State Hegemony, Macroeconomic effects and Private Enterprise in Malawi

This paper investigates the rationale for proliferation of state enterprises, implications for public sector expansion in Malawi, the fiscal, monetary and balance of payments effects of the public sector and implications for private enterprise development. The paper finds that high levels of aid and fiscal revenues triggered by buoyant export markets in the 1960s anchored a Stalinist-Marxist style public sector expansion intended to build socialism alongside a state bureaucracy and one party politics. However, collapse of export commodity prices in the late 1970s repositioned the Malawi economy in such a way that costs of state hegemony emphasized its own economic vulnerability. Large fiscal imbalances emerged as apprehensions over loss of political control heightened by pressures of multiparty politics forced government to maintain the large public sector. Under pressure from oil price inflation, the influx of Mozambican refugees and drought, government resorted to higher levels of deficit monetisation and fiscal reallocations; giving priority to state enterprise subvention. These were manifested in reduced public investment, surging inflation and stagnation in per capita GDP. Implications of public sector expansion and government’s intransigence to reform include restrictive industrial, trade and financial policies that depressed savings, hindered private investments and encouraged capital flight. The policy also encouraged public sector inefficiency and resulted in high public deficits, increased foreign borrowing and recourse to credit from the domestic banking sector. These have had serious implications for crowding out the private sector and debt service and balance of payments problems.