder Transportation Skills and Education of Available Corruption Tax administration Access to Land Other Anti-competitive or informal practices Political stability Regulatory Policy Uncertainty Telecommunications Customs and Trade Regulations Business Licensing and Operating Legal framework / Conflict resolution Labor Regulations Environmental regulations
HumanCapital
Again in the ICA nearly 50% of the firms surveyed find lack of skilled workers to be a serious problem. In addition more than half of the medium and large firms as well as foreign owned and exportingfirmsreportedlackofskillstobeanimportantproblem. Table4FirmsPerceptions LaborRegulations SkillsandEducationof FirmCategories AvailableWorkers Small 10.94 35.94 Medium 15.00 55.00 Large 13.21 62.26 46.61 DomesticallyOwned 12.71 ForeignOwned 12.20 58.54 11.90 48.41 NonExporter Exporter 15.15 54.55 Total 12.74 49.68 Returnstoschoolingareveryhigh6.AccordingtoICAcontrollingforotherfactors,anadditional yearofschoolingisassociatedwithanincreaseinwagesofnearly15%whenwedonotcontrolfor occupationalcategories(seeannexII).Controllingforoccupationreducestheestimates
6
0%
20%
40%
60%
80%
MalawiInternationalCompetitiveAssessment2006page68 Page47
MILLENNIUMCHALLENGEACCOUNTMALAWI considerablyto89.5%.Thisisstillhigherthanrecentestimatesofreturnstoeducationin developedeconomieswhichareontheorderof47%(PublicFundingandPrivateReturnsto Education,PURE2001).Thelevelofreturnstoschoolingisconsistentwithlackofskilledworkers. Thereisnostatisticallysignificantdifferenceinearningsofmenandwomeninthemanufacturing sectorinMalawi. Malawis literacy rates among the youth are improving following the free primary education program.Howeverprimaryschoolcompletionratesforthefirstfouryearsofprimaryschoolareat 44.2% the lowest of the comparator countries. Additionally, literacy levels among the adult population are among the lowest in the region. Studies show that household tobacco income is correlated to educational level attained by the head of the household implying that educated farmers are better able to understand the risks and best farming practices of growing tobacco. Hencelowereducationallevelscouldhampergrowthanddiversificationintheagriculturalsector
Fig47Tobaccoincomeagainstyearsofprimaryeducation
Tertiary enrollment in Malawi is the lowest of comparators at 0.4% gross enrollment (see chart below)despitethe factthateconomicreturnsfortertiary education arehighas evidencedbythe higherannualhouseholdexpenditureforurbanuniversitygraduatescomparedtosecondaryschool leavers.
Fig.50AnnualExpenditureforEach
In conclusion returns to tertiary education are high and in consequence Malawians make great efforts to study in overseas universities. Primary school completion rates are low and tertiary
MILLENNIUMCHALLENGEACCOUNTMALAWI educationishighlyconcentrated.Mostofthemembersoftheprivatesectorciteshortageofhighly skilled workers as the number 8th constraint. This may be caused by a mismatch between school andtertiaryinstitutionscurriculaandwhatisrequiredbymostbusinesses.Over50%ofthefirms inthesamplelackofskillsasanimportantconstraint.Thisfactorhasbeenanimportantobstacleto technologyabsorptionbythecountryaswellasproductivityimprovements.
4.6
AccordingtotheInternationalCompetitivenessAnalysis(ICA)thecostoffinanceranksasnumber 2constraintreportedbyformalfirmsandaccesstofinancenumberranksasnumber1constraint reportedbyinformalfirms.Whatthestudytriedtoestablishiswhetherornottheircomplaintsare valid.

Fig51Fig52
Finance
Percentage of firms perceiving obstacles as major or very severe
Macroeconomic instability Access to financing Cost of financing Electricity Tax rates Transportation Skills and Education of Available Corruption Tax administration Access to Land Other Anti-competitive or informal practices Political stability Regulatory Policy Uncertainty Telecommunications Customs and Trade Regulations Business Licensing and Operating Legal framework / Conflict resolution Labor Regulations Environmental regulations 0% 20% 40% 60% 80% Crime, theft and disorder
30 20
%
30 25 20 15 10 5 0
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
10 0
-10 -20 -30
Credit to public sector
Ex-ante Real Lending Rate
Ex-post Real Lending Rate
Source:ICASource:IFS Judging from the above graph(on the right) real lending interest rates in 1996 increased to over 40% and although they fluctuated momentarily downwards between 1997 and 1998 they increasedin2000,whendomesticpublicdebtshotupandpeakedupin2001atover40%again. Interestrateshavebeendecreasingsince2004duetoimprovingfiscalmanagement.
Fig53Fig54Fig55
Nominal spread
Real lending interest rate (%) Malawi Uganda Mozam bique Burundi Botswana Tanzania Zam bia South Africa Ghana Lesotho Kenya 0 4 8 12 16
Malawi Burundi Uganda Zam bia Lesotho Kenya Mozam bique Botswana Tanzania Ghana South Africa 0 4 8 12 16 20
Nominal spread 25 20 15 10 5 0
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Source:EIUandIFS ComparativelyMalawisreallendingratesareintheorderof15%whichisbyfaroneofthehighest in the world (see charts above). Interest rate spreads are also the highest in the region though decreasingslowly.ThisisindicativeoflackofcompetitionintheBankingsystemandisalsodueto
Billions Constant MWK
40
35
Page49
MILLENNIUMCHALLENGEACCOUNTMALAWI scarcityofcapital.Realdepositratesarenegativewhichisindicativeofthefactthattheeconomyis notsavingsconstrained.

Fig56Fig57
Domestic credit
Credit to private sector, % of GDP Namibia Kenya Burundi Benin Ghana Rwanda Mozambique Tanzania Zambia Malawi Uganda 0 20 2004-06 40 1992-94 60
40% 35% 30% 25% 20% 15% 10% 5% 0%

1965 1967 1969 1971 1973 1975 1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
Source:IFSandWDI Credittotheprivatesectorcurrentlystandsat6%ofGDP,butthiswasnotalwaysthecase.Private creditdroppedfrom12millionconst.MWKin1980(over15%ofGDP)to5in1987.

Fig58
Credit to private sector/GDP, %
Credit to public sector/GDP, %
2007
60
Interest rates, %
14 12 10 8 6 4 2 0
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
45 30 15 0 -15 -30 -45
Claims on Private Sector
Ex-post Real Lending Rate
Nominal Lending Rate
Source:IFS Inreality,interestratesbarelymovedbetween1980and1992(wetakenoteofthefactthatatthe timethebankingsectorwasheavilyregulated).Credittotheprivatesectorcollapsedaround1980 asinvestmentopportunitieswentdownasaresultofexternalshockssuchastheoilcrisisandthe civilwarinMozambiquewhichresultedintheclosureofexternaltransportroutes.Inotherwords privatecreditwentdownbecausedemandshrunk(fewerinvestmentprojectsyieldingagivenrate ofreturn).Crowdingoutoftheprivatesectorinsubsequentyearsdidnthelpmattersasitsshareto GDPkeptondeclining.Althoughthereisaslightimprovementinsubsequentyearsaspublicdebt shrunk(crowdingin)thefinancialsectorstillremainsshallow.

Billion Constant MWK
75
16
MILLENNIUMCHALLENGEACCOUNTMALAWI The chart below shows the interest rate spreads and spread composition. The chart shows that therehasbeenasteadydeclineininterestratespreadsfromahighof28%in2003to15%in2006. Recentreductioninspreadsisduetolowerreserverequirements(inflationputundercontrolby fixingthefiscalstance)andfewerbadloans,whileoverheadsremainedstable.
Fig59
Spread decomposition 25% 20% 15% 10% 5% 0% -5% 2002 Profit margin Provisions 2003 2004 Overhead Tax 2005 2006 Reserve req'ments Spread
Source:EIU Limited investment opportunities means that perclient overheads are high and at the same time banks remained highly profitable. Return on assets and return on equity as measures of profitability indicate that Malawian Banks are by far the most profitable amongst Malawis comparators (see tables below.) It is therefore not surprising that the deregulation of the sector triggeredarapidincreaseinthenumberofbanks(from2priorto1994to9today).
Fig60
ROE Malawi Botswana Zambia Madagascar Ghana Swaziland Uganda Mozambique South Africa Kenya Namibia 0 10 20 30 40 50 Malawi Uganda Zambia South Africa Mozambique Swaziland Madagascar Kenya Ghana Botswana Namibia 0 1
ROA
Source:FSAP In conclusion access to capital was determined to be a constraint. Interest rates are high by international standards, there are high spreads and overheads are quite high. There is limited financial depth in the sector, although between 1980 and 1990 the reduction in private sector creditwasduetoareductionininvestmentopportunitiesandnotviceversa.Thestudynotedthat the banking system is highly profitable using such measures as return on assets and return on equityandaccesstocapitalespeciallyventurecapitalisanissue.Howeverallthesepointtopoor
MILLENNIUMCHALLENGEACCOUNTMALAWI financial intermediation and in the case of high overheads these are at least partly explained by small market size. But things are gradually improving with the recent financial innovations includingFirstMerchantBanksMakwachacards,increasedATMnetworksanddecreasinginterest rate spreads notwithstanding the fact that these are not due to competitioninduced cost cutting reductions.
The stability of the macroeconomic environment is important for business and, therefore, is important for the overall competitiveness of a country and conversely, macroeconomic disarray harms the economy as firms cannot make informed decisions when inflation is raging out of control. The share of resources to finance government services gets squeezed as it has to make highinterest payments on its past debts. In sum, the economy cannot grow unless the macro environment is stable. Malawis Real GDP growth is still high and inflation moderate. The figure belowshowsthatinflationhasdramaticallyfallenfromashighas80%inthemid90stoasingle digit figure of 8%. Latest figures show that consumer prices increased by 9.3 percent in the 12 months to September 2008, largely because of a 25 percent increase in fuel prices in June 2008. Foodpriceinflationcontinuestobesubdued,thoughdomesticmaizepricesreportedlyshotupin someareasinthefirsthalfof2008.
90% 80% 70% 60% 50% 40% 30% 20% 10% 0%
Fig61InflationTrends
4.7
MacroRisks
1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Source:IFS
Malawisfiscalpositionhasimproveddramatically. Deficitswentdowntothelevelof 12%after having hovered at between 6% and 11.5% during the period 1995 to 2004. The graph on the bottom right shows that Malawis fiscal balance has gone from the worst in the region to above average.DuetoMultilateralDebtReliefInitiativepublicdebtfellfourfoldto50%ofGDP.However uncertaintystillremainsasthecountryenterselectionyear.

Page52
Fig62TrendsinPublicDebtandFiscalBalancesFig63FiscalBalancesAcrossCountries
250 200 150 100 50 0 0.0 -2.5 -5.0 -7.5 -10.0 -12.5
Lesotho Namibia Rwanda Malawi Uganda Zambia Mozambique Tanzania Burundi -8 -6 -4 -2 0 2 4 6 8
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
Fiscal Balance % of GDP (right axis) Public Debt % of GDP
2007
2005-07
2001-04
1997-2000
1992-96
Source:WDI
OnthedownsideMalawiisrunningachronicCAdeficit,whichdeterioratedsince2000.Mostofthe CAdeteriorationduetoworseningtradebalance.Howevermuchofthisdeteriorationiscoveredby concessionarydonorinflows.

Fig63BOPTrends
15 10 5 0 -5
% of GDP
-10 -15 -20 -25 -30
Current-transfers balance Trade balance
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Income balance Current-account balance Source:EIU Services balance
The real effective exchange rate (REER) appreciated sharply in 2003 and has remained relatively stablesincethen,helpedbytheweakeningoftheU.S.dollar. HowevertheappreciationoftheU.S. dollar against the currencies of many of Malawis trading partners since the onset of the credit crunch may lead to a sizable appreciation of the Malawi REER. Much of the trade balance deteriorationisduetotheappreciationofMalawisREERin2003.Thegraphbelowrightshowsa positivecorrelationbetweentherealeffectiveexchangerateandthetradebalance.
Fig64
150
Trade balance, Million US$
175 150 125 100 75 50 25 0 200 150 100 50 0 -50 -100 -150 -200 -250 -300 -350
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
100 50 0 -50 -100 -150 -200 -250 -300 70 R = 0.633 90 110 130 150 REER (2000=100) 170
Source:EIU/WDI The government continues to place substantial weight on stabilizing the nominal exchange rate againsttheU.S.dollar,whichhasheldsteadysinceMay2006.Theauthoritiesbelieveexchangerate stability has helped signal their commitment to economic stability and anchored inflation expectationsandthepricesoftradedgoods.
Fig65Fig66
Real effective exchange rate (2000 = 100)
Trade balance, million US$
MWK/US$, CPI index, log scale
320 160 80 40 20 10 5
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
MWK/US$ exchange rate, monthly % change 70 60 50 40 30 20 10 0 -10 -20

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Official Rate, MWK/US$ End of period
CPI (2000=100)
Source:IFS Historically Malawi has gone through periods of stability, followed by abrupt step devaluations (regularlyreaching20%permonth),whichledtohighexchange rateuncertainty.However,since 2004stepdevaluationshavebeenrareandofsmallermagnitude.Exchangeratestabilitypromotes tradebutrecentstabilityappearsunsustainableandmaybeincreasingriskofdramaticdevaluation innearfuture.Termsoftradehavebeenrapidlyimprovingsince2001.Butthecurrentcommodity boom seems to have done more damage than good as Malawi has been experiencing a sharp deteriorationintheTOT(everyothercomparatorcountryimprovedtheirToTin2006relativeto 2005).
AccordingtoICAmacroeconomicinstabilitywascitedbyover70%offirmsinMalawiasamajor impedimenttodevelopment,followedbyaccesstofinancingandelectricity.Thesituationis
Million US$
MILLENNIUMCHALLENGEACCOUNTMALAWI howeverdifferenttodayastheeconomyhasenjoyedrelativestabilityoverthepastfouryearswith singledigitinflationrates.

Fig67
Percentage of firms perceiving obstacles as major or very severe
Macroeconomic instability Access to financing Cost of financing Electricity Tax rates Crime, theft and disorder Transportation Skills and Education of Available Corruption Tax administration Access to Land Other Anti-competitive or informal practices Political stability Regulatory Policy Uncertainty Telecommunications Customs and Trade Regulations Business Licensing and Operating Legal framework / Conflict resolution Labor Regulations Environmental regulations
Source:ICA SummaryonMacrorisks Malawi is maintaining an artificially overvalued exchange rate which is leading to demand for foreign exchange exceeding supply thereby resulting in chronic foreign exchange shortages. As a resultforeignexchangepaymentsaredelayedasimporterscannotpaythebillsintimebecausethe banks dont have the foreign exchange. This in turn leads to late payment penalties by foreign partnersandlossofcommercialcredit. Thecamelsinthedesert: Inordertosurviveunderthecircumstancesfirmshaveaccountswithmultiplebankstominimize risk of foreign exchange shortage. Since importers were ready to buy foreign exchange at higher exchange rates, banks introduced quasiforward contracts (legal, but against the spirit of RBMs policy).RBMendedupclosingthisloophole.Interviewswiththeprivatesectorrevealthatthereare widespread expectations of devaluation in 2009 and the end result is that exporters postpone repatriatingforeigncurrency,therebyexacerbatingtheshortageofforeignexchange.Exportersare thereforehurtbyovervaluedexchangerate. In conclusion the fiscal stance is much improved, but credibility of recent advances has yet to be established. Inflation is under control and the countrys debt profile has improved. However the countryhasanovervaluedexchangeratewhichhurtsexportersandismaintainedinafashionthat alsopenalizesimporters
0%
20%
40%
60%
80%
4.8
BasedonthelatestDoingBusinessSurvey,theoverallbusinessclimateisbetterthanexpectedas thecountryranks11thoutof31countriessampled.
Fig68
South Africa Namibia Botswana Kenya Ghana Swaziland Ethiopia Nigeria Zambia Lesotho Malawi Tanzania Gambia Cape Verde Mozambique Gabon Madagascar Rwanda Benin Zimbabwe Cameroon Cte d'Ivoire Togo Mauritania Burkina Faso Senegal Guinea Eritrea Chad Burundi Congo, Rep. 0 30 60 2008 90 2007 120 150 180
MicroRisks
Source:ICA Butthecountryhasbeenrapidlyslippingdownontheeaseofdoingbusiness.Thebaraboveis gettinglongerasMalawiwouldhavebeenaboveLesothoifithadmaintainedthe2007rating. Accordingtothechartbelow,MalawiisonlysecondtoZambiaamongthe18countriesthatslipped.

Fig69
Ease of doing business. Rank 2008 vs 2007 dynamics

15 10 5 0 -5 -10 -15 -20 -25
Ghana Madagascar Kenya Mozambique Burkina Faso Mauritania Cte d'Ivoire South Africa Burundi Guinea Cameroon Rwanda Nigeria Chad Eritrea Tanzania Congo, Rep. Botswana Gabon Ethiopia Senegal Benin Cape Verde Gambia Swaziland Lesotho Togo Namibia Zimbabwe Malawi Zambia
Source:ICA
AdecompositionoftheeaseofdoingbusinessrankingshowsthatMalawiistrailinginparticularin tradingacrossborders,contractenforcementandclosingofbusinesses.HoweverMalawihasbeen
MILLENNIUMCHALLENGEACCOUNTMALAWI slipping almost across the board including starting a business, registering property and getting creditisrelatively(comparedtoothercountries)morecomplicatedthanthepreviousyear.There was even a slight slippage on paying taxes, and this probably has to do with the way MRA administersthetaxlaw.AccordingtooneoftheorganizationsconsulteditwasnotedthatMRAon occasionsselectivelyappliestaxrebateoncapitalgoodsdependingonabilitytopay.
Fig70Fig71
Changes in position by components of doing business (2007 vs 2008)
Overall ranking Protecting Investors Paying Taxes Getting Credit Registering Property Employing Workers Starting a Business Dealing with Licenses Enforcing Contracts Closing a Business Trading Across Borders 0 50 100 150 2008 200 2007
Starting a Business Registering Property Getting Credit Protecting Investors Trading Across Borders Paying Taxes Closing a Business Employing Workers Dealing with Licenses Enforcing Contracts
-2
Source:ICA Tradingacrossborders,themostcriticalcomponentifMalawiistoeffectivelydealwiththe problemoffoodsecurityandalsoeffectivelytransformtheeconomyisalsodeteriorating.Trading acrossbordersiscumbersome,especiallyexports.Malawiisdoingpoorlybothonnumberof documentsandthetimerequiredtocompleteanexportorimportoperation.Butexportsare burdenedinparticularbyadministrativebarriers.

Fig72
14 12 10 8 6 4 2 0 140 120 100 80 60 40 20 0
Cape Verde Tanzania Togo Lesotho Gambia Ethiopia Cameroon Kenya Cte d'Ivoire Botswana Chad South Africa Rwanda Nigeria Namibia Madagascar Mozambique Malawi Zambia Swaziland Senegal Mauritania Burkina Faso Congo, Rep. Zimbabwe Eritrea
Documents for import (number)
Time for import (days, right axis)
Source:ICA Labormarket
Interestingly,theongoingdebateonseverancepaymentsisnotreflectedinMalawispositioninthe rankingsonthedifficultyoffiringindexthecountryisdoingbetterthanaverage.

Page57
Fig73
90 80 70 60 50 40 30 20 10 0
Source:ICA Microrisks:conclusion Malawiisdoinglessthanitsneighborstoprovideafavorablebusinessclimatetoinvestors.Given nonadministrativebarrierstotrade(landlockedness,unreliableandexpensivetransporttoports, overvaluedexchangerate);thehighadministrativeburdenonexportersisextremelyunhelpfulin promotinganexportorientedeconomy.
Difficulty of Hiring Index
5.0
CONCLUSION
As observed in section 1 the country is struggling to assure food security. The fertilizer subsidy programhashelpedtoacertainextentbutthesituationstill remainstenuousduetothefactthat donorsupportfortheprogramwhilstwelcomemightnotbethereinperpetuityandthatMalawiis drought prone. Efforts to import maize during a drought year is met with such constraints as shortfallsinforeignexchangeearningsasthecountryisdependentonexportcommoditiesthatare alsoaffectedbyrainfallpatternsaswellasthefactthatinordertoimportmaizeduringadrought year the country has to pay abnormally high transport costs for imported maize. During years of plenty the country fails to take advantage of the benefits of trade through maize exports due to againhightransportcostsespeciallyonacommoditythatisoflowvalue.Thismakesitunprofitable to export maize except when neighbors have a shortfall. These factors combined result in price volatilities and the farmer is pushed into a corner. As already noted price volatility creates a disincentive to diversify since the farmer cannot guarantee household access to maize without a significantcashcropproduction.
Lesotho Namibia Nigeria Swaziland Malawi Mozambique Gambia Kenya Zambia South Africa Rwanda Botswana Mauritania Togo Burkina Faso Madagascar Senegal Zimbabwe Tanzania Cameroon
Difficulty of Firing Index
Page58
MILLENNIUMCHALLENGEACCOUNTMALAWI In view of the above it is therefore not surprising that Government is focused on increasing and stabilizingyieldstothepointwhereoutputdoesntfallbellowsubsistencelevelsevenduringbad years. Government is achieving this through the fertilizer subsidy program. The appreciated currencyishelpingtolowercostoffertilizerprogramwhilstamoveintolessvolatilecropshelps butMalawianswillrequirealotofciviceducationtoconsidercassavaanditsderivativesasfood. However the appreciated currency stance works against export diversification which is key in ensuringthecountrysabilitytoimportmaizeduringleanyears. IncreasinganddiversifyingMalawisexportsisthekeyinfurtheringthecountryseffortstoassure foodsecurity.Butthiswillhavetobeachievedattheexpenseofadepreciatedcurrencyinorderto incentivize the tradable sector. Inadequate and unreliable energy is preventing Malawi from exploitingitsmineralpotentialaswellastextileexportsandgenerallythecompetitivenessofthe domestic industries. Apart from underinvestment in infrastructure power is also affected also by poor natural resources management. In addition diversification cannot occur without addressing the high cost of transportation. This would lower the high cost of maize during lean years and assurefarmersofreasonablepricesduringyearsofabundance.Thiswouldreducepricevolatilities and encourage the farmer to diversify. This requires increasing the throughput and reliability of NacalaandBeiracorridorsaswellasaddressingthepoorqualityoffeederroads. Additionally the commercial capital Blantyre requires the reliability of urban water but water supplyismostlyaffected bypoweravailabilityas wellassiltation.Infrastructureproblemsinthe watersectorareloomingbutrecentdonoractivityshouldpostponetheproblemforaconsiderable period.Theexchangeratemayhavearespiteduringthetobaccosellingseasonbutitwillcometo haunttheeconomyagain.Itsimpactontheexternalsectorcannotbeoveremphasized In view of the above the most constraints identified are Power, Feeder Roads and International Corridors and Natural Resources management. Human resources management, and overvalued exchange rate, water supply to Blantyre and access to finance are equally important and will be labeledsecondaryconstraintsinthesensethattheyarenotconstrainingfoodsecurityintheshort tomedium.
Page59
BindingConstraints
Poorqualityand reliabilityofpower supply
Heavilyimpacting industryaswellas missed investment opportunities
Small.unstableand slow GrowingExport Basket

PoorNat resource manage ment
Maize price volatility
Unstable weather
HighcostofTransport duetoPoorFeederRoads andInternational Corridors
HighFoodInsecurity
Smallholders lockedinto Maize Production
Lowand vulnerablereal incomes
Loweffectivedemandfor nonagriculturalgoodsand Services
Lowgrowthleading tolittleeffecton povertylevels
AnnexI
MILLENNIUMCHALLENGEACCOUNTMALAWI TotalLandandSeaTransportCosts(%ofExportValue) Beira Durban Tobacco Sugar 14.29% 15.83% Tea Cotton Coffee FoodCrops Other 37.67% 18.55% 17.33% 11.22%
44.54% 24.63% 29.83%
33.75% 10.71% 20.00% 11.90%
RSADestination Nacala OtherAfrica
29.26% 8.91%
17.41%
27.51% 15.84% 28.38%
InlandCosts(%ofExportValue) Beira Durban Tobacco Sugar 3.28% 6.51% Tea Cotton Coffee FoodCrops Other 25.44% 18.55% 4.22% 11.22%
19.21% 10.14% 9.61% 15.72% 4.45%
21.43% 10.71% 8.81% 11.90%
17.41%
28.38%
TimeCosts(%ofExportValue) Beira Durban Tobacco Sugar 1.40% 1.60% Tea Cotton Coffee 1.61% FoodCrops Other 0% 2.05% 0% 1.60% 0% 2.05% 0%
1.40% 1.40% 0% 1.61% 0%

Source:TERA2005
2.05% 2.05% 0%
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MILLENNIUMCHALLENGEACCOUNTMALAWI AnnexII IndividuallevelWageRegressions

Yearsofschooling Workerexperience Workerexperiencesquared Workerisfemale Workerisaunionmember Workerisfulltime Receivedpastfirmfinancedinternal training Receivedpastfirmfinancedexternal training Receivedpastselffinancedtraining Logweeklyhours Firmhas49100employees Firmhas>100employees Firmexports Firmforeignowned Firmage Firmagesquared Workergotjobusingnetwork Constant Observations Rsquared FTestFirmSizeMatters prob>F (1) 0.145 (0.007)** 0.072 (0.006)** 0.001 (0.000)** 0.011 (0.065) 0.006 (0.065) 0.258 (0.102)* DependentVariable:Logofmonthlyearnings (2) (3) (4) (5) 0.095 0.093 0.083 0.077 (0.007)** (0.007)** (0.006)** (0.006)** 0.056 0.055 0.053 0.053 (0.006)** (0.006)** (0.006)** (0.006)** 0.001 0.001 0.001 0.001 (0.000)** (0.000)** (0.000)** (0.000)** 0.068 0.056 0.074 0.080 (0.061) (0.059) (0.058) (0.057) 0.044 0.019 0.069 0.105 (0.060) (0.060) (0.060) (0.060) 0.228 0.211 0.183 0.180 (0.092)* (0.092)* (0.086)* (0.087)* 0.315 0.304 0.276 0.264 (0.077)** 0.331 (0.079)** 0.188 (0.080)* (0.076)** 0.335 (0.078)** 0.189 (0.080)* 0.501 (0.101)** (0.073)** 0.290 (0.076)** 0.115 (0.081) 0.471 (0.097)** 0.292 (0.050)** 0.382 (0.054)** (0.072)** 0.238 (0.074)** 0.122 (0.080) 0.449 (0.099)** 0.203 (0.051)** 0.280 (0.058)** 0.085 (0.048)+ 0.366 (0.045)** 0.011 (0.003)** 0.000 (0.000)* 9.840 (0.453)** 1354 0.55 13.32 0.00 (6) 0.076 (0.006)** 0.052 (0.006)** 0.001 (0.000)** 0.082 (0.057) 0.106 (0.060) 0.179 (0.088)* 0.264 (0.072)** 0.239 (0.074)** 0.123 (0.080) 0.457 (0.099)** 0.198 (0.052)** 0.272 (0.059)** 0.083 (0.049)+ 0.368 (0.045)** 0.011 (0.003)** 0.000 (0.000)* 0.028 (0.040) 9.896 (0.455)** 1350 0.55 12.28 0.00
6.453 (0.127)** 1393 0.39
8.115 (0.190)** 1389 0.50
10.153 (0.463)** 1389 0.51
9.968 (0.445)** 1383 0.53 29.92 0.00
Notes:Robuststandarderrorsinparentheses+significantat10%;*significantat5%;**significant at1% Source:ICA 2006
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References
AlexanderCuliucConstraintsAnalysisinDepthwithexample:Moldova AlexanderCuliucMalawiConstraintsAnalysisPowerPointPresentation DaniRodrikAFrameworkforgrowthDiagnostics TERAMalawiTransportCostStudyFinalReport2005 IFPRIMarketOpportunitiesforAfricanAgriculture AfricaPrivateSectorGroupMalawiInvestmentClimateAssessment MEPDEconomicReports2006,2007and2008 WorldBankMalawiTradeandTransportFacilitationAudit Fayeetal.TheChallengesFacingLandlockedCountries MalawiGovernmentMGDS NSOIntegratedHouseholdIncomeandExpenditureSurvey RicardoHausmanGrowthDiagnosticsinpractice WorldBankCEMBackgroundPapers IMFMalawiArticleIVConsultation WorldBankMalawiPRSP KadaleConsultantsRapidDiagonsticsStudy KadaleConsultantsCreditDemandandSupplyintheTeaSector MCCIBusinessClimateSurveys
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MCA-Malawi - Final Constraints Analysis

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MILLENNIUMCHALLENGEACCOUNTMALAWI

(*) Tertiary education

(**)Natural Resources Management

(**)Trade corridors (**)Electricity (*)Water& Irrigation

(*)Exante riskofmicro andmacro policy

(*)Exchange rate (*) Unpredictable price/trade controls,poor customs documentation

MILLENNIUMCHALLENGEACCOUNTMALAWI 2.1.2 GDPCompositionandGrowthDynamics

1968-1980 GDP Services Industry Agric. 0 2 4 6 8 10 GDP Services Industry Agric.

1981-1993 GDP Services Industry

Average growth Standard deviation

1000 800 600 400 200 0

1000 900 800 700 600 500 400 300 200

Gross Capital formation, Millions constant 2000 US$

1979 R = 0.625 2006

1000 900 800 700 600 500 400 300 200

1979 R = 0.629 2006

75 100 125 150 175 200 225 T-o-T (2000=100)

75 100 125 150 175 200 225 T-o-T, lagged (2000=100)

SchoolofGovernment,HarvardUniversity(Cambridge,MA). DraftFinalAnalysisofConstraintstoEconomicGrowth Page15

Corruption, Financial, monetary,fiscal taxes, propertyrights instability

50 40 30 20 10 0 100 500 2500 12500 GDP/capita 2004, PPP$ 62500

6000 5000 4000 3000 2000 1000 0

600 500 400 300 200 100 0

GDP/capita PPP$ Agriculture/GDP, % (right axis)

GDP/capita PPP$ Agriculture/GDP, % (right axis)

4500 4000 3500 3000 2500

15% 10% 5% 0% -5% -10% -15%

Trend + Population growth Residual Source:WDI,WorldBank

Rainfall (MMI) GDP/capita growth

EliminatingrainfallvariabilityreducesthestandarddeviationofGDP/capitagrowthfrom5.6%to 4.4%.EvencontrollingforMMI,GDP/capitagrowthvolatilityishighcomparedtoothercountriesin theregion(seethefiguresbelow).

15% 10% 5% 0% -5% -10% -15%

GDP/capita growth controlling for weather

Exports of flowers and live trees

Selected textiles exports 20

Thousands Constant 2000 US$

1750 1500 1250 1000 750 500 250 0

Malaiwi's export failures

GDP/capita growth controlling for MMI

SubSaharanAfrica 0.6 Malawi

Cos t to e xport. $/container

Cost to im port, $/containe r

300 250 200 150 100 50 0

Fuel imports by route (million litres)

Vehicles/km of paved road People/km of paved road

MILLENNIUMCHALLENGEACCOUNTMALAWI ThelatterisattributedtotheopeningoftheNgaraportinDwangwathattransportsmainlycargo fromtheEthanolCompanyandtheDwangwaSugarCorporation.Howeverthepoorstateofmostof theportsalongLakeMalawihasresultedintheconcessionairemakinglossesonpassengertransit.

340 320 300 280

MILLENNIUMCHALLENGEACCOUNTMALAWI PressCorporationhascitedpowerproblemsasthereasonforthepurchaseofthermalgeneration capacitywhichdivertedresourcesawayfromstartingnewbusinesses.

AccordingtotheInternationalCompetitivenessAnalysis(ICA)thecostoffinanceranksasnumber 2constraintreportedbyformalfirmsandaccesstofinancenumberranksasnumber1constraint reportedbyinformalfirms.Whatthestudytriedtoestablishiswhetherornottheircomplaintsare valid.

Percentage of firms perceiving obstacles as major or very severe

-10 -20 -30

Credit to public sector

Ex-ante Real Lending Rate

Ex-post Real Lending Rate

Billions Constant MWK

MILLENNIUMCHALLENGEACCOUNTMALAWI scarcityofcapital.Realdepositratesarenegativewhichisindicativeofthefactthattheeconomyis notsavingsconstrained.

40% 35% 30% 25% 20% 15% 10% 5% 0%

Source:IFSandWDI Credittotheprivatesectorcurrentlystandsat6%ofGDP,butthiswasnotalwaysthecase.Private creditdroppedfrom12millionconst.MWKin1980(over15%ofGDP)to5in1987.

Credit to private sector/GDP, %

Credit to public sector/GDP, %

45 30 15 0 -15 -30 -45

Claims on Private Sector

Ex-post Real Lending Rate

Nominal Lending Rate

Billion Constant MWK

()Trade corridors ()Electricity (*)Water& Irrigation

()Exchange rate () Unpredictable price/trade controls,poor customs documentation