About the Economy and Some Domestic Issues: Advice for Madam President

(A draft of what appeared in The DailyTimes- malawi, Thursday, 3 May 2012; pp 18 and 26) Dr Greenwell Matchaya (Economic Expert) Introduction Now that all seems to be in order and JB has taken control of national affairs, it’s the appropriate time to offer economic development counsel to the president before it is too late as time is really not on our side. The President ought to realize that she inheriting this country at a time when we are at the lowest point in history, socially, economically and politically. Our relations with the outside world are not the best, our relations within the nation are soured by tribalism, and the economy is mauled by absence of radical changes on the supply side, poor donor relations and deteriorating human rights situation. These should be the very first tasks the new government should consider addressing to put the nation on a right track while seeing that we get moving forward. While the importance of reduced corruption, international relations, good governance and civil liberties for the sustainable development of the nation can never be overemphasized, it is important for the current leadership to pay due cognizance to the fundamental problem that we face as a nation. This is important because it will help us have a focus in whatever we do as a nation and it will also allow us to take stock of what we have done and measure our progress when the time comes. The fundamental problem that Malawi as a nation faces at present is one of supply. The supply side of the economy has not had any radical changes since the one party era whereas the demand side of the economy has changed systematically with the booming population and the growing middle class which itself is a function of education, donor activities, better business opportunities etc. The implication of this differential growth of the supply side of the economy and the demand side of the economy implies that it’s only a matter of time that the nation should be expected to be consumed by foreign exchange shortages as well as other negatives effects of the such shortages. While this theory may not fully explain the recent forex, sugar, and fuel shortages, a set of reasons behind such shortages is incomplete without the differential growth thesis. At the present regime of economic development, this is the fundamental problem and government efforts must focus on striking a balance between the two but essentially by making positive and radical structural changes on the supply side of the economy. Monetary policy is important, but it surely plays a very minor role in the whole scheme of things because of the stage of our economic development as well as the general morphology of our economy at present. The Nature of our Trade Balance My examination of the import and export time series data for Malawi up to 2011 unveils that, not only does the country import more than it exports over time, but also that the gap between imports and exports has been widening and even more so, recently such that a slanted V-shape is markedly visible when the two quantities are mapped on a two dimensional space of value and time. The increasing differential growth of imports and exports, where imports grow faster implies that the nation’s ability to generate foreign exchange (which it gets when it sells to overseas consumers) lags behind its ability to spend it. Assuming that exports are the major sources of foreign exchange, such a situation inevitably leads to potential foreign exchange shortages. The shortages are even more likely if the growth rate of imports departs significantly from its past levels (that is if there is an extra increase in imports growth while exports stay at roughly past growth rates, or when exports stagnate more than before). To the extent that fuel imports depend on foreign currency availability it is not unreasonable to expect a case of fuel shortages in other times of the year depending on aggregate foreign exchange demand holding donor funds constant. The data shows that imports have grown considerably more reaching about 2 billion dollars recently, implying that while the asymmetric growth rates in imports and exports is clearly a problem, there is yet another one. The system appears not to be entirely able to make foreign exchange available on the formal market and hence, while the formal system does not have the foreign exchange, the black market has the money. The inability of the domestic formal foreign exchange market to mobilize foreign exchange relates to the price of the kwacha relative to that of other currencies. In the event that the kwacha is given a higher value than its actual market value, many of those holding foreign currency shun the formal foreign exchange market in preference to the black markets, which, in those cases are able to offer better prices. Even after a mild devaluation by the past government, evidence reveals that while the bank price of a US dollar is around 169 Malawi Kwacha now, the dollar is going at closer to 280 Malawi Kwacha in other areas at the same time, implying an over-valuation of the Malawi Kwacha. It is this differential that repels foreign currency holders from the formal and legal currency market thereby denying the government of the much needed funds to run government business. So what can be done? (1) Normalize donor relations The problems of foreign exchange availability could be partially sorted by normalizing donor relations. This would bring in funding from which would directly help meet the burgeoning demand for foreign exchange. Normalizing donor relations entails repealing the repressive laws that were passed during the past regime and exercising good governance that respects the rule of law, and works to stamp out corruption. Of course this is a limited solution in that donors have their own goals, tastes and preferences besides the fact that their budgets are finite. The ultimate solution therefore has to be within the control of the nation at large. (2) Radical changes on the supply side of the economy The most reliable and effective long term solution is to induce radical structural changes on the supply side of the economy to ensure that the nation is able to generate enough exports that will earn the nation sufficient foreign exchange. Most of the foreign exchange that comes into the nation is accounted for by tobacco earnings whose contribution stands within the neighbourhood of 450 million US$ annually. The downside of relying on one commodity becomes apparent when one notes that the forecasts for tobacco demand show a future decrease in tobacco consumption mainly due to the anti-smoking lobby, and also because the major consumers of cigarettes will no longer be the affluent buyers of Western countries but rather developing countries which are predominantly poor and may not pay higher prices. Developed countries have stepped up their efforts to reduce tobacco consumption owing to increasing incidences of cancers of different kinds among smokers in those countries, and not surprising their aggregate demand is projected to decrease even further. Among the developing countries, China, which has a larger tobacco market, also appears to be set to increase its own domestic production implying that the future tobacco market may be uncertain. a. Non-traditional crops and associated technology Policy makers in Malawi therefore need to seriously think about introducing, and encouraging the adoption of high yielding varieties of non-traditional crops such as soybeans, cowpeas and other oilseeds (biofuels). This is because given the ever increasing prices of crude oil, Western efforts for increasing biodiesel will continue to increase. Moreover as economies of China and India continue to grow together with their livestock industry, their demand for vegetable oils, soybean oilcakes and other crop based feedstuffs may be set to increase. Malawi needs to acquire technology (including post-harvest technology) in terms of high yielding varieties of those non-traditional crops and wage a campaign for their mass adoption paralleled with helpful extension services. As agricultural exports in their raw form suffer from lowering net terms of trade in the long run due to various issues, so value adding is an important factor to consider in any bid to radically transform supply side. As far as soybeans and other oil crops are concerned, the country should consider developing its capacity in crushing so that both soy/groundnut products and seeds are exported. This cushions farmers and the nation from world market price fluctuations. It cannot be over-emphasized that these efforts need to be paralleled with advances in small-scale irrigation to divorce farmers from overdependence on rain-fed agriculture. b. Mining While addressing issues of technology and marketing in the agricultural sector are important in the equation, the nation should seriously consider mineral explorations. As I have argued elsewhere before, a quick look at a list of Africa’s successful countries reveals that mineral rich countries account for the bulk of the few well-to-do African countries. Of course there are some resource rich countries that are poor due to mismanagement or foreign intervention, but the proportion of promising resource poor countries is small underscoring the importance of minerals for Africa’s economic development. Botswana, Zimbambwe, RSA, Mozambique etc have all benefited one way or another from mineral endowments. Malawi lies on the Great Rift Valley and has a fair share of little mountains where crude oil and some minerals form. While bearing in mind that minerals can be a curse if mismanaged, I would seriously urge the government to intensify its mineral mapping and exploration efforts, while paying due cognizance of the negative effects, that mining could afflict on the environment of course. The contribution of the Karonga Uranium mine to the GDP under poor contractual arrangements already signals that mining could be very crucial for the economy. c. Entrepreneurship For the long term, there must be a deliberate effort to encourage export-oriented entrepreneurship. This could be done not only by government’s taxation policy and other efforts, the third sector could also play a vital role. NGOs need to have programs that aim to give their clientele an ability to be part of the exporting community where possible and strengthen agricultural or general value chains. Education programs should also be tailored to develop entrepreneurial skills in future graduates. (3) Sensible changes on the demand side The demand side of the economy needs to be controlled in manners that will not reduce peoples’ welfare. The following can be considered: a. Import substitution where possible While it would be unreasonable to try to produce everything, some items that demand foreign exchange constantly are those which could be domestically produced. The government and the private sector needs to do what it takes to intensify efforts to erect plants for sufficient cement and even fertilizer production and ensure that these are available domestically at reasonable prices. These will save foreign exchange. Malawians are building houses everywhere and the resultant demand for cement and other foreign building materials poses pressure on forex. c. Exchange rate depreciation In some cases a monetary solution to easing a country’s foreign exchange position is to depreciate the value of the domestic currency. In the present case where the dollar is trading at a higher price on the black market, the Central Bank can reduce the official price of the Malawi kwacha so that a dollar should start fetching something more than the current MK168. The theoretical positive effects are that such an action would encourage those with foreign currency to trade it on the formal market and that producers could gain because they would face better world prices. Depreciation could also punish imports of luxuries hence could control the growth in import demand. However, this is not without problems. In the first place there is no guarantee that once the currency is depreciated enough dollars will be released on the currency market. It may as well be that people will still go to the black market which will still try to hike its prices. Others may still hoard their dollars as they prospect future depreciations. More importantly, whether depreciation would indeed benefit the exporters which in Malawi’s case are farmers, is not straightforward because, while they may face better prices, farm inputs would become very expensive, and inflation would go up. Very high inflation would not only eat into everyone’s incomes, but could even have a more negative effects unfortunately on those that society ought to protect-the poor. This would discredit those in power and also significantly undermine future production and exports. But as this is a condition for unlocking donor support, there is need to depreciate the currency albeit while engaging the donors fully to ensure that they are part of the solution for any problems that could arise following any major depreciation. Beyond Subsidies: Industrialization The need for industrialization in Malawi is real, although a debate about the means through which it may be achieved is on-going. Here I purport to flag the importance of launching an agricultural and mining-led industrialization program to offset the effects of any future decline in agricultural and mineral terms of trade for Malawi. Going forward let it be known that the West (developed world) spends more than 380 billion US dollars on agricultural subsidies annually to bolster the incomes of their farmers in order that they maintain an artificially high level of prosperity. This is a substantial amount of money that cannot even be compared to the total aid that flows to Africa or developing world annually! For instance in 2007, the total official development assistance from the West to all poor countries amounted to circa US$123 Billion, which is less than half their spending on subsidies. In view of this, arguments about the need for countries like Malawi to remove all barriers to international trade are at best misleading and far from helpful because of the fact that Malawi as well as Africa’s trading partners in the West do subsidise their agricultural sectors to a great deal. But, the government ought to note that revolutionising agriculture sustainably and for the good of the whole nation both now and inter-temporally requires another step beyond subsidizing agricultural inputs. There is a need to subsidise those inputs while endeavouring to take advantage of the strong backward and forward linkages that the agricultural sector has with the other sectors to avoid being stuck in the agricultural sector alone, while exporting unprocessed commodities. There is need to launch what we may call ‘agricultural and mineral-led manufacturing rebirth’ or more simply ‘agricultural-mineral-led industrialization’. The problem with solely relying on raw materials in the long run emanates from the very nature of raw commodities (e.g. agriculture) and trade. Even in our households, we rarely proportionately increase green maize and nsima consumption when our incomes go up or when the price of maize goes down, or to be precise, any increase we may register would be less, relative to the change in our incomes or prices of maize flour. At the macroeconomic level of course that implies that expenditure on agro-goods does not rise at the same pace as the expenditure on manufacturing goods and services. In other words, when world incomes go up, economies that rely on unprocessed agricultural exports alone or primarily are likely to come out as losers of international trade. The problem is the same with minerals in their raw form. In addition to the implied income inelasticity of demand for agricultural goods alluded to above, the terms of trade for agricultural goods in the absence of processing do deteriorate dynamically, sometimes due to oversupply. In the absence of an active manufacturing sector that draws its resources from the agricultural sector, in some cases agricultural growth could be immiserising. To ensure this does not happen at any point and to ensure that subsidies have a lasting positive impact, there is need to rebuild the manufacturing sector which would get its inputs from agriculture. This would further imply that even in the event of a decline in agricultural unprocessed goods’ Terms of Trade, Malawi would have all the incentives to increase productivity in the agricultural sector as the nation would be exporting processed products, and there would be no immiserising growth. Although farm parcels are smaller in some areas, we must try where possible to reclaim marginal land including wetlands to try and expand total farmland. We should then seriously think about taking advantage of transgenic technology and irrigation possibilities to increase total factor productivity. To avoid immiserising growth and ensure intertemporal sustainability, we should invest the gains from agriculture into the manufacturing sector hoping that in future the share of the manufacturing sector will be larger than that of agriculture in the overall economy, at which point we will be a developed nation. The other importance of a vibrant manufacturing/industrial sector is that by providing jobs to both skilled and unskilled personnel, the manufacturing sector has the potential to meaningfully depopulate the rural areas and thereby freeing up more land per capita. There should be enabling environment for encouraging the private and third sectors to participate fully in the drive for increased exports. It may look bizzare to suggest that the third sector (CSOs) have a role in this, but it turns out that real positive changes on the supply side can be had if the state, private and third sectors work in unison. Together, the three sectors are larger than the sum of their individual parts. Feedback: matchayag@yahoo.co.uk