Growth through Trade – Malawi’s Hope for Poverty Reduction

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

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

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

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

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

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

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

Growth through trade

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

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

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

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

The role of infrastructure

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

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

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

Agriculture as a key sector driving growth

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

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

Partnership behind CEM

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

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

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

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

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