Insights on Malawi's Economic Growth Strategy

May 20, 2012

Following democratization in 1994, the Malawi government put great emphasis on reducing poverty. The predominantly agrarian economy has had little rural-urban migration and Malawi’s current level of industrialization and urbanization is low by world standards. A recent paper analyzes Malawi’s dependence on an agriculture-based development strategy. The authors find that the country currently does not place sufficient focus on economic and agricultural diversification to ensure continued growth. Without economic and agricultural diversification, including expanding the services sector, poverty reduction and economic transformation will be difficult to achieve. The agriculture sector plays a central role in determining the nature of urbanization through its impact on food prices, foreign exchange earnings, supply of raw materials, demand for urban goods, and rural-urban migration. In the recent past Malawi’s government provided fertilizer subsidies with a strong bias on maize production to small farmers to reduce poverty, but it did not generate much overall economic growth. Poverty rates in rural areas remain significantly higher than those in urban centers.

The agriculture sector is currently heavily dependent on the unsustainable promotion of two crops: maize and tobacco. Tobacco, in particular, faces stagnant international demand. The authors stress that the Millennium Development Goals cannot be achieved without diversification of the agricultural sector, which will have to supply a wide range of raw materials for further growth in the agricultural processing and manufacturing industries. This would promote rural-urban migration that increases the economic capacity of small and medium urban centers and create more integrated city systems. The services sector, currently accounting for over 40 percent of GDP, will continue to grow through the expansion of financial services, and wholesale and retail trade. However, Malawi must also address its transportation capacity. Current transport routes and costs are marked by high travel times which inhibit agricultural and non-agricultural exports. In order to realize its full business potential, Malawi’s regulatory framework, especially under which the private sector operates, will have to be improved given that the country is lowly ranked with regard to the ease of doing business. The paper recommends Malawi focus on creating an economic strategy that is not solely reliant on agriculture, thus greatly increasing its resilience and insuring continued poverty reduction.