mca-malawi - final constraints analysis

MILLENNIUM CHALLENGE ACCOUNT MALAWI

Draft Final Analysis of Constraints to Economic Growth

Table of Contents

PAGE

1.0 EXECUTIVE SUMMARY.. .. .. .. .. .. .. .. 3 2.0 SITUATION ANALYSIS .. .. .. .. .. .. .. 6 2.1 Overview of Long – Term Economic Trends .. .. .. .. 6 2.1.1 GDP/Capita Growth Dynamics .. .. .. .. .. .. 6 2.1.2 GDP Composition and Growth Dynamics .. .. .. .. .. 7 2.1.3 Export Trends and Composition .. .. .. .. .. .. 8 2.1.4 Investment Rates Trends .. .. .. .. .. .. .. 9 2.2 Understanding why Food Security is number one priority in Malawi .. 9 2.3 Conclusion on the Situation Analysis .. .. .. .. .. 13 3.0 CONSTRAINTS ANALYSIS METHODOLOTY .. .. .. .. 14 3.1 Growth Diagnostics .. .. .. .. .. .. .. .. 14 3.2 Role of Diagnostic Signals .. .. .. .. .. .. .. 16 3.2.1 Direct Evidence .. .. .. .. .. .. .. .. 16 3.2.2 Indirect Evidence .. .. .. .. .. .. .. .. 16 3.2.3 Why Target Growth .. .. .. .. .. .. .. .. 16 4.0 CONSTRAINTS ANALYSIS .. .. .. .. .. .. .. 17 4.1 Innovation .. .. .. .. .. .. .. .. .. 17 4.2 What you export matters .. .. .. .. .. .. .. 20 4.2.1 How to compute export sophistication .. .. .. .. .. 21 4.3 Geography .. .. .. .. .. .. .. .. .. 22 4.3.1 Degradation of upper catchments .. .. .. .. .. .. 24 4.3.2 Geography – Location .. .. .. .. .. .. .. 25 4.3.3 Summary of the initial constraints and Conclusion .. .. .. 32 4.4 Infrastructure .. .. .. .. .. .. .. .. 33 4.4.1 Transport Infrastructure .. .. .. .. .. .. .. 33 4.4.2 Road Infrastructure .. .. .. .. .. .. .. .. 34 4.4.3 Rail .. .. .. .. .. .. .. .. .. .. 37 4.4.3.1 Malawi Lake Services .. .. .. .. .. .. .. 41 4.4.4 Infrastructure ‐ Power .. .. .. .. .. .. .. 42 4.4.5 Infrastructure – Water and Irrigation .. .. .. .. .. 45 4.5 Human Capital .. .. .. .. .. .. .. .. 47 4.6 Finance .. .. .. .. .. .. .. .. .. 49 4.7 Macro Risks .. .. .. .. .. .. .. .. .. 52 4.8 Micro Risks .. .. .. .. .. .. .. .. .. 57 5.0 CONCLUSION .. .. .. .. .. .. .. .. .. 59



Annexes PAGE Annex 1 .. .. .. .. .. .. .. .. .. .. 62 Annex II .. .. .. .. .. .. .. .. .. .. 63 Acronyms/Abbreviations AER Annual Economic Report BAT British American Tobacco CEAR Central and East Africa Railways EIU Economist Intelligence Unit IFS International Finance Statistics ICA International Cometitiveness Assessment MEPD Ministry of Economic Planning and Development MLS Malawi Lake Services MOA Ministry of Agriculture MR Malawi Railways WDI World Development Indicators WEF World Economic Forum



1.0 EXECUTIVE SUMMARY The Constraints Analysis Study is an attempt to accomplish a comprehensive analysis of constraints that impede sustainable economic development and poverty eradication in Malawi. It analyses a large variety of potential problems related to issues generated by the geographical position of the country, the status of infrastructure components, the situation in the area of human resources supply, difficulties in accessing financial resources, innovation skills as well as to the problems related to macroeconomic risks and investment climate. It also analyses the effects of the constraints identified on food security and export diversification. An important tool used to identify the potential constraints is the comparison of Malawi’s performance with the achievements attained by other countries, especially by those from Sub‐Saharan Africa. The study comes with the conclusion that power, feeder roads and international corridors water and irrigation and access to capital represent the most binding constraints for economic growth at the moment. The study further identified other equally binding constraints, namely: an overvalued exchange rate, administrative barriers to trade and regular human capital. In arriving at the above conclusions the study looked at all the potential problems beginning with Malawi’s ability to innovate as a constraint and ending up with macro‐and micro‐risks. The analysis on innovation noted that Malawi has a highly concentrated export basket which is compounded by low export sophistication, in which Malawi ranks amongst the least sophisticated countries. The country is also adversely affected by regional co‐ordination failures to achieve transport and energy network efficiencies and reliability. However Malawi’s inability to innovate can be addressed by the most binding constraints mentioned above. Regarding geography the analysis arrived at a number of conclusions. First it was noted that rainfall is a major driver of maize yields and subsequently of GDP per capita growth. The country also suffers from serious flooding in the Lower Shire and other parts of the country which destroy crops and livestock. Besides flooding and frequent droughts, further exacerbated by low levels of irrigation, one of the other challenges in this sector is the degradation of water resources through deforestation and sedimentation that negatively impacts businesses and individuals as well as other sectors such as health, power generation and the transport network. However controlling for rainfall variability reduces the standard deviation of GDP per capita growth from 5.6% to 4.4%, which is still higher than most of the countries’ GDP per capita volatility and as such rainfall does not explain all GDP volatility. Second we looked at Malawi’s geographical position compared to other countries among the comparators as one of the drivers for GDP per capita growth. The analysis noted that Malawi is landlocked and is over 900 kilometers from the sea but so are many other countries, some even are much further away (over 2000kms away). Distance only explains a third of the very high transport costs in Malawi, for instance, transport costs are estimated at between 15% and 37.67% depending on whether one is exporting tobacco which benefits from volume discounts from the trucking industry or non‐traditional exports which don’t. This makes access to external markets more costly for non‐traditional exports as well as sugar and therefore the analysis had to look at the root cause of the high transport costs. The sugar industry is forced to ship sugar via Beira at a cost of 44.5% as they use the more expensive road transport although it costs them 27.5% of value if they used the Nacala line. However the unreliability of the Nacala line forces the sugar industry to route 40% 0f their sugar through the more expensive Beira port by road.



The analysis therefore looked at the state of infrastructure and in this case the first to be analyzed was state of transport infrastructure. The analysis noted that road density is good by regional standards. However, whereas many of the paved roads are in good or fair condition, 76% of roads are unpaved and nearly 50% of them are in poor condition and access during the rainy season is very difficult. More importantly access to ports is problematic and there are costly delays occasioned by the 77kilimetres stretch between Cuamba and Entre Lagos on the Nacala railway line which reduces train turnaround times forcing shippers to use the longer alternative routes by road to Durban and Dar es Salaam. In addition there have been considerable delays in repairing the Blantyre Lilongwe rail line thereby forcing shippers to switch to the more expensive road haulage thereby exacerbating the already high transport costs. The poor state of the power infrastructure is clearly a major constraint on returns to investment within the private sector for both existing and new investors. This will be discussed in full in section 5.2. As a result, the risk of lower returns limits diversification into non‐traditional exports and particularly undermines manufacturing output and investment. The third infrastructure‐related constraint was water. This also reduces employment and wage income for both unskilled and skilled people, restricts growth in demand for primary products and small enterprise output and services. Regarding human capital the analysis noted that returns to tertiary education are high compared to those that do not complete tertiary education and in consequence Malawians make great efforts to study in overseas universities. Primary school completion rates are low and tertiary education is highly contracted. Most of the members of the private sector cite shortage of highly skilled workers as the number 8th constraint. Some of the reasons for this shortage are thought to come from the mismatch between school and tertiary institutions’‐ curricula and what is required by most businesses as well as technical training institutions not functioning properly. Notwithstanding the results of the ICA 2006 feedback which ranked macroeconomic instability as the number one constraint for the business community it should be noted that level of inflation has dropped dramatically in recent years and Malawi’s fiscal balance is now better than average for the region; a huge improvement since the early 2000’s. Nevertheless the worsening trade balance and the resulting deterioration in the current account is of most concern as the increasingly over‐valued exchange rate has led to loss of competitiveness in world markets and periods of chronic forex shortages experienced in recent years has hurt both exporters and importers. Donor inflows are helping cushion these imbalances. On micro‐risks the overall the business climate in Malawi compares relatively favourably with SSA peers although Malawi has been consistently falling in the rankings in recent years as other countries reform at a faster rate. However, given the non‐administrative barriers to trade mentioned in previous sectors, this high administrative burden on exporters is extremely unhelpful in promoting an export‐oriented economy, especially as Malawi is so highly reliant on trade. Based on the ICA 2006 survey, businesses quote “cost of finance” and “access to finance” as highly important constraints. Analysis shows that whilst real lending rates have been decreasing since 2004, real interest lending rates and nominal spreads remain very high compared to peers. Paradoxically, the prevailing negative real deposit rates imply the absence of private savings constraint. Hurdles to economic growth still remain in the financial sector notably in financial intermediation and in accessing venture capital.



Summary of the findings of the Constraints Analysis

High cost of finance

Low Social returns Low appropriability

Lack of complementary factors Government failures Coordination/ Market failures

Bad local finance

Human Capital Geography Infrastructure Land

Exante risks Expost risks

Low R&D, self discovery (Perceptions)

Tax, reg Labour, FX

Legal, Property rights etc

1) High real lending rates 15%. 2) Spreads much higher than comparators 3) High overheads drives spread. Limited investment opportunities. 4) Now de‐regulated. # banks increased from 2 in 1994 to 9 today 5) Base rate of 15% indicating possible savings constraint 6) Negative real deposit rates implying no private‐S savings constraint.

1) Returns to education 14.5% medium‐high but drop to 9.5% once training is accounted for (ICA) 2) Possible high returns to tertiary education (40% IHS)

1) Rainfall ‐ agricultural growth highly dependent on rainfall. 2) Landlocked –trade must pass through neighbors’ ports. 4) High population density leading to pressure on land and loss of fertility

1) Regional trade infrastructure: Transport cost higher than distance to port warrants. 2) Importers will pay a premium for timeliness. 3) Power: losses from power outages highest in region Uranium mines bought diesel generators. 4) Air ports, airlines (open skies) affecting cut flower exports 5) Water supply problems especially In Blantyre Low utilization of irrigation potential

1) Scarce, small average land size of holdings compared to other countries. 2) Small‐holder supply response ‐ diversify to cash crops once more estates land available

1) Expectation of changes of trade barriers and minimum pricing 2) Expectation of macro‐instability (#1 in ICA)

1) Regular changes of trade rules and price setting (leading to market failure) 2) Poor customs: documents required for export is highest of comparators. 3) Over‐valued exchange rate 4) Long start‐up period against comparators. Multiple licenses?

1) Governance, rule of law, political stability, voice and accountability on trend.

1) Index of export sophistication (EXPY) is on trend but at a minimum point. Innovation in profitable sectors (Makwacha card) 2) Regional co‐ordination failures to achieve transport/energy network efficiencies and reliability

(**) Finance (*) Tertiary education

(**) Natural Resources Management

(**) Trade corridors

(**) Electricity

(*) Water & Irrigation

(*) Ex‐ante risk of micro and macro policy

(*) Exchange rate

(*) Unpredictable price/ trade controls, poor customs documentation

Note (**) Means the most binding constraint.



2.0 SITUATION ANALYSIS

2.1 Overview of Long – Term Economic Trends

2.1.1 GDP/Capita Growth Dynamics Malawi remains one of the poorest countries in the world. According to the 2008/09 World Economic Forum (WEF) Global Competitiveness Report, out of the 134 countries surveyed Malawi’s GDP per capita was ranked 131, significantly behind other neighbouring SSA countries The WEF report also shows a widening gap between Malawi’s economic growth and Sub‐Saharan Africa as a whole.

Fig. 1

Source: WEF 2008/09 Report

Fig. 2 Fig. 3

Source:WDI However, Malawi’s very recent economic growth has been more encouraging. In 2007, Malawi ranked sixth out of the eleven Sub‐Saharan countries in terms of growth rate (8.5%) and exports grew from $550m to $720m between 2006 and 2007, driven by increases in agricultural output and world commodity price increases. Investment levels have rebounded since 2001 and Malawi now outperforms the SSA average in real % terms.



2.1.2 GDP Composition and Growth Dynamics

Fig. 4 GDP Composition and Dynamics

Despite these recent improvements, considerable challenges remain. Agriculture still dominates GDP with the share of industry steadily declining from 25~30% in 1987‐1992 to 17%~20% in 2002‐2006. BAT the cigarette manufacturing plant stopped production and moved the plant to other countries, Unilever ceased the production of most of its soap and detergent lines, BATA shoe company closed shop, David Whitehead and Sons, a textile company, simply handed over the plant to Government as a “gift”, the examples are endless including PEW, a coach building concern which manufactured bodies for buses and trucks for export to the region and local bus operators. Job losses in these high‐paying industries were enormous and countered all efforts to reduce poverty. Historically this reliance on agriculture has been one of the factors leading to high volatility in GDP growth as poor harvests coupled with regular droughts have significantly impacted agricultural output average and hence GDP growth especially between 1981 and 2006 (fig 5 refers). Whilst the GDP volatility is driven by agriculture which has remained highly volatile since 2004 Malawi has over the past decade experienced increased volatility across all sectors.

Fig. 5 Average GDP Growth by Sector

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Industry

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GDP

1968-1980

Average growth

Standard deviation

17.2

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Industry

Services

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1981-1993

16.7

0 2 4 6 8 10

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Industry

Services

GDP

1994-2006

Source: WDI



2.1.3 Export Trends and Composition

Figure 8 shows that nominal exports have grown from between US$350 and US$450 million per annum to around US$600 million per annum in 2006. However, in real terms export growth has fallen below the Sub‐Saharan Africa average (fig. 7). Whilst the majority of its comparators have more than doubled their exports in real terms in a decade, Malawi has only managed to increase its exports by a little over a third during the same period which is indicative of the fact that Malawi has not been able to take advantage of the various opportunities at its disposal including African Growth and Opportunity Act (AGOA). Malawi is an open economy and therefore export growth is vital if the country is to sustain the higher growth levels needed to reduce poverty. Fig. 6 Fig. 7 Exports of Goods and Services

0 100 200 300 400 500

SSAKenya

MalawiSouth Africa

GhanaBotswana

UgandaZambiaLesotho

TanzaniaRwanda

MozambiqueBurundi

Real exports % increase, 1996-2006

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Terms of Trade, 2000=100 The graph below shows that tobacco is still running the show. The share of tobacco to total exports is still around 55%. Just four crops (Tobacco, tea, sugar and cotton) account for 75% of exports (down from 85% around 1998). The tobacco sector employs direct laborers and there are also tenant farmers as well as smallholder farmers engaged in the sector. Cotton growing is predominantly a smallholder affair whilst tea and sugarcane growing have seen significant smallholder participation.

Fig. 8

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Exports, million constant 2005 US$

Tobacco Tea Sugar Cotton Other

Source: EIU



2.1.4 Investment Rates Trends

Since 1980 investment rates have been low and falling. Share of gross capital formation in aggregate demand has been trending down since 1980. Investment flows have been the lowest in the region by far and the collapse in the terms of trade since 1979 seems to coincide with contracting investments according to the regression lines below. However investment has started trending up with gross fixed capital formation reaching 24% of GDP in 2006 and most likely the Kayelekera uranium mines could be one of the major drivers. Fig. 9 Gross Capital Formation Fig. 10

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T-o-T, lagged (2000=100) Source: WDI 2.2 Understanding why Food Security is number one priority in Malawi Food security seems to be topping every single government strategy. Until recently the country has been struggling to supply its own maize both at a national and household level. One of the reasons is that farmers are not insulated from weather shocks. Droughts are common as has been depicted by the figure below. Farmers cannot afford irrigation and feel the full impact of weather variability.

Fig 11

Source: MOA/World Bank Maize yields have remained stagnant since 1963 at just over a ton per hectare which is far below the world average of 5 tons per hectare and is still below Malawi’s comparators and that of the whole of Africa average at 1.8 tons per hectare. The fertilizer subsidy program is making a positive impact on yields but the impact on net agricultural profitability/productivity is unclear and the



medium term sustainability is still an issue as donor support for the subsidy is crucial at this stage. Additionally, land is scarce, there is low penetration of hybrid varieties of maize and there is underuse of fertilizer, irrigation and other inputs and this translates into low yields. As a result in drought years, maize output is insufficient to feed the country.

Fig. 12 Fig. 13

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Maize yield kg/ha, 5-yr moving average

Malawi South Africa World

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SwazilandZimbabwe

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UgandaTanzania

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Maize yield, tonnes/ha

2006 Average 2000-06

Source: MOA/World Bank By African standards, Malawi is a densely populated country with one of the lowest urbanization levels in the world as 83% of population live in rural areas. As result Malawi has little arable land per rural inhabitant. Land is overused and unsustainably managed, which depresses yields further and as a result soil fertility is declining at a rate of 60kg of NPK per ha per year

Fig. 14

0 0.2 0.4 0.6 0.8

BurundiMalawiKenya

BotswanaSouth Africa

TanzaniaUgandaRwanda

MozambiqueZambia

Arable land, ha/rural inhabitant, 2005

(Source: GoM and WB “Malawi PVA”)

From the foregoing it is noted that farmers are not insulated from weather shocks, yields are low and land is scarce. As a result in drought years, maize output insufficient to feed the country. But international trade economics tells us that this should be irrelevant as long as Malawians can import maize food security should not suffer because according the figure below Malawi should produce at the tangency of the production possibilities frontier and world price line and consume at the tangency of world price line and highest indifference curve during a good harvest, assuming no barriers to trade. During a very severe drought year as depicted by the red production possibilities



curve, through imports the nation is still able to produce at a tangent between the production possibilities curve and the world price line and consume at the tangent between the highest indifference curve and the world price line. As such Malawi can trade the difference in a good year and in a drought year Malawi can import food. However the high cost of importing and exporting makes it rational for Malawian economic actors to produce more maize and therefore less of other crops than it would if the costs of international trade had been lower. To put it simply, due to the high cost of transportation Malawi fails to maximize the benefits arising from a good harvest by taking advantage of export opportunities as export values net of the cost of transportation fall below world market prices and on the other hand Malawi fails to minimize the impact of droughts through maize imports as import prices after factoring in exports are well above world market prices. As a result the country experiences wide swings in maize prices during drought years, normal years and drought years.

Fig. 15

One of the reasons why the international trade story does not work in the case of Malawi is that output of maize and output of export commodities are correlated. However output of traditional exports is also affected by droughts as tobacco which also depends on rain fed agriculture represents over 60% of export value. The graph below shows that there is a direct relationship between maize output and tobacco output with a correlation coefficient of 70%. Nevertheless it should be noted that there is no statistical significant relationship between maize output and export revenues because Malawi is not a price taker especially in as far as burley tobacco is concerned. This implies that expansion in production may not necessarily have a proportionate increase in burley export revenues. It should be noted however that for low income countries like Malawi, people look up to Government for support but due to foreign exchange constraints occasioned by a drop in export earnings from tobacco the Government is forced to look up to donors for support. Otherwise in order for the Government to import maize in a drought year the country must export other goods in order for it to have sufficient foreign exchange to import the product. Of course the role of government would not matter if people can borrow and save, as well as trade, i.e., save in good years of tobacco production and to buy more maize abroad in a year of poor harvest.



Fig 16

Source: MOA/World Bank

Maize yields have remained stagnant since 1963 at just over a ton per hectare which is far below the world average of 5 tons per hectare and is still below Malawi’s comparators and that of the whole of Africa average at 1.8 tons per hectare. The fertilizer subsidy program is making a positive impact on yields but the impact on net agricultural profitability/productivity is unclear and the medium term sustainability is still an issue as donor support for the subsidy is crucial at this stage.

Second Malawi has a problem in regard to transport costs which are higher than those obtaining within its comparator group as the table below shows. Transport costs create a large wedge between world prices and those faced by domestic agents as relative price of maize with no transport costs would be as depicted below: P = Pwmaize / Pwother = PW However with unit transport cost ct (for now, assumed equal for import/export of all goods):

If the country exports maize then: PX = Pwmaize (1 – ct)/Pwother (1 + ct) < PW If the country imports maize then: PM = Pwmaize (1 + ct)/Pwother (1 – ct) > PW

If ct is high it means that during a year of relative abundance the country’s economic agents export at a reduced return because of high transport costs and during lean years the country will have to pay a high price to import due to high transportation costs. As will be noted later Malawi has one of the highest transport costs in the world for non – traditional exports and certain imports. As the CEM Agriculture chapter notes “Due to the high costs of transport from South Africa, import parity prices are commonly US$100 to US$150 above domestic retail prices. When there is severe drought across southern Africa, clogged transport systems raise the costs of import dependence even further. Inland transport costs alone can rise as high as US$180 per ton.” It therefore does not



come as a surprise that maize prices in Malawi fluctuate widely as the possibility of greater trade would smooth these wide fluctuations. The figures below depict two production possibilities curves for lean years and those of good harvests. If ct were lower than what it is now the country should be able to export maize and the country’s welfare would be higher as depicted by the dotted indifference curve on the right. However because of the high transport costs Malawi exports less and the country moves to a lower indifference curve where consumption is restricted to what the country is able to produce and is unable to take advantage of benefits from international trade.

Fig. 17

In summary a failed harvest removes the principal source of consumption for rural households. Capacity to replace lost production through imports is limited by foreign exchange earnings and lack of farm diversification. This situation is compounded by the high cost of transportation which limits the benefits of maize exports during years of a good harvest and makes imported maize beyond the reach of the majority of Malawians. Increased demand on the formal market during lean years greatly raises food prices making it harder to substitute lost subsistence production. The end result is that Malawi experiences high price volatility and the farmer is pushed into a corner. Price volatility creates a disincentive to diversify since the farmer cannot guarantee household access to maize without a significant cash crop production.This underscores the need to find solutions to enable Malawi to transition towards a more balanced production portfolio and balanced growth in non‐agricultural sectors. 2.3 Conclusion on the Situation Analysis Economic performance has improved over the last few years but the gains made so far need to be consolidated and sustained. However GDP per capita growth is volatile and that volatility has increased in the recent past. Investment flows are improving but still below most comparators. Nevertheless Malawi needs to sustain investment levels that are equal to or higher than those experienced in the recent past if GDP per capita growth rates are to be sustained at levels needed to



substantially reduce the high poverty levels and also to be closer to achieving the poverty MDG1. The recent gains in terms of Malawi’s export performance are encouraging. These gains are however far below most of Malawi’s comparators and as an open economy export performance is vital for sustained and rapid growth. Despite the fertilizer subsidy program which has resulted in maize surpluses the food security situation still remains tenuous due to the country’s overreliance on rain‐fed agriculture. This problem is compounded by lack of export diversification as 55‐60% of Malawi’s export basket is accounted for by tobacco. This is further compounded by co‐linearity between food crop output and tobacco output both of which are affected by rainfall. Weather‐related risk, low incomes and the high cost of importing food are responsible for food insecurity and the lack of diversification out of maize production. This problem is compounded by land pressure which results in low productivity and as such farmers are pushed into a corner situation. What next? Malawi needs to comprehensively address the problem of food insecurity. To do this the country needs to remove constraints to economic growth and export diversification and achieve a balanced growth in both agriculture and nonagriculture sectors, so as to alleviate rural and urban poverty. In this regard the study sets out to identify and isolate the main binding constraints to the country’s development. 1 Halve between 1990 and 2015, the population of people whose income is less than $1 a day.



3.0 CONSTRAINTS ANALYSIS METHODOLOGY 3.1 Growth Diagnostics

The study follows the growth diagnostics methodology proposed by Haussmann, Rodrik and Velasco (Kennedy School of Government‐ Harvard University)2. The main premise for the methodology is that different countries do not necessarily face the same set of problems and, certainly, the relative severity of these problems varies widely. Consequently, one size fits all policies like the set of recommendations collectively known as the Washington consensus will not necessarily spur growth. Therefore, a successful growth strategy has to be contingent on the economic environment at hand and focus on one or two main constraints. Consequently, the study aims to identify the constraints that are binding to Malawi’s economic growth, and which should be targeted in the framework of the MCC program and the Malawi Growth and Development Strategy MGDS. The HRV approach is based on fundamental results of neoclassical growth models, according to which growth is proportional to the private return to assets, net of cost of financing it. In other words, growth follows the ubiquitous Euler equation: Growth = Where r is rate of social returns, (1 – τ) is the rate of appropriability, and ρ is the cost of capital. The rate of appropriability represents the share of returns that are passed to the private sector, i.e. what is left after, inter alia, taxes, corruption, regulatory delays, expropriation through changes in laws and the judicial system. This equation provides the general answer to the question “what constrains growth?” It must be caused by at least one of the three factors: social returns are low, the rate of appropriability is low or the capital is too expensive. However, to have a policy‐relevant answer, we need to disaggregate the equation even further:

If it is low returns, is it insufficient investment in complementary factors of production (human capital, technical know‐how or infrastructure)?

If it is poor appropriability, is it due to high taxation, poor property rights and contract enforcement, labor‐capital conflicts, or low productivity, incomplete information and other market failures?

If it is poor finance, are the problems to do with domestic financial markets or external ones?

We can organize these possible options in a decision tree, which is presented in below.

2 Haussmann, Ricardo, Dani Rodrik, and Andres Velasco, 2005, "Growth Diagnostics," Kennedy School of Government, Harvard University (Cambridge, MA).

( )[ ]ρτσ −−== 1rkk

cc &&



Growth diagnosticsWhat constrains private investments?

Low returns to economic activity High cost of finance

Low social return Low appropriability Bad Intl. finance Bad local finance

Poor geography

Poorinfrastructure

Low humancapital

Govt.failures

Marketfailures

Microrisks

Macrorisks

Self‐discovery

Coordinationexternalities

Fiscal rigidity

Low savings

Poor intermediation

Corruption, taxes,

property rights

Financial, monetary, fiscal

instability In conformity with this representation, the report analyses the following potential constraints:

Scarcity of factors of production: geography, human capital and infrastructure. Failures in innovations and competitiveness. Low productivity (effectiveness with which the factors of production are combined) can be explained by inability to introduce better technologies at existing productions or inability to discover products that are better suited to the country’s conditions.

The high cost of finance Low appropriability of returns (1‐τ):

Macroeconomic risks. Potential reasons of macroeconomic nature that result in low appropriateness include macroeconomic instability and volatility, tax regime and unfavorable terms of trade shocks.

Investment climate. Potential reasons for microeconomic risks and terms for doing business include fiscal practices, corruption, property rights and access to justice.

In order to determine the most binding constraints the answer can be extracted from the neoclassical production function, in which all factors are complements. This is a safe assumption, given that rich countries are abundant in everything: from physical and human capital to infrastructure and institutions. 3.2 Role of Diagnostic Signals

3.2.1 Direct Evidence

A binding constraint can be determined if the return to the scarce factor is pushed up and the return to the other factors is much lower. For example, if access to capital is a problem, interest rates should be high. If there is a paucity of human capital, the skills premium should be high and unemployment among skilled labor low. If the binding constraint to growth is poor infrastructure,



then we should see bottlenecks and concentration of economic activity in areas with good infrastructure. A useful tool in analyzing the relative importance of constraints is benchmarking: comparing Malawi to a number of countries similar in size, level of economic development, past common history and physical proximity. 3.2.2 Indirect Evidence The camels and the hippopotamus – i.e. what do you observe, for instance, why are there no hippopotamus in the desert and why do camels thrive in the desert? A hippo cannot survive where there is little or no water and a camel is able to thrive in such environments. When constraints bind, they result in activities designed to get around them. High taxes result in high informality. When poor legal institutions abound you see high demand for informal mechanisms of conflict resolution and contract enforcement. Poor financial intermediation results in internalization of finance through business groups, informal lending, etc. 3.2.3 Why Target Growth This can be answered by a quotation found in the article from IFPRI Forum of October/November 2007 titled Cutting Poverty: Learning from the Leaders:

As we examine the constraints to private investment we will begin by examining the causes for low returns to economic activity. However in view of the complexity of Malawi’s problems the analysis will not follow the chronological order afforded by the Growth Diagnostics Tree. The analysis will first look at whether or not Lack of Self‐Discovery/Innovation and/or Geography are the main culprits. Thereafter the analysis will then move on to infrastructure, human capital, macro‐and micro‐risks and finance.

According to Alberto Valdes, a research associate at the Catholic University of Chile in Santiago, "Most of the work by economists has shown that rapid economic growth is the most effective way to reduce poverty because it creates employment and provides government revenues that are needed to implement social programs. The task is how to achieve a balance between rapid growth and delivering the benefits of that growth to the poor." Broadly speaking then, most countries that have succeeded in dramatically reducing poverty have done so by promoting growth and then ensuring that the benefits of growth are reliably shared with the poor. But the details of this strategy—how countries achieve growth and pass its benefits to the poor—vary widely.



4.0 CONSTRAINTS ANALYSIS

4.1 Innovation

As noted from the previous section it is not surprising that food security tops every government agenda. However, a country does not have to meet its own food requirements through local production. Food security at a national and farm level can be assured if the country is able produce other goods in sufficient quantity and export in order to earn foreign exchange. To do this the country needs to innovate because real technological advance usually results in productivity gains which tend to apply to similar or related goods, and/or an enhancement of the quality or value of existing products (sophistication). This process ultimately enlarges the list of goods produced by the country (diversification). Therefore the relevant question is whether or not Malawi is innovating in such a way as to become more competitive in more products. In order to determine whether or not Malawi is innovating there is need for an understanding of Malawi’s export composition and dynamics: What does Malawi export? How diversified is the export basket? How sophisticated are Malawi’s exports/products? The graph below shows where Malawi as a predominantly agricultural country is placed and it is very clear that the majority of countries that are predominantly agricultural have a much lower GDP per capita in comparison to those that have undergone structural transformation.

Fig. 18

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Notwithstanding the current commodity boom, especially non‐petroleum commodities one should remain cognizance of the fact that world maize yields have only been able to increase by 2.5 times in 40 years. As such diversification both at the farm and national levels is of the essence.

… market opportunities and hence growth contributions of traditional agricultural products can significantly increase if the quality of the products can be improved or if the products can be processed (even just go through primary processing)within the region. There is a substantial difference between a brand product, for example, a gourmet coffee, and a non‐brand product. Improving product quality will generate more farm income from the same volume of production, and processing the products in the region will provide more employment and improve the linkage effects both within the producing country and to some extent to neighboring African trading partners ‐ A General Equilibrium Examination of DemandSide Constraints on Agricultural Growth in East and Southern Africa IFPRI



The graph below shows that tobacco is still running the show. The share of tobacco to total exports is still around 55%. Just four crops (Tobacco, tea, sugar and cotton) account for 75% of exports (down from 85% around 1998).

Fig. 19

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Source: EIU From the charts below Malawi’s export basket is highly concentrated based on the Hirschman‐Hirfindahl index of export concentration Figure 17a shows that Malawi is only second to Botswana in terms of export concentration but above the majority of countries among its comparators. However the comparison with Botswana demonstrates that concentration is not necessarily bad provided that there is value adding even at a farm level. Malawi’s export concentration is trending up from 2004 after having trended down from 1991 and this is primarily due to an increase in tobacco export values and volumes. However figure 17b shows that there is some improvement once tobacco is factored out.



Charts based on HirschmanHirfindahl index of export concentration

Fig 20 Fig 21

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Source: UN Comtrade, 4.2 What you export matters

According to Haussmann & Rodrik (2005) rich and poor countries tend to export different goods. Rich countries that are at the technological frontier tend to export more sophisticated goods (those goods embody frontier technologies). Poor countries export goods that embody below‐the frontier technologies. A country that exports a basket of goods characteristic of a richer country has a relatively “sophisticated” export basket (closer to the frontier). Countries with more sophisticated export baskets tend to grow faster because they have achieved a level of competitiveness and an ability to more consistently adapt and apply technological change to raise productivity.

The

graphs below tell of an interesting story of how China has managed to quintuple its GDP per capita in just 20 years whilst Vietnam also has managed to more than double its GDP per capita in just 15 years and this has been done through structural transformation. In both cases the share of

There are two major reasons why rapid growth in traditional exports fails to increase real GDP substantially in this scenario. First, for most of the sample countries, the traditional export sector accounts for a small share of the total agricultural GDP, even though it accounts for a large share in its total agricultural exports. The second reason is that markets for the traditional export commodities involve relatively little domestic processing and

therefore generate only weak linkage effects through the domestic market economy. Only the farmers cultivating these crops reap major direct benefits from increased exports, and their increased income and that from the directly related nonagricultural sectors cannot provide enough demand to stimulate further growth in broad

agricultural and nonagricultural sectors. Calculated growth multipliers (real GDP growth induced by a one unit increase in the traditional export sector’s value added) are quite small for most countries.



agriculture has gone down from between 33%‐45% to under 20%. However, in the case of China, according to Dani Rodrik this happened through a “Strategic and sequential approach targeting one binding constraint at a time. First agriculture, then industry, then foreign trade, now finance…” The following by IFPRI captures this adequately

Fig 22

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The aforementioned is not intended to negate the importance of agriculture especially for countries like Malawi where agriculture is considered an engine of growth and the key source of livelihood for the majority of Malawians. The important point is to determine whether Malawi is attaining the level of sophistication that enables it to export goods that are competitive by definition, or correspond to minimum quality standards and that the list of goods produced and/or exported is enlarging. 4.2.1 How to compute export sophistication

Export sophistication can be computed by calculating PRODY and EXPY of a country:

PRODY: goods can be associated with a GDP/capita (weighted average of GDPs of countries that export that good): for instance production of wristwatches is associated with countries with percapita incomes of $31651 (on average) while cotton and tea are respectively associated with countries that have per capita incomes of $409 and $402.

EXPY: the average PRODY of products exported by the country, weighted by the share of each good in the value of total exports.

Having explained as to how export sophistication is computed it is not surprisingly that Malawi is where one would expect it to be as represented by the red dot.



Fig. 23 Level of Sophistication

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Source: Hausmann & Rodrik (2005) The graph also shows that countries with higher levels of export sophistication have higher levels of income per capita. Malawi’s export sophistication is stagnating although tobacco hides some recent progress. The graph on the right below shows that once tobcco is excluded Malawi’s export sophistication increases after 2004 following a sharp decline in 1994. Model simulations by IFPRI conducted on a number of countries including Malawi indicate that agricultural growth will be limited without the growth of other sectors. This is aptly explained in the following caption from the IFPRI study which also describes the drivers of poverty reduction.

Fig. 24

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Malawi's EXPY dynamics

EXPY EXPY excluding tobacco

Source: UN Comtrade database



Figure 20 above shows that Zambia and Mozambique have been undergoing rapid structural transformation. Between 2002 and 2006 Zambia experienced EXPY growth of over 60% and Mozambique had EXPY growth of over 55%. Cumulative GDP growth per capita for both countries was respectively over 15% and 20%. On the other hand Malawi’s EXPY growth was just over 5% over the same period and not surprisingly Malawi’s cumulative GDP growth over the same period was just over 7%. Obviously other factors were also at play but there is a direct relationship between a country’s export sophistication and GDP per capita growth. Malawi’s poor investment performance, occasioned by a poor investment climate in the past and in particular low flows of foreign direct investment coupled with poor economic infrastructure have conspired to leave Malawi backward in terms of innovation.

4.3 Geography Malawi is a landlocked country with an area of 118,484 square kilometers. Bordered by Tanzania, Mozambique and Zambia, it is a narrow territory with a total length of about 1000 km running from North to South. The Northern half of the country is bordered in the east by Lake Malawi, which is 570 kilometers long and occupies 24,800 square kilometers in Malawi. Malawi is surrounded by much bigger neighbors and its small economy depends on its neighbors for access to the sea and international markets. For this reason, Malawi suffered for more than two decades from the chronic instabilities in neighboring countries like the civil war in Mozambique and the political turmoil in Zimbabwe. Agriculture is by far the most important sector in the Malawi economy accounting for 85 percent of all employment and generating 90 percent of all export earnings. Low irrigation development and poor water management coupled with poor land husbandry practices are the key issues underlying the low productivity and profitability of Malawi’s agriculture. As earlier indicated the country experiences unreliable rainfall combined with extended period of dry spells which adversely affect the productivity of its agriculture. Droughts are endemic to Malawi and have had devastating effects on crop and livestock production. Between 1967 and 2003 the country experienced six major droughts. The worst of these droughts was in 1993, which affected 7 million people; other significant droughts occurred in 1990, 1992, 1994 and 2002. The impacts of drought are felt mainly by smallholder farmers who are generally among the poorest members of the population. For example, the impact of the crop failure in the 2001/2002 growing season due to drought was estimated at between US$150 and US$180 million (as estimated in the World Bank’s Emergency Drought recovery Project). As a result rainfall is a major driver of maize yields and, subsequently, of GDP/capita growth.



Fig 25

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Residual GDP/capita growth Source: WDI, World Bank

Eliminating rainfall variability reduces the standard deviation of GDP/capita growth from 5.6% to 4.4%. Even controlling for MMI, GDP/capita growth volatility is high compared to other countries in the region (see the figures below).

Fig 26 Fig 27

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Standard Deviation of GDP/capita growth, 1989-2006

Source: WDI Floods are also common in Malawi. Eighteen major floods have occurred between 1967 and 2003 (the most significant floods were in 1991, 1997 and 2001) killing 570 people, rendering 132,000 homeless and affecting a total of 1.8 million people. Total damage caused by flooding over this



period is estimated at around US$700,000. Floods occur in the south, particularly in the Lower Shire areas of Lake Malawi, Lake Malombe and Lake Chilwa. The Southern part of Malawi is worst affected by floods particularly the Lower Shire. Floods also occur in the lower reaches of the Songwe River in the Northern Region. The main problems of flooding are damage to agricultural lands and crop damage. Droughts, floods and rainfall variability also entrench risk‐averse behavior by farmers and other investors in agricultural industries and services, slowing the diversification of economic activities. 4.3.1 Degradation of upper catchments De‐vegetation, erosion and sedimentation are Malawi’s most serious environmental threats. Throughout most of the country a new dam is likely to fill with sediment within a few years of commissioning, therefore sedimentation poses the biggest risk to the development of water storage structures. The most significant dams are the hydropower dams on the Shire River, which are badly affected by sedimentation. Sedimentation is particularly acute in the Nkula pondage which supplies a power plant and Blantyre Water Board (BWB). With the increased soil erosion in the catchment area, the sediment load carried between Liwonde and Nkula in the wet season is accumulating in the Nkula pondage affecting the power output and water supply in Blantyre. Deforestation is considered to be a major threat to surface water resources as it causes reduced base flows and higher flood peaks. The National Environment Action Plan, 1994 showed that deforestation reduced the forest cover from 67 percent in 1967 to 49 percent in 1992 and had a significantly negative effect on the country’s water resources. There is frequent power interruption due to trash and weeds resulting from unsustainable catchment management and noxious weeds. These frequently clog the generation intake screens, forcing the only power supplier in the country (ESCOM) to shut down machines in order to remove the trash. Industrial production and other social services are adversely affected in the process. 4.3.2 Geography Location

In the previous section we learnt about how the effects of droughts coupled with limited export earning capacity is impacting on food security and lack of diversification at the farm level. International economics tells us that attaining food security at a national level should not be a problem provided the country is able to have sufficient export earnings and therefore we reach the conclusion that export diversification is key to unlocking the food security problem. Recent data (MEPD AER 2008) suggests that only 14% of Malawi’s non‐agricultural manufacturing output is exported, with the majority of manufacturing output focused on import substitution. Further analysis suggests that Malawi’s low export penetration is due to two key factors (1) supply chain inefficiencies (according to studies conducted by Kadale) (2) low price competitiveness on the global market. Only exports that are not time‐ and‐ logistics‐critical survive (tobacco, tea, sugar, cotton).



Fig. 28 Fig. 29

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Source: GoM National Accounts Malawi made various attempts at export diversification including encouraging flower exports but the results have not been encouraging. For instance the country started exporting flowers in 1994 with export values exceeding US$ 1.5 million but by 2007 this figure had dropped to zero. Transport logistics have been blamed for this dismal performance in the flower industry and all the flower farms whose products were destined for the export market ended up closing. Malawi has also had limited success with opportunities provided by AGOA as textile exports are time‐and‐logistics critical. In this example poor logistics (air transportation) have again been blamed for this export initiative. Fig. 30 Fig. 31

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Further analysis shows that there is no correlation between GDP/capita growth and changes in terms of trade. The Correlation coefficient is low and not statistically significant (t‐stat around 0.5).



Correlation between GDP/ capita growth and terms of trade is even lower when one subtracts the weather component from GDP/capita growth (t‐stat around 0.02). Identical results are observed for lagged values of T‐o‐T, % change of T‐o‐T, GDP growth or gross capital formation growth instead of GDP/capita growth. All these point to the fact that Malawi is not well integrated to the rest of the world.

One of the reasons advanced for the high transport costs is that the country is landlocked. According to the table below total import and export transport costs as a share of the value of exports is in excess of 56%3 (according to the Ministry of Economic Planning Annual Economic Report (AER) 2008, this ratio was reduced from 55% in 2006 to 53% in 2007 but it is however still the highest in the world). A breakdown of this figure shows that export transport costs as a ratio of total exports earnings is 18% whilst the ratio of import transport costs on total export earnings amounts to 38%.

Fig. 32 Fig. 33

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Figure 29 makes a comparative analysis between Malawi and sub‐Saharan African countries as well as all landlocked countries in terms of its overall transport costs (on imports and exports) as a ratio of the value of exports and the analysis concludes that Malawi is an outlier in either case. Malawi is landlocked, but so are many other countries. Distance to nearest port is less than 900km and Malawi’s transport costs should be near the regression line at 23%. As such distance only explains about a third of the high transportation costs.

3 Faye et al and Calculations based on the 2005 TERA Final Report puts this figure at 58% in 2003



Fig. 34

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Cost of trade per 22-ft container

Cost to export. $/container Cost to import, $/container

Source: Doing Business Indicators 2008

Further analysis reveals that the cause of the high transportation costs is not because of shipment costs. Figure 30 shows the average cost to ship 20ft container to a port of final destination and from a port of origin for African countries. Malawi is in the middle of the pack in the case of the cost of trade. Additionally, transport costs for most export commodities are lower than import costs as a result of the trade deficit (Kadale 2007), as Malawi’s imports exceed exports by a factor of two.

Fig. 35

Source: TERA 2005 Shipping a container may not be expensive, but neither is its contents therefore exporting low value commodities means that transportation cost per dollar of the commodity is high. For instance transport costs as a ratio of commodity values show that those for sugar are three times those for



tobacco despite using the same route and mode of transport. In addition exports and imports are both seasonal, but fall in different seasons (tobacco vs. fertilizer) resulting in containers and trucks running empty one way. This factor is compounded by the fact that routes like the Beira corridor is hardly used for importation of other commodities than fertilizer and fuel. For instance according to TERA 2006 the report indicates that Beira handled 53.6 thousand tons of fuel and 50.7 thousand tons of fertilizer and nothing else other than those two. Fuel which uses specialized containers does not offer opportunities for backhauls.

Fig 36

Source: TERA 2005 On the Durban route however, exporters of traditional crops (especially tobacco) are able to take advantage of the empty backhauls through discounted transport rates. In addition exporters do not incur transshipment costs for goods that pass through the port of Durban and as such in the case of tobacco the use of the Beira port by road does not offer a significant cost advantage. The figure below shows the transport cost build‐up for tobacco and whilst inland costs to Durban are more than twice those of Beira by road, higher handling costs at the port of Beira as well as the cost of a feeder vessel reduce the inland cost advantage



Fig 37 Fig

38

Source: TERA 2005

The story is different in the case of sugar and tea. Tea is exported through the ports of Durban Beira and Nacala and very clearly Nacala offers a clear cost advantage compared to the two routes due to low inland transport costs and yet as of 2003 only 10% of tea was passing through Nacala. Sugar is exported through the two routes of Beira and Nacala and the Beira route is twice as expensive as Nacala. Inland costs by road through Beira are twice those of Nacala. As regards other commodities inland costs alone are higher than the combined costs of sea freight and rail for Nacala and yet 27% of exports destined for overseas markets pass through Nacala. Fig 39 Fig 40



Source: TERA 2005

In spite of the cost advantages offered by the Nacala route 56% of Malawi’s exports go through the ports of Beira and Durban and 38% of the country’s imports pass through the ports of Durban, Beira and Dar es Salaam which adds to the high cost of transportation especially for sugar tea and non‐traditional exports. According to TERA (2005) the high cost of transportation for commodities is because of how [un]reliably Malawi ships its commodities. Shipping by rail through Nacala may be cheaper than alternative routes, but it is unreliable. For instance TERA (2005) estimates that the Lilongwe‐Beira route is 948 km and takes 3 days transit by road whilst the Lilongwe‐Nacala route by rail is 989 km and takes 10 days transit by rail. The table below reveals that for the Nacala route, most users indicate a low level of transit efficiency. This route shows poor ratings for two of the four corridor constraints (inadequate infrastructure and infrequent ship calls). Table 1. Transit Inefficiency by Corridor

Corridor Constraint Transit

Inefficiency Rating

Lack of Storage

Documentation Problems

Inadequate Infrastructure

Infrequent Ship Calls

Nacala Medium Low High High High medium Beira Low Low Low Medium Low Dar es Salaam Low Low Low Medium Low Durban Low Medium Low Low Low Source: Estimates by TERA. The Durban route has been ranked as low in terms of transit inefficiency as it is reported to be the most reliable transport route and the port is efficient. The Beira and Dar es Salaam routes have also been ranked as low in terms of transit inefficiency. Dar es Salaam and Beira ports both have the reputation of being efficiently operated. The table below shows that Nacala has the longest transit times. As a consequence large retail businesses state that: “If a delivery is time‐critical, I route it through Dar.” Table 2. Transit Times (Days)

Port Land Transport Sea Transport Total Transport Dar es Salaam 4 32 36 Nacala 10 30 40 Beira 3 28 31 Durban 7 25 32 Source: Estimates by TERA. According to the MEPD Annual Economic Report (AER) 2008 Government recognizes that: “[...] logistical and capacity problems with the Nacala rail line” results in most gasoline being imported through other routes. Figure 31 shows that fuel imports via Nacala declined to zero by 2006.



Fig. 41

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Fuel imports by route (million litres)

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Source: MEPD AER 2008 As such, compared to other countries Malawi is not very far away from the ports. However due to other constraints, including high transit times on the Nacala route the country is forced to use longer routes to Durban and Dar es Salaam. Beira by road does not offer a cost advantage for most commodity exports due to limited backhaul opportunities for discounted transport offers like on the Durban route. 4.3.3 Summary of the initial constraints and conclusion The analysis has looked at the initial constraints i.e geography and innovarion. Rainfall is a major driver of maize yields and, subsequently, of GDP/capita growth. Weather‐related risk, low incomes and insufficient savings (wealth) and the high cost of importing food are responsible for food insecurity and the lack of diversification out of maize production. This problem is compounded by land pressure which results in low productivity and as such farmers are pushed into a corner situation. A failed harvest removes the principal source of consumption for rural households. Capacity to replace lost production through imports is limited by foreign exchange earnings and lack of farm diversification. This situation is compounded by the high cost of transportation which limits the benefits of maize exports during years of a good harvest. Increased demand on the formal market during lean years greatly raises food prices making it harder to substitute lost subsistence production. Price volatility creates a disincentive to diversify since the farmer cannot guarantee household access to maize without a significant cash crop production. Eliminating rainfall variability reduces the standard deviation of GDP/capita growth from 5.6% to 4.4%. Even after controlling for rainfall, GDP/capita growth volatility is high compared to other countries in the region. International trade tells us that food insecurity need not be a problem because a country can fill the gap through imports. However this is not the case in Malawi because of limited integration to the world economy. De‐vegetation, erosion and sedimentation are Malawi’s most serious environmental threats. Throughout most of the country a new dam is likely to fill with sediment within a few years of



commissioning, therefore sedimentation poses the biggest risk to the development of water storage structures. The most significant dams are the hydropower dams on the Shire River, which are badly affected by sedimentation. Sedimentation is particularly acute in the Nkula pondage which supplies a power plant and Blantyre Water Board (BWB). As such Natural Resources Management is a binding constraint. Apart from weather as a geographical factor the analysis also looked at Malawi’s remoteness as a factor affecting GDP and export performance. Malawi is landlocked, but so are many other countries! The analysis looked at whether or not this explains the high cost of trade and the answer was NO. Malawi’s distance to nearest port is less than 900km. Distance explains only a third of high transportation costs. In addition the analysis looked at whether or not Malawi is inovating and the answer is that the country is at the lowest end of technological frontier but some advancement is being made if tobacco is excluded from the the export basket. However in view of the massive importance of tobacco in the economy the said advancements are too little to assure enough foreign exchange to provide food security through imports in drought years and enough to drive sufficient GDP/capita growth that will reduce poverty. Malawi needs to have an enlarged and stable source of foreign exchange if it is to effectively address the problem of food security both at the farm level and national level. It will also have to find solutions to the gluts in maize supply during years of a good harvest. Addressing these factors will solve the problem of wild price swings between years of good harvest and drought years and hence address the risk aversion of Malawian farmers which is preventing them from on‐farm diversification. In view of the discussion so far we will look at other factors that hinder growth and export diversification. These factors are infrastructure, human capital, finance, macro shocks and investment climate. 4.4 Infrastructure

4.4.1 Transport Infrastructure Malawi is served by four transport modes namely, road, rail, lake and air transport which consists of a road network with an estimated distance of 15,451 km; 797 km of railway track from Mchinji border with Zambia to Nsanje boarder with Mozambique; 4 harbors on Lake Malawi that handle cargo mainly from Ntwara in Tanzania; and 5 commercial airports (two major international airports in Lilongwe and Blantyre) including 33 aerodromes.

….model simulations suggest that changes outside the farm sector itself—reduced marketing costs and more rapid growth in the nonfarm economy—are required to provide sufficient market demand to support rapid agricultural growth. Model simulations suggest that a sharp reduction in marketing costs through investments in marketing infrastructure (for example, roads and bridges, ports, storage facilities, electricity) and development of market institutions…combined with agricultural productivity growth would raise per capita GDP growth by approximately 2 percent per year in the sample countries. Simulation results also suggest that, combined with nonagricultural productivity growth, productivity growth in agriculture results in per capita annual agricultural real income growth of 3.0–4.4 percent. (IFPRI)



Transport infrastructure plays a major role to the Malawian economy in terms of distribution of exports and imports. The major trading blocs for Malawi comprise of the European Union (EU), Southern African Development Community (SADC), United States of America (USA) and the Common Market for East and Southern Africa (COMESA). The EU is the key export destination for Malawi accounting for 35% of Malawi’s exports, followed by SADC (29%) of which 16% goes to the Republic of South Africa (RSA), COMESA (19%), USA (9%) and rest of the world (ROW) accounting for 9%. Malawi’s major imports come from SADC (55%) particularly from the RSA which accounts for 37% of Malawi’s imports. Goods from the EU account for 17% of Malawi’s imports and COMESA account for 11% of the imports to Malawi4. Food items including agricultural and manufactured products constitute the bulk of imports from RSA. Figure 1 (see annex 1) outlines the trend of Malawi exports and imports to major trading blocs and countries and the rest of the world. 4.4.2 Road infrastructure

Malawian roads fall into five (5) classes of main, secondary, tertiary, district and urban roads. In addition to these classes nonstandard roads are estimated to cover a distance of approximately 10,000 km. Of the total road length, paved roads constitute 26% (4,038 km) and unpaved roads make up the balance of 74%. The paved roads constitute mainly main roads (70%) and urban roads (19%). District roads serve as feeder roads connecting to main roads as well as community roads. The analysis set out to find out if the high cost of transportation is due to bad or congested national roads. The answer according to the charts below is that, Malawi’s road network is dense by regional standards.

Fig. 42

0 20 40 60

MozambiqueBotswanaTanzania

KenyaZambiaMalawi

ZimbabweSouth Africa

UgandaRwanda

Road density (km of road per 100 sq km of land area)

All roads Paved roads

0 50 100 150 200

MalawiZimbabwe

ZambiaRwanda

MozambiqueTanzaniaUganda

KenyaSouth Africa

Road usage

Vehicles/km of paved road

People/km of paved road Source: MEPD AER

As a result of implementation of several projects by the Ministry of Transport and Public Works (MTPW) and the National Roads Authority (NRA) road conditions have improved significantly since 4 These calculations are obtained from the SADC Trade data obtained at www.sadctrade.org/tradedata



2004. In 2007, 33% of the total road network was in good condition compared to 24% recorded in 2006. It is too early to judge the impact arising from improvements in the road network but suffice to say that investment and export levels are trending up and GDP is quite high by Sub‐Saharan African standards. Although the main road infrastructure within Malawi is in good condition this is the result of active donors’ support, notably that of the European Union. The Malawi government will however need to establish a sustainable maintenance policy as the road fund can only provide 25 percent of maintenance needs. Despite donors’ intervention, the backlog in periodic maintenance is growing. The chart below shows that over 70% of paved roads were in good condition. This however represented a slight decrease from the 2006 percentage of over 75%.

Fig. 43

0% 20% 40% 60% 80% 100%

2006

2007

Paved roads

0% 20% 40% 60% 80% 100%

2006

2007

All roads

Good Fair Poor

0% 20% 40% 60% 80% 100%

2006

2007

Unpaved roads

Source: MEPD AER On the other hand just over 20% of unpaved roads were in good condition. Of the remainder, nearly 35% of the unpaved road network was in poor condition. This hinders access by agricultural buyers and sellers of farm inputs. It also hinders access to services such as tourism, education, health and micro‐finance. It should be noted that more than 85% of Malawi’s population lives in rural areas and they are dependent on secondary and tertiary roads for transporting their goods. The quality and funding of this network is problematic. These roads and the river crossings are not well maintained. This results in high transport costs and renders certain regions in the country inaccessible during the rainy season. Improved rural infrastructure can provide all year access to key collection areas to connect farmers to markets and therefore improve, through increased trade, the living standards of small farmers. Rural accessibility and mobility is seriously compromised by the poor condition of the rural road network During the rainy season accessibility to the collection points can be extremely difficult and delivery or collections can face up to 5 days of vehicle delays. According to TERA5 few transport operators wish to take their 5‐10 ton trucks to inaccessible rural destinations, leaving only pickups operated or hired by intermediaries to deliver seeds and fertilizers at very high prices. These intermediaries also buy the produce at very low farm‐gate prices citing high transport costs as the reason for low prices offered. 5 Malawi Transport Cost Study by TERA International Group. Inc, April 2005



Table 3 Transport Costs for Smallholder Tobacco (Malawi Kwacha)

Description High Transport Cost Low Transport Cost Average per bale Earnings 10,790 10,790 Per hectare Average Production (kg) 3,000 3,000 Average number of bales per hectare 35 35 Per hectare Input Costs: Nursery Stage Chemicals Fertilizers

3,0002,000

3,000 2,000

Transplanted Stage Fertilizers Harvesting labor Material for bales

40,00010,000

882

40,000 10,000

882 Total Input Costs per hectare 55,883 55,883 Total Input Costs per bale 1,597 1,597 Transport Costs 925 500 Total Cost per bale 2,522 2,097 Net Earnings 8,269 8,693 Transport Costs/Total Price 8.6% 4.6% Transport Costs/Earnings 11.0% 5.8% Source: TAMA and TERA estimates. TERA gives an example of two areas one with good infrastructure and another with a rough road in the above table. As presented in Table…, longer distance to depot and lower road quality can almost double the transport share of cost from 4.6% to 8.6% as a share of the total price per bale. The long civil war in Mozambique disrupted many of the traditional trade routes towards the open sea, including the former Beira Railway Line. In a long and costly process, the country re‐orientated its trade lanes during the 1980s and 1990s to its present configuration. The opening of new roads and the availability of improved transport equipment ‐ last but not least the advent of the container ‐ helped in this process, but also imposed some constraints, which today tend to cement trade routes, transport modes and resulting commercial habits. However, considering that long distance trucking is by far the least economic mode of transport and thus the most expensive for the country, any other option beyond trucking should merit at least a hard glance. 4.4.3 Rail

The analysis looked at whether poor rail infrastructure is responsible for high transport costs. Malawi’s geographical location is one of the most favorable. Only Zimbabwe, Lesotho and Swaziland are closer to their natural coastal gateway. The distance between the economic center of Malawi, Blantyre, and the closest port, Beira, is 560km (by rail), which is comparable to major inland cities in Eastern and Southern Africa (table below). Table 4 Comparative Distances to Ports



Centre Port Distance (km)

Blantyre Beira 560 (rail)/800 (road) Harare Beira 560 Johannesburg Durban/Maputo 570 Nairobi Mombasa 485

Source: World BankMalawi Trade and Transport Facilitation Audit Historically the Beira railway line played an important role in the development of Malawi and is the shortest in terms of distance to the sea port. The country was able to develop economically by taking advantage of this proximity to a port and the efficient railway operations along the traditional Beira line. Unfortunately, the civil war in Mozambique in the 1970s disrupted the traditional trade routes and Malawi had to rely on longer routes and essentially switch to road transport. This is when the Northern Corridor (Dar es Salaam‐Mbeya‐Mzuzu‐Lilongwe) with a total distance of 1663 km was developed. The route to South Africa via Zambia and Zimbabwe was even longer (2900 km). The war in Mozambique forced Malawi to re‐orientate its external trade and transport routes, as the nearest ports Beira and Nacala were not available any more. South Africa, being by far the main trade partner of Malawi, was accessible only by road, which implied the increased use of trucks. Thus, the trucking industry during the 1990s was much promoted and attracted much entrepreneurial initiative. It has developed into an important economic force and is said to even exert strong political influence. This is felt to be reflected in a preference for road traffic and the funding for maintenance of the roads. The established transport modes like railway and shipping on Lake Malawi have been unable to offer the same speed and efficiency as the road transport, reflected in a steady decline of their performances. Today, Malawi essentially relies on three relatively long land routes to access international gateways: the road to Durban (2300 km), the road to Beira and the railroad to the port of Nacala in Mozambique, both about 800 km. The South African corridor is actually a network of roads, liaising southern Malawi via the border post of Mwanza through Mozambique to Zimbabwe and South Africa (see map below). The distances are around 600 km to Harare, 1,600 Km to Johannesburg and 2,000 Km to Durban. Durban is the main intercontinental shipping hub of southern Africa and from there Malawi cargo destined to Europe, America and Far East is shipped. Durban is accessible from Malawi either by land transport by truck or by feeder shipping through the corridor ports of Beira and Nacala. Therefore, Malawi’s main volumes of cargo are moved on these routes by truck.



The Sena railway line in Mozambique, coming up from Beira, is being rehabilitated by an Indian consortium and will have a connecting spur into Malawi, liaising with the Malawi railway network at Nsanje/Bangula. The Sena railway is expected to be operational in 2009 and Malawi may once again be more directly connected to Beira by rail. However the Chiromo Bridge was washed away and the track is in very poor condition. Until the track and bridge have been rehabilitated, the only connection is by road which starts in Blantyre and passes through the border post of Mwanza which is around 800 Km long. The main export commodities moving on this route are: sugar (50,700 t in 2003), tobacco (31,700 t) and tea (7,100t). The main import commodities are: fuel (123,800 t in 2003) and fertilizer (33,900 t). The transit time between southern Malawi and Beira by road is about 3 days. Beira offers regular feeder calls for Durban.



Malawi has a total of 797 km single‐track within the country’s borders, of which 757 km is operational. The rail network serves the Southern half of the country, South of Lilongwe. In Nkaya, mid way between Blantyre and Salima, a branch goes east to the Mozambican border (Nayuchi/ Entre Lagos) to reach the Nacala line at Cuamba. However, the 77‐km railway section from Entre Lagos to Cuamba is in a bad state and the Mozambican government through its concessionaire is currently carrying out major rehabilitation works. Lead times using rail transportation has been affected by the condition of both the locomotives and the railway network. All locomotives operated by CEAR are old and dilapidated and this has increased operation and maintenance costs for the concessionaire. Furthermore, the frequent suspension of rail services has affected the condition of the rails of which most of them have deteriorated and need urgent upgrading. The major problem has been the 77‐km section in Mozambique from Entre Lagos to Cuamba that remained undeveloped due to civil conflicts. This lack of reliability has been one of the major reasons for low volumes of cargo and passengers utilizing this route a contributing factor to the uncompetitiveness of rail transportation against other transport modes such as roads. Improving this section in Mozambique is, therefore, of top priority. Rail infrastructure in Malawi is poor and is in need of major rehabilitation which compares unfavourably to the swift repair of the road link. The state of rail infrastructure reduces transportation options and drives costs up.



According to the TERA study delays, in many cases, ‘cause total loss of a shipment. Many products are perishable, such as horticulture products, tropical ornamental fish, and fresh food products. Both total trip time and reliability are critical. For products which are seasonal, delays can be as consequential as for perishables, such as products sold in anticipation of specific holidays. Where ship port calls are infrequent, delayed cargo may miss a critical shipping date and incur extra storage costs and exposure to loss and damage. Alternatively, a shipper will have to plan for cargo to arrive in port substantially in advance of the ship call date, simply to avoid risk of delays, with extra cost of storage and delay in payment. If delivery of a farm input such as fertilizer is delayed and unavailable at planting, then the cost is enormous in terms of lost productivity, plus holding costs for use next season.” With the condition of the railroad being poor and transport times very inconsistent it is therefore of no surprise that shippers of commodities other than tobacco, tea and sugar prefer the longer more expensive route through the port of Durban. In summary the problem areas on the rail road are:

In Mozambique, a 77km section located in a flood area between Cuamba to Entre‐Lagos has been in very poor condition, causing many interruptions. It is currently being rehabilitated

The tracks south of Blantyre (a 209 km section) are in a poor condition. The most southern section 80 km south of Machanga is no longer in use and needs rehabilitation as some sections have been washed out by floods. The Chiromo bridge is in need of reconstruction.

In 2003 a washed out bridge South of Salima prevented operations to Salima and Lilongwe. The bridge has finally been repaired with the support of a DFID grant.

Whilst the line between Blantyre and Salima as well as the branch from Nkaya to the border is generally in good acceptable condition although it needs some rehabilitation and repair.



Since the rail sub‐sector is capable of transporting large volumes of goods at a low price and on time, the functionality of rail transport is of vital importance to Malawi. This becomes important when one considers terms of trade and competitiveness of agricultural products with Malawi’s trade counterparts within and outside the region. With transportation costs for sugar tea and non‐traditional up to 44% of the export values, upgrading and reviving rail transportation is important for Malawi’s economic development if it is to shift from a predominantly consuming and importing country to one that predominantly manufactures and exports.

4.4.3.1 Malawi Lake Services

Malawi Lake Services (MLS) was established as a division of Malawi Railways (MR) to provide essential transport services for freight and passengers along the 500 km length of the lake. MLS operates a fleet of about 10 vessels. Ship services are provided to 21 landing points on Lake Malawi, four of which have freight and passenger handling facilities. With the increasing efficiency, speed and deregulation of road transportation, the lake transportation experiences similar problems as general freight carried by rail. Due to the lack of flexibility and the additional costs of transshipment, the activities of MLS have been gradually declining over the years, with the exception of renewed interest in the mid 1970s to the 1980s, when access to ports in Mozambique, Nacala and Beira, were closed due to the civil war. During this time investments were made into port infrastructure and vessels, but problems were experienced with low lake water levels and access to the key ports. The lake levels have since recovered, but the traffic volumes still showed a steady decline, leading to a decision in 1995 to separate MLS from Malawi Railways and to concession the operations to a private sector enterprise. Water transportation on Lake Malawi is used to transport goods and services such as foods, fertilizers, construction materials, daily commodities, fuel and passengers (both local and tourists). There are six (6) major ports along Lake Malawi, namely: Itungi (Tanzania); Chilumba, Nkhata Bay, Chipoka, Monkey Bay, and Ngara ports. These are all in a dilapidated state thus affecting the efficient use of water transportation in the country. Table 1 outlines some of the key constraints at selected ports along Lake Malawi. Only Chipoka and Chilumba ports are equipped with a quay/pier, loading and unloading facilities, warehouse, repair yard and reserve tanks. There are only three ports at Nkhata Bay, Ngara and Monkey Bay equipped with floating piers. Only the Monkey Bay port was operated by a private company, the Malawi Lake Services, until their concession expired in 2008. The pier at Nkhotakota port is dilapidated and cannot be used. Since 2004 there have been changes in the use of marine services. During this period passenger services have decreased by 12% and the volume of cargo has increased by more than 300%.

When growth in agriculture is combined with a more efficient transport sector, both total GDP and farm income increase sharply: additional GDP per capita annual growth rises to close to or more than 1 percent in five of the countries (all except Mozambique and Zimbabwe, Table4.2, part A, column 7), and per capita farm income goes up by close to or more than 2 percent in all seven countries(Table A12, part B, column 2).Agricultural exports benefit more from improving the transport sector’s productivity: total agricultural exports annually increase by 4.17–6.18 percent per capita in six countries and by 8.43 percent in Zambia(Table A12,partB, column 6). Malawi’s agricultural export growth rate in this scenario is more than two times higher than the growth rate in the scenarios of agricultural growth alone. For the other six countries, agricultural export growth rates increase by 30 to 90 percent.



The latter is attributed to the opening of the Ngara port in Dwangwa that transports mainly cargo from the Ethanol Company and the Dwangwa Sugar Corporation. However the poor state of most of the ports along Lake Malawi has resulted in the concessionaire making losses on passenger transit.

4.4.4 Infrastructure – Power

Malawi currently suffers major shortages of power generation capacity and power outages but planned investment in Kapichira‐II hydropower plant and the interconnection of Malawi’s electricity grid with Mozambique in 2011 should help reduce capacity shortages and load shedding and improve supply reliability. However demand is growing rapidly and is projected to reach 325 MW, 478 MW and 757 MW for years 2010, 2015 and 2020 respectively. Given the expected load growth, a continuation of current problems with the availability and reliability of existing hydroelectric power plants would, despite the planned investments and would lead to more load shedding, discouragement of business investment, and would undermine economic development



and efforts to reduce poverty. It would also damage attempts to widen access to electricity among Malawi’s population. The analysis performed shows that currently ESCOM’s installed capacity is 302MW (95% hydro; 5% diesel) whilst available capacity is only 265MW against forecast demand of 295MW. With the rehabilitation of Tedzani I and II and the expected decommissioning of one of the machines for purposes of rehabilitation an additional 20MW which was expected by the end December 2009 bringing total available capacity to 285 MW which is still below current demand. With this scenario load shedding is inevitable and the situation will continue to deteriorate as demand grows. It should be noted that access to electricity currently stands at 7.9%.

Fig. 44

180

200

220

240

260

280

300

320

340

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

MW

Installed capacity Available capacity Peak Demand

Source: MEPD AER 2006 & 2008 A consequence of the capacity shortage is the deteriorating performance of existing hydropower plants since without spare capacity it has not been possible to take plant out of service to allow proper maintenance and refurbishment. Additionally, problems with weed infestation, siltation and debris in the river have damaged turbines and generators. These problems have been accentuated by unsustainable catchment management and noxious weeds. A further challenge with the power infrastructure is the overloaded transmission and distribution networks. This results in unreliable electricity supply which causes and voltage fluctuations causing damage to consumers’ (households and businesses) electricity equipment. The implications of low generation capacity coupled with unreliable transmission and distribution networks is that ESCOM cannot guarantee quality and sufficient quantity of supply to new and existing customers and that the country continues to suffer from regular power outages. There is also a backlog of unconnected customers as well as potential customers that have deferred investment or moved to other countries where power is not a problem.



This has adversely affected both domestic consumers as well as industry and has ended up driving away investors. The following examples serve to illustrate the adverse effect of the state of power supply:

ESCOM couldn’t guarantee sufficient quantity of electricity to uranium mines which require very reliable power sources and as a result Paladin resorted to the importation of diesel generators which is a much more expensive form of energy and results in increased diesel imports. Importing diesel creates additional pressure on international transport as well as foreign exchange. This problem is compounded by a weak transmission line to the Northern region.

Heavy sands extraction never materialized because of the same inability to guarantee power supply. Heavy sands are used in the manufacture of titanium, a light and robust metal, which is, inter alia, used in airframe manufacture. Malawi lost out on an opportunity to diversify its export base and the investors moved to Mozambique where power then was not a problem. Heavy sands can also mined on a smaller scale and therefore Malawi missed out on an opportunity to empower the majority of its citizens who could have benefited from being linked to a large producer of titanium.

BAT quoted power outages as one of the reason for their departure from Malawi as each power outage cost the company a significant amount of money. Every time machines stop as a result of power outages 50,000 cigarettes have to be thrown away as they cannot be recycled. Similarly the high incidence of power outages has affected the competitiveness of most industries including Unilever, a detergent manufacturer which had to move its major production lines to other countries including Zimbabwe.

Dairy industry can’t provide consistent quality of milk (outages preclude maintaining constant temperature) and as a result losses are high. Rural households in milk‐shade areas quoted lack of access to power as one of the major impediments growth of rural‐based dairy industries. This limits improvements in rural livelihoods.

Plastics: Each time there is a power outage the machines get clogged with molten plastics and result in expensive cleaning operations of equipment. This adversely affects the competitiveness of the sub‐sector and consequently the export potential is limited.

Several potential textile investors have considered investment in Malawi in recent years. Textile manufacture, especially spinning, is a power sensitive operation which requires good quality power (in particular, a consistent power voltage to avoid uneven thread thickness). The cost of unscheduled outages can often be disproportionate to the duration of the outage. For example, the Mapeto textile factory may lose between 300 and 500 metres of fabric in their finishing/dyeing operation, whenever there is a supply interruption. A number of textile factories have closed in recent years, with some of them (e.g. HAPS) citing power supplies as a major reason for closure.

Median sales losses due to power outages are at 10% the highest within Malawi’s comparators. In fact for companies without a generator, median sales losses are of the order of 20 percent compared to those with a generator whose losses are in the order of 5 percent. As a consequence the number of firms with a generator is at 50%, one of the highest in the region.



Press Corporation has cited power problems as the reason for the purchase of thermal generation capacity which diverted resources away from starting new businesses.

Fig. 45

0% 2% 4% 6% 8% 10%

Low income

SSA

South Africa

Uganda

Zambia

Kenya

Madagascar

Tanzania

Malawi

Median sales losses due to power outages

0% 20% 40% 60% 80%

Low income

SSA

South Africa

Madagascar

Uganda

Zambia

Malawi

Tanzania

Kenya

% of firms with generator

Source: Malawi ICA 2006 In summary the state of power infrastructure is poor, impacting on returns to investment and constraining new investments in the country. It has prevented the country’s diversification into non‐traditional exports (e.g. titanium and on farm processing) and a large number of companies have heavily invested in generating their own power. This is a diversion of resources which could be used for investment in other ventures and also it does have an impact on Malawi’s competitiveness. In addition using own generators puts pressure on foreign exchange which is meager at the moment, raises the cost of transportation as larger fuel quantities have to be imported and eventually it has an adverse effect on the cost of other imports including fertilizer. Finally poor power quality and insufficient power quantity has led closures of a number of firms with the resultant loss of jobs and has in turn heightened poverty. It has also led to the shrinking of manufacturing output. It can therefore be concluded that power is a constraint to growth and poverty reduction. 4.4.5 Infrastructure Water and Irrigation

The study next looked at water and irrigation infrastructure as a constraint to economic growth. As far as meeting the water MDG is concerned, 74.2% of Malawians have access to improved water supply implying that the country is on course to attaining the water MDG. As for urban areas of Lilongwe and Blantyre there is a significant challenge in maintaining the ageing water system as the urban population increases. Water shortages are very common especially in Blantyre and seriously affect business operations. Despite abundance of water resources irrigation development has been limited. Only 27% of the irrigation potential has been exploited



Water supply service delivery in the cities of Blantyre and Lilongwe are operated through Blantyre Water Board and Lilongwe Water Board, respectively. The two water boards are commercial statutory corporations required to operate on a sound economic basis within their gazetted or designated water supply areas. The demand for water supply and sanitation services in these urban areas has been growing over the past decades due to population growth, urbanization and improvements in the economic and social well‐being of people living in the two major cities of the country. The water supply and sanitation services are currently characterized by inadequate and inefficient delivery of services. The most affected are the low income areas that incidentally make up an increasing proportion of the urban population (currently estimated at 69% for Blantyre and 70% for Lilongwe). The services being provided are unreliable, spurred by high water losses (48% and 34% of unaccounted for water in Blantyre and Lilongwe Water Boards, respectively). This is a result of the inheritance of old water supply delivery systems and occasioned by lack of adequate and timely investments for rehabilitation. This has a negative impact on the private sector and the overall national economic development of Malawi. It has been projected that with the existing capacity, Lilongwe Water Board will be able to meet its demand up to 2010. With the growing demand as a result of rapid urbanization in the city (currently projected at 7.1%), the capacities and efficiency of some of the plant systems continue to deteriorate and there is need to add more infrastructures to meet the growing demand expanding towards the borders of the city. Blantyre Water Board is responsible for the provision of water supply services in the city of Blantyre and inherits a water supply system that is over 45 years old. Its water supply system draws water from the Shire River through a 36‐km transmission pipeline to Blantyre that has an overall pump head of approximately 800 meters. Almost 50% of the revenue collected is thus spent on electricity costs which affect the water board operations and maintenance activities. A second source of water supply is through the Mudi Dam which contributes 10% of the water supplied to the city. The intake arrangements and treatment plants operating on the Shire River are located at Walkers Ferry on which the water board has a compound of operators and technicians working at the raw water pumping station, water treatment plants and the high‐lift pumping station. The intake structure was constructed in 1963 and has expanded in line with increased abstraction requirements from the growing city. The raw water pumping station is reported to have a design capacity of 106,000 m3/day and the treatment plant and high lift pumping station have design capacities of 78, 000 m3/day and 83,000 m3/day respectively. Chileka high lift station and the pipeline from Walkers Ferry to Blantyre have design capacities of 83,000 m3/day and 96,000 m3/day respectively. Due to current condition of the equipment, Walkers ferry system is capable of producing an average of 75,000 m3/day to Blantyre. Mudi system has a design capacity of 45,000 m3/day but due to degradation of catchment and hence poor raw water condition, the current production capacity is 8,000 m3/day. In total, Blantyre Water Board has a production capacity of approximately 83, 000 m3/day against an average demand of 87,000 m3/day and peak demand of 95,000 m3/day. In conclusion the following are major constraints in infrastructure: Energy and International corridors. Limited irrigation infrastructure and water supply are also constraints to development. However water supply is mostly affected by availability of power as well as poor natural resources management which affect the capacities of the dams on which Blantyre Water Board depends.



Access to water has improved and Malawi is on course to attaining the water MDG by 2015, however water resource management is still an issue and could constrain growth. 4.5 Human Capital

In the International Competitiveness Assessment (ICA) shortage of skills is ranked as 8th most constraining factor by businesses and this absence of skills has prevented development of high‐skill businesses. One of the indicators of skills shortage is that Malawi has a high number of foreign workers in key management/ technical posts in firms and NGOs and that there is a high proportion of businesses owned or managed by foreigners in formal sector.

Fig. 46 Ranking of Constraints

0% 20% 40% 60% 80%

Environmental regulations

Labor Regulations

Legal framework / Conflict resolution

Business Licensing and Operating …

Customs and Trade Regulations

Telecommunications

Regulatory Policy Uncertainty

Political stability

Anti-competitive or informal practices

Other

Access to Land

Tax administration

Corruption

Skills and Education of Available …

Transportation

Crime, theft and disorder

Tax rates

Electricity

Cost of financing

Access to financing

Macroeconomic instability

Again in the ICA nearly 50% of the firms surveyed find lack of skilled workers to be a serious problem. In addition more than half of the medium and large firms as well as foreign owned and exporting firms reported lack of skills to be an important problem. Table 4 Firms’ Perceptions

Firm Categories Labor Regulations Skills and Education of Available Workers

Small Medium Large

10.9415.00 13.21

35.9455.00 62.26

Domestically Owned Foreign Owned

12.7112.20

46.6158.54

NonExporter Exporter

11.9015.15

48.4154.55

Total 12.74 49.68 Returns to schooling are very high6. According to ICA controlling for other factors, an additional year of schooling is associated with an increase in wages of nearly 15% when we do not control for occupational categories (see annex II). Controlling for occupation reduces the estimates

6 Malawi International Competitive Assessment 2006 page 68



considerably to 8‐9.5%. This is still higher than recent estimates of returns to education in developed economies which are on the order of 4‐7% (Public Funding and Private Returns to Education, PURE 2001). The level of returns to schooling is consistent with lack of skilled workers. There is no statistically significant difference in earnings of men and women in the manufacturing sector in Malawi.

Malawi’s literacy rates among the youth are improving following the free primary education program. However primary school completion rates for the first four years of primary school are at 44.2% the lowest of the comparator countries. Additionally, literacy levels among the adult population are among the lowest in the region. Studies show that household tobacco income is correlated to educational level attained by the head of the household implying that educated farmers are better able to understand the risks and best farming practices of growing tobacco. Hence lower educational levels could hamper growth and diversification in the agricultural sector

Fig 47 Tobacco income against years of primary education

Tertiary enrollment in Malawi is the lowest of comparators at 0.4% gross enrollment (see chart below) despite the fact that economic returns for tertiary education are high as evidenced by the higher annual household expenditure for urban university graduates compared to secondary school leavers.

In conclusion returns to tertiary education are high and in consequence Malawians make great efforts to study in overseas universities. Primary school completion rates are low and tertiary

Fig. 50 Annual Expenditure for Each



education is highly concentrated. Most of the members of the private sector cite shortage of highly skilled workers as the number 8th constraint. This may be caused by a mismatch between school and tertiary institutions curricula and what is required by most businesses. Over 50% of the firms in the sample lack of skills as an important constraint. This factor has been an important obstacle to technology absorption by the country as well as productivity improvements.

4.6 Finance According to the International Competitiveness Analysis (ICA) the cost of finance ranks as number 2 constraint reported by formal firms and access to finance number ranks as number 1 constraint reported by informal firms. What the study tried to establish is whether or not their complaints are valid.

Fig 51 Fig 52

0% 20% 40% 60% 80%

Environmental regulationsLabor Regulations

Legal framework / Conflict resolutionBusiness Licensing and Operating …

Customs and Trade RegulationsTelecommunications

Regulatory Policy UncertaintyPolitical stability

Anti-competitive or informal practicesOther

Access to LandTax administration

CorruptionSkills and Education of Available …

TransportationCrime, theft and disorder

Tax ratesElectricity

Cost of financingAccess to financing


Percentage of firms perceiving obstacles as major or very severe

0

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35

-30

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-10

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1980

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Bil

lio

ns C

on

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t M

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%

Credit to public sector Ex-ante Real Lending Rate Ex-post Real Lending Rate

Source: ICA Source: IFS Judging from the above graph(on the right) real lending interest rates in 1996 increased to over 40% and although they fluctuated momentarily downwards between 1997 and 1998 they increased in 2000, when domestic public debt shot up and peaked up in 2001 at over 40% again. Interest rates have been decreasing since 2004 due to improving fiscal management. Fig 53 Fig 54 Fig 55

0 4 8 12 16

KenyaLesotho

GhanaSouth Africa

ZambiaTanzania

BotswanaBurundi

MozambiqueUgandaMalawi

Real lending interest rate (%)

0 4 8 12 16 20

South AfricaGhana

TanzaniaBotswana

MozambiqueKenya

LesothoZambiaUgandaBurundiMalawi

Nominal spread

0

5

10

15

20

25

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

Nominal spread

Source: EIU and IFS

Comparatively Malawi’s real lending rates are in the order of15% which is by far one of the highest in the world (see charts above). Interest rate spreads are also the highest in the region though decreasing slowly. This is indicative of lack of competition in the Banking system and is also due to



scarcity of capital. Real deposit rates are negative which is indicative of the fact that the economy is not savings‐constrained.

Fig 56 Fig 57

0%

5%

10%

15%

20%

25%

30%

35%

40%

1965

1967

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

Domestic credit

Credit to private sector/GDP, % Credit to public sector/GDP, %

0 20 40 60

UgandaMalawiZambia

TanzaniaMozambique

RwandaGhanaBenin

BurundiKenya

Namibia

Credit to private sector, % of GDP

2004-06 1992-94

Source: IFS and WDI Credit to the private sector currently stands at 6% of GDP, but this was not always the case. Private credit dropped from 12 million const. MWK in 1980 (over 15% of GDP) to 5 in 1987.

Fig 58

0

2

4

6

8

10

12

14

16

-45

-30

-15

0

15

30

45

60

75

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

Bil

lion

Con

stan

t M

WK

Inte

rest

rat

es,

%

Claims on Private Sector Ex-post Real Lending Rate Nominal Lending Rate

Source: IFS In reality, interest rates barely moved between 1980 and 1992 (we take note of the fact that at the time the banking sector was heavily regulated). Credit to the private sector collapsed around 1980 as investment opportunities went down as a result of external shocks such as the oil crisis and the civil war in Mozambique which resulted in the closure of external transport routes. In other words private credit went down because demand shrunk (fewer investment projects yielding a given rate of return). Crowding out of the private sector in subsequent years didn’t help matters as its share to GDP kept on declining. Although there is a slight improvement in subsequent years as public debt shrunk (crowding‐in) the financial sector still remains shallow.



The chart below shows the interest rate spreads and spread composition. The chart shows that there has been a steady decline in interest rate spreads from a high of 28% in 2003 to 15% in 2006. Recent reduction in spreads is due to lower reserve requirements (inflation put under control by fixing the fiscal stance) and fewer bad loans, while overheads remained stable.

Fig 59

-5%

0%

5%

10%

15%

20%

25%

2002 2003 2004 2005 2006

Spread decomposition

Profit margin Overhead Reserve req'mentsProvisions Tax Spread

Source: EIU Limited investment opportunities means that per‐client overheads are high and at the same time banks remained highly profitable. Return on assets and return on equity as measures of profitability indicate that Malawian Banks are by far the most profitable amongst Malawi’s comparators (see tables below.) It is therefore not surprising that the deregulation of the sector triggered a rapid increase in the number of banks (from 2 prior to 1994 to 9 today).

Fig 60

0 10 20 30 40 50

NamibiaKenya

South AfricaMozambique

UgandaSwaziland

GhanaMadagascar

ZambiaBotswana

Malawi

ROE

0 1 2 3 4 5 6

NamibiaBotswana

GhanaKenya

MadagascarSwaziland

MozambiqueSouth Africa

ZambiaUgandaMalawi

ROA

Source: FSAP In conclusion access to capital was determined to be a constraint. Interest rates are high by international standards, there are high spreads and overheads are quite high. There is limited financial depth in the sector, although between 1980 and 1990 the reduction in private sector credit was due to a reduction in investment opportunities and not vice versa. The study noted that the banking system is highly profitable using such measures as return on assets and return on equity and access to capital especially venture capital is an issue. However all these point to poor



financial intermediation and in the case of high overheads these are at least partly explained by small market size. But things are gradually improving with the recent financial innovations including First Merchant Bank’s Makwacha cards, increased ATM networks and decreasing interest rate spreads notwithstanding the fact that these are not due to competition‐induced cost cutting reductions. 4.7 Macro Risks The stability of the macroeconomic environment is important for business and, therefore, is important for the overall competitiveness of a country and conversely, macroeconomic disarray harms the economy as firms cannot make informed decisions when inflation is raging out of control. The share of resources to finance government services gets squeezed as it has to make high‐interest payments on its past debts. In sum, the economy cannot grow unless the macro environment is stable. Malawi’s Real GDP growth is still high and inflation moderate. The figure below shows that inflation has dramatically fallen from as high as 80% in the mid‐90s to a single digit figure of 8%. Latest figures show that consumer prices increased by 9.3 percent in the 12 months to September 2008, largely because of a 25 percent increase in fuel prices in June 2008. Food price inflation continues to be subdued, though domestic maize prices reportedly shot up in some areas in the first half of 2008.

Fig 61 Inflation Trends

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

Source: IFS

Malawi’s fiscal position has improved dramatically. Deficits went down to the level of 1‐2% after having hovered at between 6% and 11.5% during the period 1995 to 2004. The graph on the bottom right shows that Malawi’s fiscal balance has gone from the worst in the region to above average. Due to Multilateral Debt Relief Initiative public debt fell fourfold to 50% of GDP. However uncertainty still remains as the country enters election year.



Fig 62Trends in Public Debt and Fiscal Balances Fig 63 Fiscal Balances Across Countries

-12.5

-10.0

-7.5

-5.0

-2.5

0.0

0

50

100

150

200

25019

95

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

Fiscal Balance % of GDP (right axis)

Public Debt % of GDP-8 -6 -4 -2 0 2 4 6 8

Burundi

Tanzania

Mozambique

Zambia

Uganda

Malawi

Rwanda

Namibia

Lesotho

2005-07 2001-04 1997-2000 1992-96 Source: WDI

On the down side Malawi is running a chronic CA deficit, which deteriorated since 2000. Most of the CA deterioration due to worsening trade balance. However much of this deterioration is covered by concessionary donor inflows.

Fig 63 BOP Trends

-30-25-20-15-10-505

1015

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

% o

f G

DP

Current-transfers balance Income balance Services balanceTrade balance Current-account balance

Source: EIU The real effective exchange rate (REER) appreciated sharply in 2003 and has remained relatively stable since then, helped by the weakening of the U.S. dollar. However the appreciation of the U.S. dollar against the currencies of many of Malawi’s trading partners since the onset of the credit crunch may lead to a sizable appreciation of the Malawi REER. Much of the trade balance deterioration is due to the appreciation of Malawi’s REER in 2003. The graph below right shows a positive correlation between the real effective exchange rate and the trade balance.



Fig 64

-350-300-250-200-150-100-50050100150200

0

25

50

75

100

125

150

175

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

Mil

lion

US

$

Real effective exchange rate (2000 = 100) Trade balance, million US$

R² = 0.633-300

-250

-200

-150

-100

-50

0

50

100

150

70 90 110 130 150 170

Trad

e ba

lanc

e, M

illio

n U

S$

REER (2000=100) Source: EIU/WDI The government continues to place substantial weight on stabilizing the nominal exchange rate against the U.S. dollar, which has held steady since May 2006. The authorities believe exchange rate stability has helped signal their commitment to economic stability and anchored inflation expectations and the prices of traded goods. Fig 65 Fig 66

5

10

20

40

80

160

320

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

MW

K/U

S$

, C

PI in

dex, lo

g s

cale

Official Rate, MWK/US$ End of period CPI (2000=100)

-20

-10

0

10

20

30

40

50

60

70

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

MWK/US$ exchange rate, monthly % change

Source: IFS Historically Malawi has gone through periods of stability, followed by abrupt step devaluations (regularly reaching 20% per month), which led to high exchange rate uncertainty. However, since 2004 step devaluations have been rare and of smaller magnitude. Exchange rate stability promotes trade but recent stability appears unsustainable and may be increasing risk of dramatic devaluation in near future. Terms of trade have been rapidly improving since 2001. But the current commodity boom seems to have done more damage than good as Malawi has been experiencing a sharp deterioration in the TOT(every other comparator country improved their T‐o‐T in 2006 relative to 2005).

According to ICA macro‐economic instability was cited by over 70% of firms in Malawi as a major impediment to development, followed by access to financing and electricity. The situation is



however different today as the economy has enjoyed relative stability over the past four years with single digit inflation rates.

Fig 67

0% 20% 40% 60% 80%

Environmental regulationsLabor Regulations

Legal framework / Conflict resolutionBusiness Licensing and Operating …

Customs and Trade RegulationsTelecommunications

Regulatory Policy UncertaintyPolitical stability

Anti-competitive or informal practicesOther

Access to LandTax administration

CorruptionSkills and Education of Available …

TransportationCrime, theft and disorder

Tax ratesElectricity

Cost of financingAccess to financing


Percentage of firms perceiving obstacles as major or very severe

Source: ICA Summary on Macrorisks Malawi is maintaining an artificially overvalued exchange rate which is leading to demand for foreign exchange exceeding supply thereby resulting in chronic foreign exchange shortages. As a result foreign exchange payments are delayed as importers cannot pay the bills in time because the banks don’t have the foreign exchange. This in turn leads to late payment penalties by foreign partners and loss of commercial credit. The camels in the desert: In order to survive under the circumstances firms have accounts with multiple banks to minimize risk of foreign exchange shortage. Since importers were ready to buy foreign exchange at higher exchange rates, banks introduced quasi‐forward contracts (legal, but against the spirit of RBM’s policy). RBM ended up closing this loophole. Interviews with the private sector reveal that there are widespread expectations of devaluation in 2009 and the end result is that exporters postpone repatriating foreign currency, thereby exacerbating the shortage of foreign exchange. Exporters are therefore hurt by overvalued exchange rate. In conclusion the fiscal stance is much improved, but credibility of recent advances has yet to be established. Inflation is under control and the country’s debt profile has improved. However the country has an overvalued exchange rate which hurts exporters and is maintained in a fashion that also penalizes importers



4.8 Micro Risks Based on the latest Doing Business Survey, the overall business climate is better than expected as the country ranks 11th out of 31 countries sampled.

Fig 68

0 30 60 90 120 150 180

Congo, Rep.Burundi

ChadEritreaGuinea

SenegalBurkina Faso

MauritaniaTogo

Côte d'IvoireCameroonZimbabwe

BeninRwanda

MadagascarGabon

MozambiqueCape Verde

GambiaTanzania

MalawiLesothoZambiaNigeria

EthiopiaSwaziland

GhanaKenya

BotswanaNamibia

South Africa

2008 2007 Source: ICA But the country has been rapidly slipping down on the ease of doing business. The bar above is getting longer as Malawi would have been above Lesotho if it had maintained the 2007 rating. According to the chart below, Malawi is only second to Zambia among the 18 countries that slipped.

Fig 69

-25-20-15-10-505

1015

Gha

naM

adag

asca

rKe

nya

Moz

ambi

que

Burk

ina

Faso

Mau

ritan

iaCô

te d

'Ivo

ireSo

uth

Afric

aBu

rund

iG

uine

aCa

mer

oon

Rwan

daN

iger

iaCh

adEr

itrea

Tanz

ania

Cong

o, R

ep.

Bots

wan

aG

abon

Ethi

opia

Sene

gal

Beni

nCa

pe V

erde

Gam

bia

Swaz

iland

Leso

tho

Togo

Nam

ibia

Zim

babw

eM

alaw

iZa

mbi

aEase of doing business. Rank 2008 vs 2007 dynamics

Source: ICA

A decomposition of the ease of doing business ranking shows that Malawi is trailing in particular in trading across borders, contract enforcement and closing of businesses. However Malawi has been



slipping almost across the board including starting a business, registering property and getting credit is relatively (compared to other countries) more complicated than the previous year. There was even a slight slippage on paying taxes, and this probably has to do with the way MRA administers the tax law. According to one of the organizations consulted it was noted that MRA on occasions selectively applies tax rebate on capital goods depending on ability to pay.

Fig 70 Fig 71

0 50 100 150 200

Trading Across BordersClosing a Business

Enforcing ContractsDealing with Licenses

Starting a BusinessEmploying Workers

Registering PropertyGetting CreditPaying Taxes

Protecting InvestorsOverall ranking

2008 2007 -2 0 2 4 6 8

Enforcing Contracts

Dealing with Licenses

Employing Workers

Closing a Business

Paying Taxes

Trading Across Borders

Protecting Investors

Getting Credit

Registering Property

Starting a Business

Changes in position by components of doing business (2007 vs 2008)

Source: ICA

Trading across borders, the most critical component if Malawi is to effectively deal with the problem of food security and also effectively transform the economy is also deteriorating. Trading across borders is cumbersome, especially exports. Malawi is doing poorly both on number of documents and the time required to complete an export or import operation. But exports are burdened in particular by administrative barriers.

Fig 72

0

20

40

60

80

100

120

140

0

2

4

6

8

10

12

14

Cape

Ver

deTa

nzan

iaTo

goLe

soth

oG

ambi

aEt

hiop

iaCa

mer

oon

Keny

aCô

te d

'Ivo

ireBo

tsw

ana

Chad

Sout

h Af

rica

Rwan

daN

iger

iaN

amib

iaM

adag

asca

rM

ozam

biqu

eM

alaw

iZa

mbi

aSw

azila

ndSe

nega

lM

aurit

ania

Burk

ina

Faso

Cong

o, R

ep.

Zim

babw

eEr

itrea

Documents for import (number) Time for import (days, right axis)

Source: ICA Labor market

Interestingly, the ongoing debate on severance payments is not reflected in Malawi’s position in the rankings – on the difficulty of firing index the country is doing better than average.



Fig 73

0

10

20

30

40

50

60

70

80

90

Leso

tho

Nam

ibia

Nige

riaSw

azila

ndMa

lawi

Moza

mbi

que

Gam

bia

Ken y

aZa

mbi

aSo

uth

Afric

aRw

anda

Bots

wana

Maur

itani

aTo

goBu

rkin

a Fa

soMa

daga

scar

Sene

gal

Zim

babw

eTa

nzan

iaCa

mer

oon

Difficulty of Hiring Index Difficulty of Firing Index

Source: ICA Micro risks: conclusion Malawi is doing less than its neighbors to provide a favorable business climate to investors. Given non‐administrative barriers to trade (landlockedness, unreliable and expensive transport to ports, overvalued exchange rate); the high administrative burden on exporters is extremely unhelpful in promoting an export‐oriented economy. 5.0 CONCLUSION As observed in section 1 the country is struggling to assure food security. The fertilizer subsidy program has helped to a certain extent but the situation still remains tenuous due to the fact that donor support for the program whilst welcome might not be there in perpetuity and that Malawi is drought prone. Efforts to import maize during a drought year is met with such constraints as shortfalls in foreign exchange earnings as the country is dependent on export commodities that are also affected by rainfall patterns as well as the fact that in order to import maize during a drought year the country has to pay abnormally high transport costs for imported maize. During years of plenty the country fails to take advantage of the benefits of trade through maize exports due to again high transport costs especially on a commodity that is of low value. This makes it unprofitable to export maize except when neighbors have a shortfall. These factors combined result in price volatilities and the farmer is pushed into a corner. As already noted price volatility creates a disincentive to diversify since the farmer cannot guarantee household access to maize without a significant cash crop production.



In view of the above it is therefore not surprising that Government is focused on increasing and stabilizing yields to the point where output doesn’t fall bellow subsistence levels even during bad years. Government is achieving this through the fertilizer subsidy program. The appreciated currency is helping to lower cost of fertilizer program whilst a move into less volatile crops helps but Malawians will require a lot of civic education to consider cassava and its derivatives as food. However the appreciated currency stance works against export diversification which is key in ensuring the country’s ability to import maize during lean years.

Increasing and diversifying Malawi’s exports is the key in furthering the country’s efforts to assure food security. But this will have to be achieved at the expense of a depreciated currency in order to incentivize the tradable sector. Inadequate and unreliable energy is preventing Malawi from exploiting its mineral potential as well as textile exports and generally the competitiveness of the domestic industries. Apart from underinvestment in infrastructure power is also affected also by poor natural resources management. In addition diversification cannot occur without addressing the high cost of transportation. This would lower the high cost of maize during lean years and assure farmers of reasonable prices during years of abundance. This would reduce price volatilities and encourage the farmer to diversify. This requires increasing the throughput and reliability of Nacala and Beira corridors as well as addressing the poor quality of feeder roads.

Additionally the commercial capital Blantyre requires the reliability of urban water but water supply is mostly affected by power availability as well as siltation. Infrastructure problems in the water sector are looming but recent donor activity should postpone the problem for a considerable period. The exchange rate may have a respite during the tobacco selling season but it will come to haunt the economy again. Its impact on the external sector cannot be overemphasized

In view of the above the most constraints identified are Power, Feeder Roads and International Corridors and Natural Resources management. Human resources management, and overvalued exchange rate, water supply to Blantyre and access to finance are equally important and will be labeled secondary constraints in the sense that they are not constraining food security in the short to medium.



Unstable weather

Maize price

volatility

Poor quality and reliability of power

supply

Binding Constraints

High cost of Transportdue to Poor Feeder Roads and International

Corridors

Poor Nat resource management

Small .unstable and slow Growing Export

Basket

High Food Insecurity

Smallholders locked into Maize

Production

Heavily impacting industry as well as

missed investment opportunities

Low and vulnerable real

incomes

Low effective demand for non‐agricultural goods and

Services

Low growth leading to little effect on poverty levels

Annex I



Total Land and Sea Transport Costs (% of Export Value)

Tobacco Sugar Tea Cotton Coffee Food Crops Other

Beira 14.29% 44.54% 24.63%

Durban 15.83% 29.83% 33.75% 37.67%

RSA Destination 29.26% 8.91% 17.41% 10.71% 18.55%

Nacala 27.51% 15.84% 20.00% 17.33%

Other Africa 28.38% 11.90% 11.22%

Inland Costs (% of Export Value)


Beira 3.28% 19.21% 10.14%

Durban 6.51% 15.72% 21.43% 25.44%

RSA Destination 17.41% 10.71% 18.55%

Nacala 9.61% 4.45% 8.81% 4.22%

Other Africa 28.38% 11.90% 11.22%

Time Costs (% of Export Value)


Beira 1.40% 1.40% 1.40%

Durban 1.60% 1.61% 1.61% 1.60%

RSA Destination 0% 0% 0% 0%

Nacala 2.05% 2.05% 2.05% 2.05%

Other Africa 0% 0% 0%

Source: TERA 2005



Annex II

Individual level Wage Regressions

Dependent Variable: Log of monthly earnings (1) (2) (3) (4) (5) (6)Years of schooling 0.145 0.095 0.093 0.083 0.077 0.076 (0.007)** (0.007)** (0.007)** (0.006)** (0.006)** (0.006)**Worker experience 0.072 0.056 0.055 0.053 0.053 0.052 (0.006)** (0.006)** (0.006)** (0.006)** (0.006)** (0.006)**Worker experience squared ‐0.001 ‐0.001 ‐0.001 ‐0.001 ‐0.001 ‐0.001 (0.000)** (0.000)** (0.000)** (0.000)** (0.000)** (0.000)**Worker is female ‐0.011 0.068 0.056 0.074 0.080 0.082 (0.065) (0.061) (0.059) (0.058) (0.057) (0.057)Worker is a union member 0.006 0.044 0.019 ‐0.069 ‐0.105 ‐0.106 (0.065) (0.060) (0.060) (0.060) (0.060) (0.060)Worker is full time 0.258 0.228 0.211 0.183 0.180 0.179 (0.102)* (0.092)* (0.092)* (0.086)* (0.087)* (0.088)*Received past firm‐financed internal training

0.315 0.304 0.276 0.264 0.264

(0.077)** (0.076)** (0.073)** (0.072)** (0.072)**Received past firm‐financed external training

0.331 0.335 0.290 0.238 0.239

(0.079)** (0.078)** (0.076)** (0.074)** (0.074)**Received past self‐financed training 0.188 0.189 0.115 0.122 0.123 (0.080)* (0.080)* (0.081) (0.080) (0.080)Log weekly hours ‐0.501 ‐0.471 ‐0.449 ‐0.457 (0.101)** (0.097)** (0.099)** (0.099)**Firm has 49‐100 employees 0.292 0.203 0.198 (0.050)** (0.051)** (0.052)**Firm has >100 employees 0.382 0.280 0.272 (0.054)** (0.058)** (0.059)**Firm exports 0.085 0.083 (0.048)+ (0.049)+Firm foreign‐owned 0.366 0.368 (0.045)** (0.045)**Firm age 0.011 0.011 (0.003)** (0.003)**Firm age squared ‐0.000 ‐0.000 (0.000)* (0.000)*Worker got job using network ‐0.028 (0.040)Constant 6.453 8.115 10.153 9.968 9.840 9.896 (0.127)** (0.190)** (0.463)** (0.445)** (0.453)** (0.455)**Observations 1393 1389 1389 1383 1354 1350R‐squared 0.39 0.50 0.51 0.53 0.55 0.55F‐Test Firm Size Matters 29.92 13.32 12.28prob>F 0.00 0.00 0.00 Notes: Robust standard errors in parentheses + significant at 10%; * significant at 5%; ** significant at 1% Source: ICA 2006



References

Alexander Culiuc Constraints Analysis in Depth with example: Moldova

Alexander Culiuc Malawi Constraints Analysis Power Point Presentation

Dani Rodrik A Framework for growth Diagnostics

TERA Malawi Transport Cost Study Final Report 2005

IFPRI Market Opportunities for African Agriculture

Africa Private Sector Group Malawi Investment Climate Assessment

MEPD Economic Reports 2006, 2007 and 2008

World Bank Malawi Trade and Transport Facilitation Audit

Faye et al. The Challenges Facing Landlocked Countries

Malawi Government MGDS

NSO Integrated Household Income and Expenditure Survey

Ricardo Hausman Growth Diagnostics in practice

World Bank CEM Background Papers

IMF Malawi Article IV Consultation

World Bank Malawi PRSP

Kadale Consultants Rapid Diagonstics Study

Kadale Consultants Credit Demand and Supply in the Tea Sector

MCCI Business Climate Surveys