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Constraints to growth in Malawi

Author

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  • Lea, Nicholas
  • Hanmer, Lucia

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.

Suggested Citation

  • Lea, Nicholas & Hanmer, Lucia, 2009. "Constraints to growth in Malawi," Policy Research Working Paper Series 5097, The World Bank.
  • Handle: RePEc:wbk:wbrwps:5097
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    Citations

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    Cited by:

    1. Manoel Bittencourt & Chance Mwabutwa & Nicola Viegi, 2012. "Financial Reforms and Consumption Behaviour in Malawi," Working Papers 201210, University of Pretoria, Department of Economics.
    2. Nhamo, Luxon & Matchaya, Greenwell & Nhemachena, Charles & van Koppen, Barbara, 2016. "The impact of investment in smallholder irrigation schemes on irrigation expansion and crop productivity in Malawi," African Journal of Agricultural and Resource Economics, African Association of Agricultural Economists, vol. 11(2), June.
    3. World Bank, 2016. "Malawi Urbanization Review," World Bank Other Operational Studies 24391, The World Bank.

    More about this item

    Keywords

    Economic Theory&Research; Debt Markets; Emerging Markets; Currencies and Exchange Rates; Access to Finance;

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