MILLENNIUM CHALLENGE ACCOUNT ‐ MALAWI
CA Summary ÎContext for MCCs Engagement ÎWhat Constrains Economic Growth? Geography Human Capital Infrastructure – Roads, energy and water Finance Macro and Micro risks Market failures
¾Summary of Major Constraints
Low and stagnant agricultural yields, overdependence on rain fed farming and low uptake of improved farming Degradation of water resources; inadequate promotion of hygiene and sanitation
Malawi Growth and Development Strategy
Inadequate and unreliable energy supply
Priority Reforms
By Sector
Public Investments
Favourable macroeconomic Conditions; inefficient High costs of doing business; Poor Infrastructure; Poor Public/private; Cooperation ; Weaknesses in Human Resource Base; HIV/AIDS Prevalence; High levels of corruption
MPRSP, MEGS
Priority Interventions
Challenges & Constraints
• Control of Corruption •Regulatory Quality •Public Sector Reforms •Fiscal Policy •etc.
By Aid Modality
• Agriculture and Food Security • Irrigation and Water Development •Transport Infrastructure Development •Energy Generation and Supply •Integrated Rural Development •Prevention and Management of Nutrition Disorders, HIV and AIDS Donor Support=45% of National Budget
Long Term Poverty Reduction and Attainment of MDGs
Medium Term Achievement of Sustainable Economic Growth and Wealth Creation
Long Term Decrease Aid Dependency and attainment of Vision 2020
Growth diagnostics What constrains private investments?
Low returns to economic activity
Low social return
Poor geography
Low appropriability
Low human capital
Bad infrastructure
High cost of finance
Govt. failures
Micro risks
Macro risks
Corruption, Financial, taxes, monetary, fiscal property rights instability
Bad Intl. finance
Market failures
Self‐ discovery
Fiscal rigidity
Coordination externalities
Bad local finance
Low savings
Poor intermediation
CONSTRAINTS TO ECONOMIC GROWTH : GEOGRAPHY
Malawi Constraints Analysis
Geography • Weather has impacted maize output
Maize
MMI (Rainfall index)
2007
2006
2005
30
2004
0
2003
50
2002
500
2001
70
2000
1000
1999
90
1998
1500
1997
110
1996
2000
1995
130
1994
2500
1993
150
1992
3000
1991
170
1990
3500
1989
Maize, Thousands tonnes
– Contributes to low maize output • Droughts are common (1992, 1994, 1997, 2002, 2005) – Farmers cannot afford irrigation and feel full impact of weather variability
Drought Source: Ministry of Agriculture, World Bank
Geography • Major impediment to economic growth – Rainfall is therefore a major driver of maize yields and subsequently of economic growth 15% 10% 5% 0% -5% -10%
Trend + Population growth
Rainfall (MMI)
Residual
GDP/capita growth
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
1968
1966
1964
-15%
Source: WDI, World Bank
Geography
ÎEven controlling for MMI, GDP/capita growth volatility is high compared to other countries in the region Standard Deviation of GDP/capita growth, 1989-2006 Malawi Madagascar Mozambique Malawi (controlling for MMI) Rwanda (excl. 1994-95) Zambia Burundi Lesotho Botswana Namibia South Africa Tanzania Kenya Benin Uganda Swaziland Ghana 0
1
2
3
4
5
6
7
Source: WDI
Geography Î Low maize output and land pressure ÎBy African standards, Malawi is a densely populated country. ÎOne of the lowest urbanization levels in the world: 83% of population live in rural areas. As result: ÎArable land per rural inhabitant has declined substantially. Issues of land distribution must be addressed ÎLand is overused, which depresses yields further: soil fertility declining at a rate of 60kg of NPK per ha per year. (Source: GoM and WB “Malawi PVA”)
Arable land, ha/rural inhabitant, 2005 Zambia Mozambique Rwanda Uganda Tanzania South Africa Botswana Kenya Malawi Burundi 0
0.2
0.4
0.6
0.8
Source: WDI, author’s calculations
Geography ÎMalawi landlocked ‐ so are many other countries! ÎDistance to nearest port <900km and transport costs should be around 20% according to the regression line ÎDistance explains only a third of high transport costs All landlocked countries
Sub Saharan Africa 0.6
0.6
Malawi
0.5
Transport costs / exports
Transport costs / exports
Malawi
0.4 0.3 0.2 0.1 R² = 0.185
0.0 0
1000 Distance to port (km)
2000
0.5 0.4
?
0.3 0.2 0.1
R² = 0.277
0.0 0
1000 Distance to port (km)
2000
Geography ÎGeography only explains part of the story ÎMalawi is landlocked and rainfall is an important driver of growth ÎLand is scarce which and lends itself to overuse resulting in loss of soil fertility ÎBut neither of these factors can explain the high variability of GDP, nor does Malawi being a landlocked country explain the high cost of international transport
CONSTRAINTS TO ECONOMIC GROWTH : INFRASTRUCTURE
Malawi Constraints Analysis
Transport : Roads ÎDo bad or congested roads constrain growth? ÎNo. Malawi’s road density is good by regional standards though still below that of a number of countries in the region Road density (km of road per 100 sq km of land area)
Road usage South Africa
Rwanda
Kenya
Uganda
Uganda
South Africa
Tanzania
Zimbabwe
Mozambique
Malawi
Rwanda
Zambia
Zambia
Kenya
Zimbabwe
Tanzania
Malawi
Botswana Mozambique
0 0 20 40 All roads Paved roads
60
50
100
150
Vehicles/km of paved road People/km of paved road
200
Roads ÎQuality of roads improving Î... although over 30% of unpaved roads are still in poor condition Æ hinders access for agricultural buyers, microfinance institutions, tourism, etc Paved roads 2007 2006 0%
20%
40%
60%
80%
100%
60%
80%
100%
60% Poor
80%
100% Source: MEPD AER 2008
Unpaved roads 2007 2006 0%
20%
40% All roads
2007 2006 0%
20%
40% Good
Fair
Access to ports & railway ÎDoes access to ports through the railway constrain economic growth? ÎLet’s look at the state of the infrastructure. ÎThere has been a long delay in rehabilitating the 77 km stretch to Cuamba on the Mozambique side, severely impacting transit times. ÎNo rail infrastructure to Beira ‐ currently accessible only by road – more expensive than needed. ÎRail infrastructure in Malawi is poor – in need of major rehabilitation. “Delays in repairing the Blantyre‐Lilongwe rail line (was cut in 2003) compared badly to the swift repair of the road link.”
ÎState of rail infrastructure is poor.
Transport Costs State of rail infrastructure reduces transportation options and drives costs up:
Fuel imports by route (million litres)
300 250
Î Shipping by rail through Nacala cheap, but unreliable
200
Î TERA (2005) estimates:
150
Lilongwe‐Beira: 948 km. 3 days transit by road
Lilongwe‐Nacala: 989 km. 10 days transit by rail (77km to Cuamba @15km/h)
100
Nacala: weeks
$4000
12
Beira: weeks
$4800
12
Dar‐es‐Salaam: $6000
6‐8 weeks
Î Govt. recognizes: “[...] logistical and capacity problems with the Nacala rail line” results in most gasoline being imported through other routes. (Source: MEPD AER 2008)
Nacala
Beira
Dar-es-Salaam
2007
2006
2005
2004
2003
2002
2001
0
2000
Î Large retail business: “If a delivery is time‐ critical, I route it through Dar.” Cost and duration of import from India:
50
Mbeya+Gweru
Source: MEPD AER 2008
Transport costs • As a result of high transport costs Malawi not well‐integrated into the world economy
Transport costs / value of exports Malawi Rwanda Chad Mali Uganda
– Large wedge between domestic and international prices – Inefficiencies in the logistics chain
Burundi Niger Burkina Faso CAF Zambia Botswana Zimbabwe Lesotho Swaziland 0%
20%
40%
60%
Transport costs • Wedge between domestic and international prices can be explained by : – Few options for reliable international transport – Imbalance in the value, timing and quantity, of imports and exports • Tobacco, cotton, sugar, tea and coffee – low price per kg ‐ high shipping cost per value of kg • Exports and imports occur at different times and sometimes result in empty back haulage (tobacco, fertiliser) • Imports 2x the value of exports
Transport Costs Only exports that are not time‐ and logistics‐critical survive Î Tobacco, tea, sugar, cotton well‐adapted to survive Î Flower exports a failure, due to poor logistics (air transportation)
Î Problems with transport logistics contribute to limited response to AGOA Selected textiles exports
1500 1250 1000 750 500 250
20
Million constant 2000 US$
1750
16 12 8 4
Malaiwi's export failures
Cotton Fabrics
Unknitted Apparel
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
0
1994
0
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Thousands Constant 2000 US$
Exports of flowers and live trees
Knitted Apparel
Source: GoM National Accounts
Transport Costs Import substitution dominates manufacturing sector ÎNon‐agriculture manufacturing dominated by import‐ substituting industries that are insulated from international competition by high transportation costs: Only 14% of manufactured output is exported (MEPD AER 2008)
Transport Costs • Due to the state of transport infrastructure, options are limited and costs are high. • Only exports that are not time and logistics critical survive • As a result Malawi has a stagnant export basket • Conclusion : Transport infrastructure is a constraint.
CONSTRAINTS TO ECONOMIC GROWTH : Impact of transport costs, land pressure and rainfall on food security and agricultural diversification
Malawi Constraints Analysis
Effects of geography and poor infrastructure on food security
• Yields are stagnant
– Low penetration of hybrid varieties of maize Maize yield, tonnes/ha – Pressure on land reduces soil fertility South Africa – Underuse of fertilizer, irrigation and Ethiopia other inputs including the hand‐held hoe Namibia Zambia translate into low yields Kenya
Maize yield kg/ha, 5-yr moving average
Tanzania
5000
Uganda Malawi
4000
Burundi
3000
Mozambique Rwanda
2000
Lesotho
1000
Zimbabwe Swaziland
Malawi
South Africa
World
2005
2003
2001
1999
1997
1995
1993
1991
1989
1987
1985
1983
1981
1979
1977
1975
1973
1971
1969
1967
1965
1963
0
World Africa 0 2006
1
2
3
Average 2000-06
4
Source: FAOSTAT
Effects on Food Security
Good h arvest
Output of traditional exports affected by droughts
Dr o ug ht
P X < P
Maize exports if ct=0 W
Welfare if ct=0
Consumption Output
Consumption = Output Welfare if ct=0 W
P
W
P
Subsistence
Other goods
Food security = low maize productivity +agricultural exports +high cost of trade Î Forex receipts from tobacco fall when needed most Î Imports are expensive because of high cost of trade (ct) Î Little maize exports when the country has good harvest because of high cost of trade (ct) Î Results in large price swings which in turn creates a disincentive to diversify Î Low maize productivity pushes farmers into corner solution during drought years
W
M P P >
Maize
Maize Little maize exports with high ct
Summary on food security and agricultural diversification • Due to the high cost of transportation combined with geographical factors as well as little use of inputs the farmers find themselves in a corner situation • There is low demand during times of good harvests and there are large surges of demand in times of poor harvests leading to high price volatilities • Small landholdings result in overuse and precipitates loss of soil fertility. Cash crop production is also limited • Price volatility creates a disincentive to diversify‐ the farmer cannot guarantee household access to maize without a significant cash crop production
Power ÎDoes quality and quantity of supply constrain growth? ÎESCOM loaded at full capacity ÎReintroduction of Tedzani will remove immediate pressure, but not for long. ÎPeak demand reaching capacity = power outages 340 320
Installed capacity
300
Point where peak demand Exceeds installed capacity
MW
280 260
Peak demand
240 220
Available capacity
200 180 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Installed capacity
Available capacity
Peak Demand
Source: MEPD AER 2006 & 2008
Power Power outages and large scale projects Î ESCOM couldn’t guarantee QoS to uranium mines Æ Paladin imported diesel generators: much more expensive energy increased diesel imports create additional pressure on international transport. Î Heavy sands extraction never materialized because of the same inability to guarantee QoS Î BAT quoted power outages as one of the reason for their departure from Malawi: Each power outage = 50,000 cigarettes thrown away Î Dairy industry can’t provide consistent quality of milk (outages preclude maintaining constant temperature) Î Plastics: power outage = expensive cleaning of equipment.
Power • Power shortages – outages = losses – Median losses from power outages: 20% without a generator vs 5% with generator Median sales losses due to power outages
% of firms with generator
Malawi
Kenya
Tanzania
Tanzania
Madagascar
Malawi
Kenya
Zambia
Zambia
Uganda
Uganda
Madagascar
South Africa
South Africa
SSA
SSA
Low income
Low income 0%
2%
4%
6%
8% 10%
0%
20%
40%
60%
Source: Malawi ICA 2006
80%
Power • State of power infrastructure poor, impacting 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) • It has led to the shrinking of manufacturing output • Yes, power is a constraint to growth.
WATER AND IRRIGATION
Malawi Constraints Analysis
Water and Irrigation • Frequent Droughts and Floods – Droughts are endemic to Malawi and have had devastating effects on crop and livestock production. Floods occur in the south, particularly in the lower shire areas of Lake Malawi, Lake Malombe and Lake Chilwa. Floods also occur in the lower reaches of the Songwe River in the Northern Region. – The main problems of flooding are damage of agricultural lands and crop damage. Droughts, floods and rainfall variability also assert risk‐averse behaviour by farmers and other investors in agricultural industries and services, slowing the diversification of economic activities.
Water and Irrigation • Degradation of upper catchments – De‐vegetation, erosion and sedimentation are Malawi’s most serious environmental threat, affecting energy generation and water supply to homes industries. – 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).
Water and irrigation • Coverage of water supply and sanitation – Almost 50 percent of all illnesses in Malawi are water‐related, such as cholera and typhoid, a problem exacerbated by the rapid spread of HIV/AIDS – The chemical contamination of stream water in urban and peri – urban areas is becoming a common problem due to the improper disposal of industrial waste. – Europhication of water bodies and the growth of the water weeds including water hyacinth threaten fish resources. – Today 74.2% Malawians have access to improved water supply and the country is on course to attaining the water MDG – As for urban areas of Lilongwe and Blantyre there is significant challenge in maintaining the ageing water system as the urban population increases. Water shortages are very common especially in Blantyre and seriously affects business operations
Water and irrigation • Despite abundance of water resources irrigation development has been limited • Only 27% of the irrigation potential has been exploited
Conclusion:Water and irrigation are a constraint • Malawi is on course to attaining the water MDG by 2015 • The country experiences serious droughts which results in agricultural land and crop damage • Reinforce farmers’ aversion to risk‐taking including diversification • Malawi suffers from degradation of upper catchments thereby affecting other economic activities including power generation and Pumping capacity of Blantyre Water Board • Lilongwe and Blantyre Water Boards have the problem of ageing water systems • Malawi is not exploiting its irrigation potential
HUMAN CAPITAL
Malawi Constraints Analysis
Primary Education • Completion rates for the first four years of primary school are 44.2% (lowest of comparator countries). • Primary education is accompanied by higher cash‐crop income Tobacco income against years of primary education
Source: IHS 2005, authors calculations
Tertiary Education Tertiary enrollment is lowest of comparators (0.4% gross enrollment) • Annual expenditure for urban university graduates is 4x secondary school leavers • Malawians make great efforts to study in overseas universities Ö High returns to tertiary education •
Annual expenditure for each education level
Source: IHS 2005, authors calculations
Skills • ICA: shortage of skills is quoted as 8th by businesses • But absence of skills prevents existence of high‐skill businesses • High number of foreign workers in key management/ technical posts in firms and NGOs • High proportion of businesses owned or managed by foreigners in formal sector.
Macroeconomic instability Access to financing Cost of financing Electricity Tax rates Crime, theft and disorder Transportation Skills and Education of Available … Corruption Tax administration Access to Land Other Anti-competitive or informal practices Political stability Regulatory Policy Uncertainty Telecommunications Customs and Trade Regulations Business Licensing and Operating … Legal framework / Conflict resolution Labor Regulations Environmental regulations 0%
20%
40%
60%
80%
Is Human Capital a constraint? •
Yes: Low primary school completion rates Highly contracted tertiary education High returns to primary education in cash cropping High returns to tertiary education in urban employment Shortage of highly skilled workers There is a mismatch between school and tertiary institutions curricula and what is required by most businesses – Technical training institutions not properly functioning – – – – – –
•
Government/ donors are gradually improving primary and secondary education – School building – New curriculum – Expansion of Teacher Training colleges
•
Transformation of education is crucial but slow and expensive
Finance Is access to capital a constraint? Î Yes:
High interest rates High spreads High overheads (little pressure to cut costs) Small financial depth (but 1980s‐90s reduction in private credit due to reduction in investment opportunities, not vice‐versa) Banking highly profitable (ROA and ROE) Access is an issue Venture capital not available
Î All point to poor financial intermediation But high overheads are at least partly explained by small market size
Î But things are gradually changing: Recent financial innovations: FMB’s Makwacha cards, increased ATM networks Spreads decreasing (albeit not due to competition‐induced cost‐cutting) At least one bank considers raising deposit rates
Macroeconomic risks Summary Î Fiscal stance much improved, but credibility of recent advances has yet to be established. Î Inflation is under control Î Overvalued exchange rate hurts exporters and is maintained in a fashion that also penalizes importers
Macroeconomic instability Access to financing Cost of financing Electricity Tax rates Crime, theft and disorder Transportation Skills and Education of Available … Corruption Tax administration Access to Land Other Anti-competitive or informal practices Political stability Regulatory Policy Uncertainty Telecommunications Customs and Trade Regulations Business Licensing and Operating … Legal framework / Conflict resolution Labor Regulations Environmental regulations 0%
20%
40%
60%
80%
Source: ICA
Micro risks: conclusion ÎOverall business climate has tremendously improved in recent years. Nevertheless Malawi doing less than its neighbors to provide a favorable business climate to investors ÎGiven non‐administrative barriers to trade and coupled with the high administrative burden on exporters it is extremely unhelpful in promoting an export‐oriented economy
SELF‐DISCOVERY
Malawi Growth Diagnostics
Export sophistication Î Export basket still highly concentrated Î ... although there is some improvement once tobacco is factored out
Hirschman‐Hirfindahl index of export concentration 7000
Botswana
6000
Malawi
5000
Mozambique
4000
Rwanda
3000
Zambia
2000
Ghana
1000
Namibia
1990 1991 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
0
Uganda Kenya
HHI Index 0
1000
2000 2006
3000 2002
4000 1997
5000
6000
HHI Index w/o tobacco
7000
Source: UN Comtrade, author’s calculations
Export sophistication • Malawi’s placement 32000
EXPY 2003, $
16000 8000 4000 2000 1000 500
1000
2000
4000
8000
16000
32000
64000
GDP/capita 2003, PPP$
Source: Hausmann & Rodrik (2005)
Exports v GDP ÎA stagnant EXPY, stagnant GDP Î Export sophistication is stagnating although tobacco hides some recent progress Î Zambia and Mozambique: rapid structural transformation, higher growth
EXPY and GDP/capita growth Mozambique
4500
Malawi's EXPY dynamics
4000
Zambia
3500
Malawi
3000
Kenya
2500
Uganda 0%
20%
40%
60%
GDP/capita growth, 2002 to 2006 EXPY growth, 2002 to 2006
1990 1991 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
2000
EXPY
EXPY excluding tobacco
Source: UN Comtrade database, authors calculations
Back to Food Security • Addressing food security is key in unlocking Malawi’s potential to diversify and transform its productive and export base – A failed harvest removes the principal source of consumption for rural households – Increased demand on the formal market during lean years greatly raises food prices making it harder to substitute lost subsistence production – Capacity to replace lost production through imports is limited by forex earnings
Food Security Three components to food security Æ three long term solutions + one short‐ term fix: 1. Increase and stabilize yields to the point where output doesn’t fall below subsistence levels even during bad years. 2. Increase and diversify Malawi’s exports. 3. Lower barriers to trade (transportation costs in particular). 4. Insure yourself against droughts on international financial markets (e.g. call option for maize). Government focused on (1) at the expense of (2) and overlooking (3). (4) is a short‐term and expensive fix that does not address the root causes of the problem.
Food Security Different solutions, different tools 1.
Increase and stabilize food production:
2.
Irrigation Fertilizer Feeder roads Appreciated currency (to lower cost of fertilizer program) Move into less volatile crops (cassava) Subsidized rural credit Avoiding creating market distortions
Increase and diversify Malawi’s export industries: Energy, urban water (Blantyre) Depreciated currency (incentivize tradable sector) Favorable business climate (severance pay)
3.
Integrate Malawi into world economy: Increase throughput and reliability of Nacala and Beira corridors Simplify import/export procedures Export diversification will help automatically
Different solutions Competing Priorities? ÎExchange rate: appreciated (1) vs. depreciated (2) ÎInfrastructure: irrigation (1) vs. energy (2) ÎTransportation: feeder roads (1) vs. international corridors (3) What should Malawi prioritize from the point of view of long‐term growth? ¾ In addressing these factors it is important to consider the following:
70 60
Agriculture/GDP, %
50 40 30 20 10 0 2500 12500 GDP/capita 2004, PPP$
30
500
800
25
600
20
35
300
30
200
25 20
10
0
15
2003
100
2001
15
1999
0
40
400
1997
200
50 45
1995
400
62500
Vietnam
1993
1000
600
1991
1200
35
1989
China
1987
1400
500
1985
100
1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003
Î Malawi still needs to take advantage of the current commodity boom, however for accelerated growth , agriculture offers little prospects after the boom; for instance Î It is rare to see a rich and agricultural country Î Long term growth ‐ move into goods with higher value added or have high growth potential. Î World maize yields increased 2.5 times in 40 years. Î China’s GDP/capital quintupled in 20. Î Vietnam only took 15 years to increase GDP/capita 2.5 times. Î How? Structural transformation away from agriculture.
Solutions
GDP/capita PPP$
GDP/capita PPP$
Agriculture/GDP, % (right axis)
Agriculture/GDP, % (right axis)
MCA Constraints Analysis
Summary of Findings
15 March 2009
53 53
Conclusion Binding constraints: Finance, International Corridors and Feeder Roads, Power, Human Capital, and distortions in agricultural value chains. Secondary constraints: overvalued exchange rate, administrative barriers to trade, and regular changes to trade rules
Stakeholder Consultations
• Q&A Session The Project Coordinator Millennium Challenge Account – Malawi Ministry of Finance LILONGWE