malawi case study political economy determinants of economic growth

Malawi Case StudyPolitical Economy Determinants

of Economic Growth

Effective States for Inclusive DevelopmentSeminar – Cape Town

28th April 2014

Jonathan [email protected]

mailto:[email protected]

Objective

• To present findings of Malawi Case Study

Overview

1. Introduction

2. Malawi’s Growth and Structural Transformation Experience

3. Political History

4. Evolution of Deals Space and Situation Today

5. Political Dynamics of Growth Acceleration

6. Political Dynamics of Growth Maintenance

7. Conclusion

Introduction

• Study of institutions & growth• Why do growth-impeding institutions persist in many LDCs• Inadequate understanding of political dynamics of economic growth• 3 unanswered questions:

a) some countries initiate episodes of rapid growth while others suffer extended stagnationb) some countries sustain growth episodes while other episodes revert to stagnation or collapse? c) what characterises feedback loops between growth & institutions?

• Malawi case study to contribute to literature on political determinants of growth• Application of conceptual framework developed by Sen (2012) & Pritchett/Werker (2012)• Qualitative assessment of political factors that explain past & current growth processes in Malawi• Analyses roles played by product space, structure of rents around product space & incentives of

political & business elite in Malawi’s growth regimes & structural transformation process since 1954

Overview

1. Introduction






7. Conclusion

3 Structural Growth Breaks since 1955

Source: Penn World tables 7.1 – PPP Converted GDP Per Capita (Chain Series), at 2005 constant prices

Malawi’s GDP per Capita (1955-2010), US dollar prices, and breaks filtered from 4 possible Bai-Perron Breaks

$0

$100

$200

$300

$400

$500

$600

$700

$800

$9004th Growth

Regime3rd Growth

Regime1st Growth

Regime2nd Growth

Regime

First two growth regimes: stagnation then acceleration

• 1954 - 1964: Stagnation• Final years of British Colonial Rule• Monetary and Fiscal Policy ill-suited to Malawi. E.g. British Pound too strong• Infrastructure expenditure focused on South Rhodesia (Zimbabwe)

• 1965 – 1978: Growth Acceleration• Hastings Banda’s dualistic development strategy

• Government intervention: • construction of hospitals, capital city, schools, universities, roads etc• 2 Government Companies

• ADMARC to buy agricultural products• Press Holdings; involved in many sectors eg retailing, wholesaling, tobacco, banking, fuel,

property, transport, pharmaceuticals, estate farming. Accounted for 1/3 of GDP at peak.• Strategic Partners: targeted private sector investment; i.e. one ‘winner’ (foreign companies)

picked in each key sectors such as tobacco, sugar, tea, cotton, textiles, beverages etc

19601962

19641966

19681970

19721974

19761978

19801982

19841986

19881990

19921994

19961998

20002002

20042006

20082010

10

15

20

25

30

35

$0

$100

$200

$300

$400

$500

$600

$700

$800

$900

Export (% of GDP) GDP

Export-led growth up to 1978…

Source: Penn World tables- PPP Converted GDP per Capita (Chain Series), at 2005 constant prices and World Bank World Development Indicators

Percentage of Exports and GDP per Capita, US Dollar Prices

19651967

19691971

19731975

19771979

19811983

19851987

19891991

19931995

19971999

20012003

20052007

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

…and economic complexity increased, before collapsing

Source: The Observatory of Economic Complexity. Dotted lines represent Malawi’s growth breaks. Note: 2.5 represents maximum level of complexity & -2.5 the minimum.

Economic Complexity Index, Malawi

1979 – 2002: Decline

• External shocks triggered decline • Oil price shock; collapse of commodity prices; structural adjustment programmes

• Exposed underlying structural constraints that gradually developed since 1960s• Weak & deteriorating state capacity: emergence of predatory state• Exclusion of majority of population from productive economy due to estate agriculture • Weak market structures: monopolies & oligopolies• Aid & debt dependence for social welfare

• Multi-party democracy from 1994 further weakened civil service due to less-centralised corruption at top, political appointments & poor wages

• Spread of HIV/AIDS & fiscal ill-discipline reduced capacity even further • Debt undermined spending on public services & infrastructure • Inability to deal with rain failures, so droughts were common• Foreign investment, manufacturing, job creation & food security all undermined• Private investment slowed: lending rate increased from 17% in 1980 to 56% in 2001

2003 – to date: Another Attempt at Growth Acceleration

• New President centralised & controlled rent-seeking behaviour, got macroeconomic policy right & opened up to private sector

• Change in government served as conducive basis for growth factors to kick in from 2004• Return of development partners following the ousting of previous Govt• Debt relief: total aid inflows equalled 93% of GDP in 2006 & 50% in 2007• Large fertiliser & seed subsidy programme which created maize surplus for 1st time since 1980s• Health sector improvements• Good rains & tobacco boom• Fixed exchange rate above market equilibrium which incentivised consumption & imports

• Caused overvalued exchange rate, structural trade deficit & aid cuts; led to forex crisis in 2011

In conclusion Malawi has failed to structurally transform in past 50 years: remains highly dependent on export of tobacco (58% in 2010); productive economy still in infancy

Overview

1. Introduction






7. Conclusion

Independence from colonisation in 1964

• 1964 – 1994: Malawi Congress Party led by Hastings Banda• Created republic & one-party state in 1966• Opposition leaders & dissenters imprisoned, detained or driven into exile• In 1980s succession politics emerged, with John Tembo, Banda’s deputy, strengthening his position• State capacity declined from 1980s due to succession politics & end of active development strategy• Poverty, drought, economic crisis & limited freedoms led to first multi-party elections in 1994

• 1994 – 2004: United Democratic Front led by Bakili Muluzi• Former Minister in MCP but had broken away to establish United Democratic Front• Backed by politicians interested in short-term gains: used state resources, aid & development

process to stay in power & get rich• Unlike Banda, did not balance development & personal enrichment

Dominant party settlement; with big boss competition

• 2004 – 2012: Democratic Progressive Party led by Bingu wa Mutharika• After failing to get 3rd term, Muluzi chose Mutharika as successor• Once elected, broke away from Muluzi to establish new party • Prioritised food security; opened to private sector• Balanced patronage & short-term growth strategy• Cut links with private sector in 2nd term & lost interest in development; focused on succession

• 2012 to date: People’s Party led by Joyce Banda• Vice President when Mutharika died in 2011; had fallen out with Mutharika in 2010• Only had 1 supporting MP; prior to becoming President but then numerous MPs joined her party• Some signs of developmental strategy, but priority has been re-election in 2014• Accused of stealing from state to finance political campaign, as done by 3 preceding Presidents

• May 2014 – elections• Over 30 parties, but 4 serious contenders: MCP & 3 parties that emerged from it• Element of competitive clientelist: leaders manage system of patronage & compete for clients• But no real competition in regime changes: new governments came about by accident• So its a dominant party settlement with neopatrimonal logic that drives behaviour of ruling elite• No strong ideology: though strategists point to Hastings Banda’s model as optimal one

Overview

1. Introduction






7. Conclusion

Hastings Banda – patronage & clientelism

• Hastings Banda • Used patronage to promote loyalty; clients dependent on his largesse (Harrigan, 2001)• His clientelism was conservative, capitalist, support-the-strong development policy• Provided benefits like land, credit & training to ‘strategic winners’, based on unfulfilled expectation

that this would create middle class that would develop nation• Closed but orderly deals; became disorderly in 1980s/early 1990s• Lack of freedoms & unsustainable macro & micro economic policies led to multi-party democracy• Lack of openness created negative feedback loop on rent space

• Bakili Muluzi • Rent space more disorderly but more open – particularly for private traders (importers)• Rent space also opened up for smallholder farmers, though negligible rents• Deterioration of rent space caused by:

• Muluzi’s clients being largely importers• Dismantling of Press Holdings (Hastings Banda’s primary source of rent)• Lack of growth & development strategy; poor macroeconomic policies• Loss of control over corruption & rent-seeking activities by government officials

Muluzi, Mutharika & Joyce Banda all prioritised clientelism

• Bingu wa Mutharika• Deals space more orderly & to certain extent more open• Centralised rent-seeking activities at top of government such that contracts, though corrupt, better

supervised & controlled• Rampant corruption & creation of rents for patronage purposes • Companies expected to perform against contracts, unlike in Muluzi’s time, in return for long term

relationship with President who they funded• In 2nd term deals space closed (as Bingu focused on fewer clients; e.g. Mota-Engil, Mully Brothers &

Chinese); & less orderly as caused forex crisis• Joyce Banda

• Following similar approach: initially opened up & improved orderliness of deals space; but disorderliness increased as targeted Govt budget to finance re-election campaign

• Established parallel structures outside of Ministries to meet political goals• Perception of weak control over government rent-seeking behaviour• Maintained some of Mutharika’s clients, e.g. mining, Mota-Engil, Chinese• Wants to follow Hastings Banda’s approach of strategic private sector players in each sector

Mapping of Market Rent Matrix todayRentiers- Tobacco (54% of exports), 5 main buyers- Mining (12% of exports)- Tea (6% of exports), 4 main producers- Tourism (3% of exports), 2 main players- Coffee (1% of exports), a few players- Cotton (2% of exports), 14 ginners

Magicians- Beverages (juices), 1 new company, social enterprise- Some small tobacco buyers- Some 5,000 smallholder tea producers- Numerous small tourism players- Some exporters of groundnuts, rice, pigeon peas, paprika etc & some

processing companies who are mainly domestic oriented but also export

Powerbrokers- Manufacturing (10% of exports, 8% of GDP)- Farm Inputs (seed, fertiliser) (based on links to government, dependant on

government procurement)- Beverages (beer, spirits), 1 main company- Dairy (4 main companies)- Packaging & Plastics (5 main companies)- Wheat & maize processing (3 main companies)- Sugar (4% of exports), 1 main processor- Oil Seeds (8% of exports), 5 major players- Electricity (1% of GDP), 1 state company- Construction (5% of GDP)- Financial Services (7% of GDP, 12 commercial banks but 3 largest banks own

approximately 65% of total bank assets & profit margins above 50%)- Telecommunications (4% of GDP)- Large retailers (supermarkets) (14% of GDP)- Transport; Fish, Government services, Poultry, Meat, Forestry, Fuel & Car

Imports

Workhorses- Millions of maize smallholder farmer households, 80% of population- Some 250,000 smallholder tobacco farmers- Some small manufacturers of various products e.g. beverages, assembly,

food processing, plastics, pharmaceuticals- Numerous informal retailers & distributors, close to 800,000- Some smaller foreign banks that have entered Malawi in past 10 years- Some small oil seed processors & farmers (inc groundnut, soya, legumes)- Sugar small smallholder farmers- Thousands of smallholder farmers growing crops like rice, beans, potatoes,

cassava, pigeon peas etc. Some work in associations such as 100,000-member National Association of Smallholder Farmers of Malawi

- Some smaller seed & fertiliser importers/producers- Business & professional service providers- Numerous smallholder fishermen- Thousands of smallholder energy providers (charcoal)- Some 1,000 smallholder sugar producers

Nature of deals face by each group & rent sources

• Rentiers• largely centred on agriculture estate concessions secured under Hastings Banda & mining concessions secured since 1999. • rents mainly earned from accessing global commodity markets (e.g. tobacco, tea, coffee, uranium)• no new agricultural concessions recently, limiting scope for deals due to weak land policy• in tobacco deals also characterised by linkage between smallholder farmers & auction floors

• Magicians• required for licenses, access to seed, extension services, tax, electricity connection, water access etc. • more formal than informal• rents primarily gained from accessing competitive export markets

• Powerbrokers• centred on securing government contracts; limiting competition & new entrants; securing preferential access to inputs;

securing preferential licenses; extracting income from government • deals much more informal than formal• rents large & gained from taxpayers & aid (fertilisers, construction, finance) & domestic market (telecoms, poultry, sugar)

• Workhorses• characterised by maize subsidy, maize market, farm inputs, securing business permits & evading tax• mixture of formal & informal deals• very low rents & includes majority of population

Political Interest Sectors & Location in Product SpaceSectors with Political Elite Interest Political Elite Interest Location in Product SpaceGovernment Services (Powerbroker) Access to rents from law enforcement & public service provision Various. Potentially enabling services & regulations that could assist

evolution of product space. But limited capacity to address market failures means such services not sufficiently conductive to structural transformation & increased complexity in product space.

Farm Inputs (Powerbroker) Farm inputs generate strongest political-business elite relationship. Largest market is government-run Farm Input Subsidy Programme, which accounts for 50% of market. Large political elite interest who. target such companies to secure patronage base

Complexity depends on specific crops supported & extent to which those crops are economically complex. Maize is main crop but while many downstream products can be secured, culture & lack of capacity to address market failures limit to food crop

Construction (Powerbroker) Mota-Engil primary beneficiary of government contracts; corrupt. Politicians involved in construction company ownership. Infrastructure contracts targeted by politicians to prioritise voter areas. Chinese construction companies increasingly involved

Key enabling sector. High quality of national trunk roads has supported more complex sectors in product space. But current major construction projects include many white elephants

Transport & Storage (Powerbroker) Dominated by strong trucking lobby with significant business interests by politicians. Many politicians & their families own trucking businesses, include Joyce Banda’s son

Key enabling sector, particularly for linking rural agriculture to manufacturers (agro-processing). But since political elites do not gain much rent from agro-processing, transport services failed to serve as enabler of structural transformation

Poultry (Powerbroker) Largest company lobbies for bans on export of soya which it uses as chicken feed

Low economic complexity

Meat Industry (mainly beef) (Powerbroker) Meat industry recently linked to political elite. Epitomised by President’s One Cow One Family project instigated by it

Low economic complexity. Malawi struggles to compete with regional neighbours that have vast amounts of pasture

Fuel Importation (Powerbroker) Agents for companies have typically held close relationships with political elite, & appear to secure petrol station licenses very easily

Key input into numerous sectors with both high and low economic complexity

Financial Services (Powerbroker) Main banks either government owned (Malawi Savings Bank) or owned by Press Corporation (National Bank). Govt runs micro-finance agencies – targeted by politicians to transfer funds to secure political patronage

Key enablers for all sectors, including those with both high and low economic complexity. But abnormal profits in sector, lack of coherent government growth strategy & political elite distortions mean sector does not support productive sectors

Matching rent space & product space

• Political elite’s rent space mostly linked to sectors with low economic complexity • such as sectors dependent on government welfare spending (e.g. maize), mining & import trading

• Elites also tied to construction which is key enabling sector for development. • yet impact depends on what is built: e.g. white elephants vs power plants

• Elites also extract rents from key enablers: e.g. finance & energy but limited incentive for growth• Magicians/Workhorses characterised by disconnect between political & business elite rents• Bottlenecks faced by these sectors not political priorities• May explain why structural constraints faced in 1990s largely unaddressed since multi-party democracy• Rent space & product space combination not conducive to long-term growth• Outcome reinforced by low complexity of main exports & rent earners (tobacco, tea) since 1960s

Overview

1. Introduction






7. Conclusion

What led to Malawi’s acceleration regimes?

• 1964 - 1978• Independence produced development stance that led to ordered deals after colonial collapse• Development agenda secured investment needed to support growth acceleration• Political elites rallied behind Banda in newly independent African country

• 2003 – 2012• Primarily driven by change in Govt in 2004: led to more orderly & open deals & return of aid• Lack of growth up to 2002 caused positive feedback loop from lack of growth recorded under

Muluzi to improved institutions• allowed Mutharika to distance himself from Muluzi & strengthen patronage base

• Mutharika able to consolidate corruption at centre of government & secure commitment of elite• Mutharika’s development policy in 1st term prioritised fiscal & state reforms driven by President &

top civil servants/ministers• Allowed economy to benefit from structural adjustment policies of 1980s as previously Govt got

sequencing of economic liberalisation wrong, was fiscally indisciplined & weakened civil service

Overview

1. Introduction






7. Conclusion

Can Malawi enter a growth maintenance regime?

• What does this analysis suggest about Malawi’s next growth regime? • Acceleration to Maintenance or Acceleration to Stagnation?• We try to answer this question using mapping of product & rent spaces

Product space developing but still in infancy

• Product space expanding (eg plastics, dairy, soya, assembly); but too weak to form growth coalition• Despite potential for investor continuity under dominant party system, rent space for remains too

heavily tied to powerbroker business elite. • Little alignment of political rents to magicians, rentiers (except mining & cotton) & workhorses• Powerbrokers: little incentive to support export oriented policies & competition, leading to little

political interest to drive through economic diversification strategies• Such interest increasing though only comes about when politicians want growth: stop-and-go support

to development agenda so structural weaknesses no addressed• Suggests nature of growth going forward will be volatile: a number of booms & crises in short-term

growth backed up by a gradual underlying positive long-term trend. • While long-term growth likely to remain positive, driven by improvements in technology

(telecommunications, agricultural technology), financial sector development, investment in energy &slight but strengthening pull of regional integration, unlikely to be strong enough in next 8 years to overcome increased demands for welfare improvements

Rent space leaves little space for development agenda

• Mutharika’s 1st term (2004-2009) led to negative feedback loop in 2nd term: • landslide election victory in 2009, succession politics & weakness of formal deals & rules led to

more disorderly nature of deals in increasingly closed environment• Forex crisis of 2010-11 gave Joyce Banda possibility to become President as drove army to take her side

in succession struggle following Mutharika’s death• Banda opened deals space & initially increased orderly nature of deals through formal deals & rules • Restored growth, extending acceleration of 2003-2012 into 2013• But rent space weakened again as priority shifted solely to re-election (in May 2014 elections)• Alleged to have stolen funds from Govt (cashgate) to finance election campaign giving appearance of

increased & less controlled corruption; • Election focus also distorted markets & misallocated state resources; no improvement in state capacity• Suggests another negative feedback loop from growth like that experienced in Mutharika’s 2nd term

Growth maintenance regime looking unlikely

• Despite potential for investor continuity under dominant party system, rent space too heavily tied to powerbroker business elite & product space still underdeveloped

• Malawi seems unable to secure permanent transition to orderly & open deals settlement due to incentives for political elites created by 5 year term democratic system

• Likely continuation of negative feedback loops of growth, whereby short-term development policies driven by past political failures lead to boom in growth, but then switch to predatory, patronage strengthening, personal-wealth-creating policies

• No translation to long-term development strategy; 2nd terms not developmental

• So likely growth trajectory in next 8 years is stagnation

Overview

1. Introduction






7. Conclusion

Conclusion• Malawi has failed to structurally transform since 1950s

• Rent-earning sectors low in economic complexity• Political elite rent-seeking activities concentrated in powerbroker sectors• Lack of political incentive to develop state capacity & improve rent space

• Although increasing number of parties competing for power, Malawi effectively has dominant party system with clientelist, patronage basis inherited from Hastings Banda’s time

• Dominant party settlement may be good for growth (e.g. 1st 15 years of H. Banda) but Malawi’s dominant party settlement operates in five-year term democracy that means succession politics & patronage-seeking tend to take upper hand over growth policies

• This political settlement delivering two types of feedback loops between growth & rent space: • Negative loops: positive growth leads to worsening of rent space through more disorderly deals (e.g. H. Banda’s

2nd 15 years; Mutharika’s 2nd term; J. Banda’s 2nd year)• Positive loops from negative growth or slowdowns: negative growth causes reaction in electorate because of

drought or shortages of supplies. Drives new governments to deliver short-term growth (e.g. H. Banda in 1964; Mutharika in 2004; J. Banda in 2012)

• Positive feedback loops from negative (or weak) growth too weak to deliver permanent gains in orderliness & openness of rent space; no translation to long-term development strategy

• Once short-term growth is restored, succession politics & nature of deals between political & business elites kicks in: no sufficient political interest to address structural constraints that prevent long-term growth maintenance & structural transformation

Influence on Malawi Industrial Policy thought process

ESID Growth Framework influenced industrial policy thinking by:

• Rent space analysis in key growth clusters (oil seeds, manufacturing, sugar cane) & key enabling sectors (finance, energy, transport, farm inputs) which cause binding constraints

• Identified disconnect between political elite & key growth sectors• Inability to secure orderly deals so binding constraints remain

• Identified many key enabling sectors as powerbrokers • Incentive to maintain closed deals, while ensuring order

• Identified strong connection between political elite & powerbrokers, i.e. enabling sectors

Key questions raised by ESID Growth framework

• How can rent space among powerbrokers (enablers) be influenced?• Use of investment policy; competition policy; tax policy, energy policy etc to increase openness

• How can rent space among key growth sectors be influenced to generate growth coalition?• Exploit Trade Sector Wide Approach & Presidential thinking on strategic partners/forums to create

forums to provide platforms for sectors to influence policy makers/donors & increase orderly nature of deals/addressing of their binding constraints

• How can understanding of rent space in each sector help improve prioritisation & sequencing of sector or cross-cutting strategies?• E.g. in seed reform how can rents earned by resisters to change be maintained while allowing reform?• E.g. how can distorting transport rents caused by farm input subsidy programme be lowered?• What type of investor in agriculture/agro-processing should Malawi attract & not attract?

Malawi industrial policy framework including ESID thinking

Proposed industrial policy based on:• Institutional economics (includes ESID growth framework)

• Getting process of policy making right: how to identify & address binding constraints• Formal public-private dialogue & collaboration (Trade Sector Wide Approach)• Strong link to Presidential strategy & goals• Transitioning to developmental state (public sector reform; party funding reform)• Aid effectiveness & reducing donor policy capture

• Priority sectors: application of produce space model• Identified achievable clusters that could implicitly allow structural transformation (jumping)• Identified main export sectors to be low in economic complexity

• Evolutionary economics• Getting process of learning right

• upskilling; access to technology; quality; education policy; population policy

Thank you for your attention

Please contact me:

[email protected] Development

Tel: +265 991896366

mailto:[email protected]

malawi case study political economy determinants of economic growth

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