Working Paper 318 - A DGE Model for Growth and Development Planning: Malawi

It was Margaret Thatcher who said, “plan your work for today and every day, then work your plan". Yet many national development plans in Africa have failed because they were either not well planned or the plans were not well worked out. We present a fully specified medium-scale dynamic general equilibrium model that can be used as the macroeconomic framework for development planning. Structural peculiarities of low-income developing economies are emphasized, including limited access to credit markets by households, a prominent natural resource sector, limited labour and capital mobility, absorptive capacity constraints, and corruption leakages, among others. The model is applied to Malawi and provides a systematic way to assess the implications of alternative policy options for a new national development plan. Key insights from the policy experiments conducted with the model are as follows: (i) there is a $1.2 billion public investment requirement to move per capita income up to about $1000; (ii) debt trajectories are sustainable because investment literally pays for itself by generating future growth and a broader tax base; (iii) the traded sector contracts temporarily in favour of an expansion of the nontraded sector; (iv) growth rates under commercial borrowing options are lower, mainly because of the crowding-out effect that commercial borrowing has on private investment and consumption; (v) mild and gradual fiscal adjustments significantly improves debt indicators; and, (vi) finally, persistent adverse precipitation shocks in the form of drought spells can lead to a contraction of growth rates by up to 2 percentage points. JEL Classification: E61,O21,H54