RESPONSIVENESS OF MALAWI-SOUTH AFRICA

BILATERAL TRADE FLOWS TO CHANGES IN

RELATIVE PRICES AND INCOME

BY HOPE E MFUNIMASTERS OF ARTS IN ECONOMICS

RESPONSIVENESS OF MALAWI-SOUTH AFRICA BILATERAL TRADE FLOWS TO

CHANGES IN RELATIVE PRICES AND INCOME

BY HOPE EPHRON MFUNI

Background

• In August 1990 Malawi signed a non reciprocal bilateral trade agreement with South Africa.•Malawi regarded this agreement as an opportunity to improve possibilities for increasing more exports to South African markets.

Trade Trend

Problem Statement

As can been seen on the graph, since 1996, Malawi has seen the emergence of large and persistent bilateral trade deficits.

For example, by December 2012 Malawi’s exports to South Africa stood at MK22 billion while imports from South Africa rose to MK 145 billion in the same period (NSO, 2012).

Purpose

• To identify the main determining factors of Malawi – South Africa trade flows in decomposed form.

Specific objectives are:• To compute income and price elasticities on export

and import demand functions. • To find out the direction of causality among test

variables in a static framework.• To ascertain the direction of causality among test

variables in a dynamic framework

Methodology

•A quantitative design using secondary data collected from National Statistics Office and World Bank country data base. •Reserve Bank of Malawi and Reserve Bank of South Africa confirmed the exchange rates. •Data analysis applied the ARDL bounds testing approach (Pesaran et al, 2001).

Estimation Technique: ARDL

Regression Results

Cointergration Test Results• Tests on the null hypothesis were to prove that lagged

levels of the variables involved in the error correction equations of both export and import models are jointly equal to zero (the test was based on F-statistic).

Joint Short-run Effects

Long-run Effects

Conclusion •The inclusion of the dummy variable to capture the bilateral trade agreement influence in both models was not effective. This means • that the Bilateral trade agreement has not played a significant role in mitigating trade imbalances.

Conclusion….

• The sum of the estimated price elasticities of export and import demand for Malawi and South Africa were greater than unity at (-3.014). Indicating that the Marshall - Lerner (ML) condition does holds when it comes to Malawi’s trade with South Africa. • Hence it can be concluded that in the long run a

devalued Malawian kwacha will be effective in altering the exports supply and imports demand to reduce trade deficits.

Conclusion….

•The study found that there was no causality and speed of adjustment in the short run for both models. This means • that any adjustments in trade policy in the current period will not be effective to alter trade deficits in the short run.

Conclusion….

• In the long run domestic prices and bilateral exchange rate are the main determining factors for exports between Malawi and South Africa. •Subsequently, domestic income, domestic

prices, foreign prices and bilateral exchange rate are the main determining factors for imports in the long run.

Policy Implications

• Policy makers in Malawi can use domestic prices as an instrument of increasing exports by focusing on policies that control money supply as money supply is directly linked to Consumer Price Index of Malawi.

• Exchange rate policy can also be used to reduce imports and promote export enhancement by proper adjustment of the bilateral exchange rates given that relative domestic price movements do not offset the bilateral exchange rate realignments.

Policy Implications….• Since growth in domestic income has an influence on

imports. Increase in trade deficits can be because of growth in domestic income, this is so because local consumption shifts to favor imported goods if equal competitive substitutes are not available.

• Low foreign prices influence imports by making foreign goods cheaper and attractive. Hence, policy makers can initiate enhanced production facilities aligned to the National Export Strategy (NES) to help local firms improve quality of locally produced goods to match imported goods.

Policy Implications….• Structure wise the Malawian economy is agriculture based,

as indicated in the NES a huge potential lies in the agriculture sector to earn more foreign income and help reduce trade deficits. This can be done by preventing the importation of consumer goods which can be produced and found locally and by enhancing processing and exporting of such commodities.

• The Malawi Government should open more agriculture research and technical institutes to increase the market share at local and international level. An incentive policy should be explored to enhance exports of agriculture products.

Study Limitations

• Unavailability of data: The wholesale price index would have given a better view of country prices of traded goods as it incorporates a larger basket of commodities at factory level.