THE MACROECONOMIC DRIVERS OF GROWTH IN ZAMBIA 

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CHAPTER 2 THE MACROECONOMIC DRIVERS OF GROWTH IN MALAWI 

Introduction

This chapter reviews the key macroeconomic drivers of economic growth in Malawi since the 1960s. The chapter is divided into seven sections. Section 2.2 briefly discusses the performance of key macroeconomic indicators in Malawi. Section 2.3 reviews the main economic development policies implemented in Malawi during the study period. Section 2.4 examines the main macroeconomic reforms implemented in Malawi since the 1980s in order to support the implementation of the development plans and to address structural challenges emanating during the period 1980 and 2010. Section 2.5 summarises the key macroeconomic drivers of economic growth in Malawi. Section 2.6 discusses the key policy issues or challenges that directly affected the performance of the key macroeconomic determinants. Lastly, section 2.7 provides concluding remarks.

Trends in Economic Growth

Based on available data for the period 1960-2013, the overall performance of real GDP, real GDP per capita, and population are illustrated in Figures 2.1 and 2.2. Figure 2.1 illustrates trends in real GDP and population during the study period.
The primary vertical axis represents a scale for real GDP while the secondary vertical axis is a scale representing population figures. Real GDP at 2005 United States Dollars (USD/US$) constant prices in Malawi increased from US$0.5 billion in 1960 to US$4.3 billion in 2013, growing at an average rate of 4.3% p.a. This growth rate was more than the rate of population growth that averaged 2.9% p.a., increasing from 3.5 million in 1960 to 16.4 million in 2013 (World Bank 2015c).
Figure 2.2 illustrates positive trends in terms of real GDP per capita during the same period, 1960-2013, expressed in 2005 US$ constant prices.
As illustrated in Figure 2.2, the performance of real GDP per capita was also not impressive. It rose from US$138 per capita in 1960 to US$268 per capita in 2013. This resulted in an average real GDP per capita of US$206 p.a. – that is, growing at an average rate of 1.4% p.a. between 1960 and 2013 (World Bank 2015c). The growth in real GDP per capita was, therefore, lower than the growth rate of population during the same period.

Economic Development Policies in Malawi

The nature of Malawi’s economic and development policy planning since independence in 1964 was guided by the availability of its natural resources endowment and driven largely by abundant fertile land and availability of cheap unskilled labour. The institutional framework and stage of development at independence were the two most important factors that defined the structure and content of future development policies in Malawi (Government of Malawi 1971). Though taking different approaches, the institutional framework was characterised by a mixed economic system that defined a national regulated state development planning process which was highly centralised and driven by state planning (World Bank 1966).
In 1964, the Malawian economy was dominated by agriculture; and by Malawi’s erstwhile membership of the Central African Federation that existed between 1953 and 1963 and which exported labour to work in the mines of Zambia, Zimbabwe and the South Africa (World Bank, 1966). With its having no existing mining industry of its own, the availability of abundant fertile land and cheap labour guided the development of an economic policy that was focused on Malawi’s comparative advantages in labour-intensive agricultural development (Government of Malawi 1971; World Bank 1975). As in many mixed economic systems, development planning in Malawi started from the agricultural sector where the formulation of public investment projects was geared towards supporting agricultural production and productivity. Hence, to increase agricultural production, new lands were opened in the central and northern region of the country (Government of Malawi 1971; World Bank 1966, 1975).
Figure 2.3 provides a chronology of Long-Term Plans (LTPs), Medium-Term Plans (MTPs) and Short-Term Plans (STPs) that have been implemented in Malawi since independence. The LTPs were plans that had a planning horizon of at least ten (10) years. These were comprised of the Development Plan of 1971-1980; the Development Plan of 1987-1996; and the Malawi Vision 2020 covering the period 1998-2020 (Government of Malawi, 1971, 1987, 1998). The MTPs covered a period of three (3) to five (5) years and these were implemented within the cohort of long-term plans, but not including the Medium-Term Plan of 1981-1986. These plans included the three-year rolling Development Plans implemented in the 1970s, the Medium-Term Plan of 1981-1986, the Malawi Poverty Reduction Strategy of 2002-2005, the Malawi Economic Growth Strategy of 2004-2008, and the Malawi Growth and Development Strategy I and II of 2006-2011 and 2011-2016, respectively (Government of Malawi 2002, 2004, 2006, 2011). Supporting the implementation of the LTPs and MTPs were a number of short-term reform programmes that each covered a period of fewer than three (3) years. These included the World Bank and IMF Structural Adjustment Loans and the Enhanced Structural Adjustment Facilities (World Bank 1981b, 1983, 1985, 1988, 1998, 2004). The sub-sections 2.3.1 – 2.3.7 and section 2.4 give an overview of the development policies and reforms implemented during the period 1971-2011

The Development Plan of 1971-1980

The first long-term development plan to be implemented by the government of Malawi was the Statement of Development Policies, 1971-1980 (DEVPOL80). The implementation of the development plan was done through three-year rolling development plans for the periods 1971-1974, 1974-1977, and 1977-1980 (World Bank 1975). The central objectives of the DEVPOL80 were to (i) achieve an average growth rate of 8% per annum (p.a.); (ii) increase agricultural production and productivity to raise rural incomes and national foreign exchange earnings; (iii) expand geographical distribution of economic activity by opening up new areas in the Central and Northern Regions of the country; (iv) increase local participation in economic activities via management and ownership of enterprises; and (v) reduce of the dependence on foreign assistance to cover government’s recurrent expenditure (Government of Malawi 1971).
Within the framework of the DEVPOL80, investment was identified as the key driver of growth. The second driver of growth was the opening of new land in the central and southern regions of the country so as to increase production and development. At independence, most of the developments were concentrated in the south of the country and the government’s strategy therefore aimed at increasing agricultural production and development through opening up of new land. The third driver of growth was human capital development. At independence, the availability of skilled personnel was very low and it is reported that about 33 Malawians had a university degree out of an estimated population of 4 million (World Bank 1966). The fourth driver of economic growth during the DEVPOL80 period was international trade where terms of trade, the trade balance and the current account balance were identified as important drivers of economic growth (Government of Malawi 1971).
The government of Malawi took up development planning, with little engagement of the private sector since this sector had been underdeveloped during the 1960s. According to the World Bank (2015), Gross Domestic Savings in the 1960s were negative and averaged -0.2% p.a. while economic growth averaged 4.8% p.a.: as a result, government involvement was crucial (World Bank 2015c). Parastatals were being created in areas, such as commerce and industry, agricultural production, transport and communications, tourism and social services (Government of Malawi 1971). Consequently, economic growth in the 1970s rebounded; and the economy grew at an average rate of 6.2% p.a., which was more than twice the growth rate of the population which was averaging 2.9% p.a. during the same period (World Bank 2015c). Furthermore, Gross Domestic Savings, as a share of GDP, improved from -0.2% p.a. in the 1960s to an average of 14.4% p.a. in the 1970s (World Bank 2015c).
However, towards the end of the decade, six major problems that affected the sustainability of Malawi’s future economic growth emerged. These included the slow growth and the poor quality of traditional exports from smallholder farmers; the declining terms of trade; the continued problem of population growth that increased pressure on the land available for the cultivation of export crops; the low performance of public enterprises; the increasing government budget deficit; and the slow growth in human capital development – resulting in a continued shortage of skilled labour, and reliance on expatriates (World Bank 1981a). Moreover lack of diversification of cash crops for exports, such as tobacco and tea, which accounted for 90% of all foreign exchange earnings, was coupled with the significant challenge of unpredictable export prices and price controls by the government. The low international tobacco and tea prices; taxes on export crops, such as cotton, groundnuts and tobacco; and the ad hoc or arbitrary price controls imposed on agricultural products, such as meat, poultry and dairy products, led to a growth stagnation of smallholder agriculture (World Bank 1981a).
Figure 2.4 is an illustration of the real price movements for international tobacco and tea prices that affected the Malawian economy during the period 1960-2013.
As illustrated in Figure 2.4, the international prices for tobacco and tea declined sharply in real terms between 1960 and 1970. For example, international tobacco prices fell by almost two-thirds from US$9,073 per metric ton in 1960 to US$3,500 per metric ton in 1980. Similarly, international tea prices fell by more than half – from an average of US$5.38 per kg in 1960 to US$2.54 per kg in 1980 (World Bank 2015a).
In addition, the continued growth in population as a driver of economic growth became a concern, owing to the fact that available fertile land for cultivation was sharply declining (Government of Malawi 1987). Between 1966 and 1976, population growth was estimated at 3.3% p.a., declining to 2.9% p.a. between 1977 and 1986 (Government of Malawi 2010). The rising population meant that government had to spend more on social services, such as health and education, which were already constrained: as a result, the shortage of skilled labour continued to increase in the 1970s. This shortage of skilled labour was also exacerbated by wage controls implemented by the government: this restrained increases in real wages – leading to serious adjustment problems affecting the Malawian economy (Government of Malawi 1987; World Bank 1981a). Consequently, this led to increasing government budget deficits, thus crowding out private investment. Although the government registered surpluses on its recurrent account and also modest budget deficits between 1973 and 1979, the situation changed drastically between 1979 and 1981, when the fiscal position deteriorated sharply (Government of Malawi 1987).
Figure 2.5 illustrates the co-movements between government consumption and the accumulation of Gross Domestic Savings during the period 1960-2013.
The primary vertical axis represents a scale for government consumption while the secondary vertical axis is a scale for gross domestic savings. As illustrated in Figure 2.5, government consumption, as a share of GDP, was on average over the minimal threshold of 10% of GDP. The poor performance of a number of public enterprises registering significant losses had an adverse impact on the government’s budget and necessitated increased subventions to such poor enterprises (Government of Malawi 1987; World Bank 1988). Although Gross Domestic Savings as a share of GDP improved in the 1970s and 1980s the crowding-out effect of increased government consumption started to be felt in the 1990s; when Gross Domestic Savings declined sharply from an average of 14.4% in the 1970s to 2.5% p.a. in the 1990s. At the same time government expenditures rose sharply from an average of 13.0% in 1993 to an average of 31.6% in 1994: this was the same year that Malawi held its first multiparty elections and underwent a transition from an authoritarian to a democratic state (World Bank 2015c).

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The Medium Term Plan of 1981-1986

The advent of Structural Adjustment Programmes in Malawi commenced with the development of a five-year Medium-Term Plan covering the government of Malawi’s fiscal years of 1981/82 to 1985/86. This was formulated in consultation with the World Bank and International Monetary Fund in order to tackle the structural problems and economic shocks faced by Malawi during the period 1979-1981 (Government of Malawi 1987). The major objectives of the medium-term plan were threefold: (i) to achieve a real GDP growth rate of 4.8% p.a.; (ii) to increase export diversification through the development of new smallholder and estate crops, livestock and forestry industries, and agro-businesses; and (iii) to improve the financial performance of public enterprises so as to reduce the burden on domestic borrowing and debt (World Bank 1988; Collier and Gunning 1999). The Medium-Term Plan was supported by three structural adjustment loans funded by the World Bank in June 1981, November 1983 and November 1985 (World Bank 1981b, 1983, 1985). The principal objective of these loans was to assist the government of Malawi in addressing its balance-of-payment problems. However this balance-of-payment support had conditions, one of which was related to influencing fiscal and monetary policies targeting those high fiscal deficits that caused increases in prices (inflation), and exchange rate misalignment. During the period when the structural reforms were implemented, the government of Malawi managed to contain current account deficits, which fell from 23.5% of GDP in 1979-80 to an average of 9.5% of GDP during the period of 1981-85 (World Bank 1988).
The progress made was a result of reducing external borrowing by government of commercial loans in favour of concessional loans offered by the World Bank, the African Development Bank and others; the rescheduling of debt-service payments that were due between 1981 and 1985; and the reduction of public sector consumption of merchandise imports (World Bank 1988). The Structural Adjustment Programmes also had the arduous task of exploring ways to improve output growth through trade, investment in agriculture and industry, and employment performance in sectoral institutions and government services (World Bank 1981a). The crowding-out effect of increased government expenditures was felt when the levels of investments fell sharply by almost 50% during the 1979-81 period; and when gross capital formation, as a share of GDP, fell from 30.2% of GDP in 1979 to 17.6% of GDP in 1981 (World Bank 2015c). The vulnerability of the government’s budget continued with a rapid deterioration of the government’s budget deficit that rose from 12.3% of GDP during the 1978/79 fiscal year to 16.5% of GDP in the 1980/81 fiscal year. Although the government managed to reduce the overall government budget deficit from 16.5% of GDP during the 1980/81 fiscal year to 8.3% of GDP in the 1985/86 fiscal year, this was at the expense of a significant reduction in development expenditure (Government of Malawi 1987).
The growth in government recurrent expenditures was marred by high interest payments which had increased due to borrowing at commercial interest rates. The increased borrowing was used to support recurrent expenditures and counter a sharp deterioration of the performance of public enterprises (Government of Malawi 1987; Collier and Gunning 1999). Figure 2.6 illustrates the co-movement between government consumption share in GDP and real interest rates

  1. CHAPTER 1  INTRODUCTION TO THE STUDY 
    1.1 Background to the Study
    1.2 Statement of the Problem
    1.3 Objectives and Hypotheses of the Study
    1.4 Significance of the Study
    1.5 Organisation of the Study
    CHAPTER 2 THE MACROECONOMIC DRIVERS OF GROWTH IN MALAWI 
    2.1 Introduction
    2.2 Trends in Economic Growth
    2.3 Economic Development Policies in Malawi
    2.4 Economic Reforms in Malawi
    2.5 The Macroeconomic Drivers of Growth in Malawi
    2.6 Policy Challenges affecting Economic Growth in Malawi
    2.7 Concluding Remarks
    CHAPTER 3  THE MACROECONOMIC DRIVERS OF GROWTH IN ZAMBIA 
    3.1 Introduction
    3.2 Trends in Economic Growth
    3.3 Economic Development Policies and Reforms in Zambia
    3.4 Economic Reforms in Zambia
    3.5 The Macroeconomic Drivers of Growth in Zambia
    3.6 Policy Challenges affecting Economic Growth in Zambia
    3.7 Conclusion
    CHAPTER 4  THE MACROECONOMIC DRIVERS OF GROWTH IN SOUTH AFRICA 
    4.1 Introduction
    4.2 Trends in Economic Growth
    4.3 Economic Development Policies and Reforms in South Africa
    4.4 The Macroeconomic Drivers of Growth in South Africa
    4.5 Policy Challenges affecting Economic Growth in South Africa
    4.6 Conclusion
    CHAPTER 5  THEORETICAL AND EMPIRICAL LITERATURE REVIEW 
    5.1 Introduction
    5.2 Theories of Economic Growth
    5.3 Empirical Literature Review
    5.4 Conclusion
    CHAPTER 6  EMPIRICAL MODEL SPECIFICATION AND ESTIMATION TECHNIQUES 
    6.1 Introduction
    6.2 Theoretical Foundations of the Model Used in the Study
    6.3 Empirical Model Specification
    6.4 Estimation Techniques
    6.5 Post-Estimation Diagnostic Tests .
    6.6 Data Sources and Definition of Variables
    6.7 Conclusion
    CHAPTER 7  ECONOMETRIC ANALYSIS AND EMPIRICAL FINDINGS
    7.1 Introduction
    7.2 Econometric Analysis and Empirical Results
    7.3 ARDL-Based Empirical Analysis of Model 1
    7.4 ARDL-Based Empirical Analysis of Model 2
    7.5 Conclusion
    CHAPTER 8 CONCLUSION AND POLICY IMPLICATIONS 
    8.1 Introduction
    8.2 Summary of the Study
    8.3 Main Empirical Findings of the Study
    8.4 Conclusions and Policy Recommendations
    8.5 Limitations of the Study and Areas for Further Research
    BIBLIOGRAPHY ..
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