Malawi Case Study Political Economy Determinants

Overview Introduction

Malawi’s Growth and Structural Transformation Experience

Political History

Evolution of Deals Space and Situation Today

Political Dynamics of Growth Acceleration

Political Dynamics of Growth Maintenance

Conclusion<br>

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:
some countries initiate episodes of rapid growth while others suffer extended stagnation
some countries sustain growth episodes while other episodes revert to stagnation or collapse?
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<br>

Overview Introduction

Malawi’s Growth and Structural Transformation Experience

Political History

Evolution of Deals Space and Situation Today

Political Dynamics of Growth Acceleration

Political Dynamics of Growth Maintenance

Conclusion<br>

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 1st Growth Regime 2nd Growth Regime<br>

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<br>

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<br>

…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<br>

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<br>

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<br>

Overview Introduction

Malawi’s Growth and Structural Transformation Experience

Political History

Evolution of Deals Space and Situation Today

Political Dynamics of Growth Acceleration

Political Dynamics of Growth Maintenance

Conclusion<br>

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<br>

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<br>

Overview Introduction

Malawi’s Growth and Structural Transformation Experience

Political History

Evolution of Deals Space and Situation Today

Political Dynamics of Growth Acceleration

Political Dynamics of Growth Maintenance

Conclusion<br>

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<br>

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<br>

Mapping of Market Rent Matrix today<br>

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<br>

Political Interest Sectors & Location in Product Space<br>

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<br>

Overview Introduction

Malawi’s Growth and Structural Transformation Experience

Political History

Evolution of Deals Space and Situation Today

Political Dynamics of Growth Acceleration

Political Dynamics of Growth Maintenance

Conclusion<br>

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<br>

Overview Introduction

Malawi’s Growth and Structural Transformation Experience

Political History

Evolution of Deals Space and Situation Today

Political Dynamics of Growth Acceleration

Political Dynamics of Growth Maintenance

Conclusion<br>

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<br>

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<br>

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<br>

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<br>

Overview Introduction

Malawi’s Growth and Structural Transformation Experience

Political History

Evolution of Deals Space and Situation Today

Political Dynamics of Growth Acceleration

Political Dynamics of Growth Maintenance

Conclusion<br>

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<br>

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<br>

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?<br>

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<br>

Thank you for your attention Please contact me:

Jonathan@imanidevelopment.com
Imani Development
Tel: +265 991896366<br>