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Constraints to growth in Malawi (English)

This paper applies a growth diagnostics approach to identify the most binding constraints to private-sector growth in Malawi - a small, landlocked country in Southern Africa with one of the lowest per capita incomes in the world. The approach aims to identify the constraints (in terms of public policy, implementation, and investments) most binding on marginal investment, and therefore whose relaxation would have the largest impact on growth through the investment channel. The authors find that growth in Malawi has been primarily driven by the domestic multiplier effect from export revenues. The multiplier effect is particularly pronounced due to the high number of smallholder farmers, which produce Malawi’s main export crop, tobacco, and consequently results in the widespread and rapid transmission of agricultural export income. Furthermore, despite changes in the structure of agricultural production from estate to smallholder farming and liberalization of prices and finance, a longstanding relationship persists between exports in real domestic currency and overall gross domestic product. This central role of exports in creating domestic demand highlights the importance of the real exchange rate in Malawi’s growth story, which directly increases the strength of the export multiplier. The most pressing constraint to growth in Malawi continues to be the regime of exchange rate management. Despite good progress, there is compelling evidence that the rate is still substantially overvalued. Furthermore, it is also likely that the inflow of foreign aid - in excess of 50 percent of exports -contributes to the overvaluation through its large component of recurrent expenditures.


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    Hanmer,Lucia C., Lea,Nicholas John

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    Policy Research Working Paper

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  • Doc Name

    Constraints to growth in Malawi

  • Keywords

    real exchange rate;rate of return on capital;Poverty and Vulnerability Assessment;gross fixed capital formation;public finance;millennium development goal;price elasticity of supply;imports of investment good;export revenue;aid inflow;constraints to growth;effect of aid;nominal exchange rate;current account deficit;Exchange Rates;domestic price;maize harvest;errors and omission;terms of trade;real interest rate;dynamics of growth;Tobacco Control;growth in agriculture;total factor productivity;foreign exchange;multiplier effect;rise and fall;south african rand;interest rate parity;good transport infrastructure;exchange rate level;exchange rate management;cost of finance;Foreign Exchange Reserve;purchasing power parity;domestic financial market;cost of capital;vulnerability to drought;growth and development;state marketing board;application of fertilizer;per capita term;foreign exchange income;behavior of investment;adverse price shocks;equilibrium exchange rate;amount of tobacco;domestic agriculture sector;cash crop income;aid in kind;standard of living;gross domestic product;nominal lending rate;aid per capita;liberalization of prices;world market price;cost of import;remittances from migrant;engine of growth;composition of expenditure;number of banks;balance of payment;export income;domestic export;export crop;export sector;tobacco production;smallholder production;real export;explanatory power;smallholder agriculture;foreign currency;dollar price;export growth;fiscal discipline;import demand;binding constraint;domestic currencies;government expenditure;export price;informal exchange;net effect;human capital;merchandise export;aggregate demand;export volume;domestic value;world demand;export product;domestic economy;trade deficit;smallholder sector;supply response;tobacco crop;rural transportation infrastructure;complementary factor;domestic debt;Civil War;agricultural production;private investment;landlocked country;public policy;external balance;external shock;import price;marginal investment;financial service;dollar term;small holder;consumer import;marginal propensity;methodological problems;maize production;consumption demand;trade balance;shadow price;aid spending;fixed regime;



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Hanmer,Lucia C. Lea,Nicholas John

Constraints to growth in Malawi (English). Policy Research working paper ; no. WPS 5097 Washington, D.C. : World Bank Group.