- Malawi’s 50% GDP increase over the past 30 years has been insufficient to raise living standard.
- Agriculture, the mainstay of Malawi’s economy, is more exposed to climate shocks than other economic sectors.
- Achieving Malawi 2063 requires linking macroeconomic and sectoral economic policy reforms and implementation.
LILONGWE, December 13, 2023—Over the years, Malawi has not been able to sustain an inclusive economic expansion sufficient to significantly reduce poverty and improve the well-being of the average Malawian.
Over the past 30 years, per capita GP has increased by over 50% but that is insufficient to raise living standards. Despite being home to only 0.24% of the world’s population, Malawi is home to 2% of the world’s poor.
The World Bank’s Malawi Country Economic Memorandum (CEM): A narrow path to prosperity analyzes some of the main constraints to Malawi’s economic growth. The report looks at the macroeconomic constraints, the agriculture sector, constraints to Firm Productivity Growth, Trade, and Governance and its implementation.
The Underlaying Challenges
Sustained macroeconomic imbalances and persistent policy distortions in Malawi have exacerbated an already unfavorable environment, and a series of external shocks that hit the economy have amplified the impact of the crises, according to the CEM.
For the past decade, Malawi’s fiscal position has been deteriorating due to weak fiscal planning and implementation making the annual national budgets ineffective in guiding resource allocation. While significant budget deficits have been planned for, the government has continued to spend beyond the budget, and from mostly easily predictable expenditure items, repeatedly exceeded their allocation, pointing to institutional rather than technical causes of budget overruns. Without effective and credible budgeting, it is impossible to prioritize the most growth-effective expenditures.
Agriculture, the mainstay of most vulnerable Malawian households, is more exposed to climate shocks than other economic sectors, and housing and living conditions suffer in the aftermath of floods and droughts.
Over the decade, Malawi’s agriculture sector has largely been shaped by policies that have promoted food self-sufficiency rather than commercial farming. As a result, the sector has an untapped potential for further growth and job creation. Commercial farmers currently constitute only a small minority of the population. The policy environment does not currently incentivize broader employment creation. This policy environment, paired with the inability of public sector institutions to implement reforms, limits agricultural growth and rural economic transformation.
Constraints to Firm Productivity Growth
Malawi continues to export few products compared to the import demand which is always high, and this has perpetuated foreign exchange shortages, as well as negative microeconomic impacts, as firms lose out on the productivity gains from exporting. In addition, Malawian firms face considerable barriers to formalization, entry, and growth, in part due to significant distortions that constrain competition in many sectors. Entrenched corruption, lack of competitive practices, coupled with cumbersome tax administration and an unpredictable regulatory environment favor incumbents and stifle growth of existing businesses.
Malawi's continued lack of economic diversification has been central to its macroeconomic challenges. The country has faced persistent difficulties in enhancing export performance, relying heavily on tobacco exports, with diversification efforts proceeding only slowly and exports declining.
Past analyses of the political economy of core governance constraints impeding Malawi’s growth highlight the interlinked issues of strong state-business relationships, decentralized short-term rent seeking, and isomorphism. There also exists a persistent mistrust between the state and business interests and most business deals are under a political arrangement.
At the same time, political elites are focused on the extraction of rents in the short term, rather than enabling growth of available rents. This is reflected in the endemic and inefficient type of corruption that exists in Malawi where, while committed to making processes look legitimate and in line with international best practices, this often only happens at surface level with underlying informal arrangements unchanged—a dynamic referred to as “isomorphism”.
According to the CEM, to achieve long-term growth, Malawi requires a clear development vision and commitment to then linking macroeconomic and sectoral economic policy design and implementation towards that vision. Past Malawian successes can inform future sectoral policies, reforms, and strategies to support the attainment of the Malawi 2063 goals.
This CEM suggests that policy change is the most critical ingredient to start a continued cycle of sustained and inclusive economic growth. It is recommended that Malawi undertake strategic shifts in the economy; from volatility and macroeconomic imbalances to stability and sustained growth; from import dependence to domestic production and export growth; from consumption to savings and investment; from misallocation to increased productivity; from a narrow production base to diversification; and, finally from heavy state intervention to a more market-based system in which the state plays a facilitating role.
CEM recommendations include:
- Malawi should depart from old growth patterns by achieving debt sustainability and improved debt management, determining fiscal reforms, increasing the efficiency of public investment, and ensuring a more resilient external balance. The country should seek out a surge in private sector investment to make the most of its growing and highly capable workforce.
- The agriculture sector requires a comprehensive agenda that focuses on the effective coordination, sequencing, and targeting of policies and investments. This can be structured around three pillars: repurposing existing policies and support programs to foster efficiency and equity; removing barriers to stimulate private sector engagement in the agri-food space; and fostering commercially oriented agricultural production systems that can expand opportunities for and participation of farmers in productive agricultural value chains.
- To reduce constraints to Firm Productivity Growth, there is a need to strengthen firms’ capabilities, improve management training and support services, improve access to finance, and an urgent need for the public sector to reduce borrowing demands.
- To improve trade, Malawi requires sustained implementation of policies that have potential to boost export-led growth, rather than creating more barriers to trade. This includes addressing the significant policy distortions that create uncertainty for investors and raise costs for exporters and importers.
- To improve governance, results-based financing can be scaled up. The approach has demonstrated its potential to align financial incentives with performance and should be considered as an approach to more widely include fostering coalitions for change and strategic public-private dialogue to help overcome fraught state-business relationships.