Find us on Google+

Monday, 11 January 2010

Growth Diagnostics : Malawi

A recent paper on binding constraints to Malawi's growth :

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.
I suspect the above conclusion and this outburst from Mutharika are linked. The constant drying up of foreign exchange certainly appears to point to an overvalued exchange rate. That said in general I was not confident the authors have fully demonstrated this is the "most binding constraint". Its one for further study, especially given the other constraints identified e.g. high cost of finance.

2 comments:

  1. " 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. "

    In other words, if there are many producers participating in the economy, economic growth can actually be spread throughout the population.

    This is another reason why the Zambian government should stop chasing after foreign corporations and start empowering local SMEs.

    ReplyDelete
  2. BoZ projects increased GDP

    By NKOLE CHITALA
    THE Bank of Zambia (BoZ) projects that Zambia will achieve 7 - 8 percent gross domestic product (GDP) rate this year.
    BoZ governor Caleb Fundanga said there is need to meet higher growth rates this year to create more wealth for the people.
    Dr Fundanga said the BoZ is also anticipating inflation rates to continue dropping to single-digit levels.
    “This year we are targeting higher growth rates of between 7and8 percent. We need to create new wealth and we should go flat-out in wealth creation,” he said.
    Dr Fundanga was speaking on a Zambia National Broadcasting Corporation television programme National Watch over the weekend.
    He said increased copper production and more investments into the mining sector by various investors are also expected to increase this year.
    Dr Fundanga said Zambia’s attainment of a single-digit inflation in December last year was a positive development for the growth of the national economy.
    He said 16 percent inflation rate at the beginning of 2009 was very bad compared with recent achievements.
    “This is significant given that we are back to single digits. The Minister of Finance targeted inflation rate at 10 percent, then it was revised to 12 percent last year, so this means we have gone over the revised rate. This is something to celebrate about,” he said,
    Dr Fundanga said this year BoZ is looking to commercial banks to reduce interest rates further from 20 through to 16 percent.
    Meanwhile, Dr Fundanga said increased foreign reserves last year helped BoZ to stabilise the local currency.
    He said if BoZ did not accumulate reserves, the Kwacha could have weakened.

    ReplyDelete

All contributors should follow the basic principles of a productive dialogue: communicate their perspective, ask, comment, respond,and share information and knowledge, but do all this with a positive approach.

This is a friendly website. However, if you feel compelled to comment 'anonymously', you are strongly encouraged to state your location / adopt a unique nick name so that other commentators/readers do not confuse your comments with other individuals also commenting anonymously.