Constraints to Growth in Malawi

48 Pages Posted: 20 Apr 2016

See all articles by Nicholas Lea

Nicholas Lea

affiliation not provided to SSRN

Lucia Hanmer

World Bank

Date Written: October 1, 2009

Abstract

This paper applies a growth diagnostics approach to identify the most binding constraints to private-sector growth in Malawi - a small, landlocked country in Southern Africa with one of the lowest per capita incomes in the world. The approach aims to identify the constraints (in terms of public policy, implementation, and investments) most binding on marginal investment, and therefore whose relaxation would have the largest impact on growth through the investment channel. The authors find that growth in Malawi has been primarily driven by the domestic multiplier effect from export revenues. The multiplier effect is particularly pronounced due to the high number of smallholder farmers, which produce Malawi’s main export crop, tobacco, and consequently results in the widespread and rapid transmission of agricultural export income. Furthermore, despite changes in the structure of agricultural production from estate to smallholder farming and liberalization of prices and finance, a longstanding relationship persists between exports in real domestic currency and overall gross domestic product. This central role of exports in creating domestic demand highlights the importance of the real exchange rate in Malawi’s growth story, which directly increases the strength of the export multiplier. The most pressing constraint to growth in Malawi continues to be the regime of exchange rate management. Despite good progress, there is compelling evidence that the rate is still substantially overvalued. Furthermore, it is also likely that the inflow of foreign aid - in excess of 50 percent of exports -contributes to the overvaluation through its large component of recurrent expenditures.

Keywords: Economic Theory & Research, Debt Markets, Emerging Markets, Currencies and Exchange Rates, Access to Finance

Suggested Citation

Lea, Nicholas and Hanmer, Lucia, Constraints to Growth in Malawi (October 1, 2009). World Bank Policy Research Working Paper No. 5097, Available at SSRN: https://ssrn.com/abstract=1498971

Nicholas Lea (Contact Author)

affiliation not provided to SSRN

No Address Available

Lucia Hanmer

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

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