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Malawi Case Study Political Economy Determinants of Economic Growth. Effective States for Inclusive Development Seminar – Cape Town 2 8 th April 2014 Jonathan Said jonathan@imanidevelopment.com. Objective. To present findings of Malawi Case Study. Overview. Introduction

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Malawi Case StudyPolitical Economy Determinants of Economic Growth

Effective States for Inclusive Development

Seminar – Cape Town

28th April 2014

Jonathan Said

jonathan@imanidevelopment.com


Objective

  • To present findings of Malawi Case Study


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


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


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 episodesof 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


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


3 Structural Growth Breaks since 1955

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

2nd Growth Regime

1st Growth Regime

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


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


Export-led growth up to 1978…

Percentage of Exports and GDP per Capita, US Dollar Prices

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


…and economic complexity increased, before collapsing

Economic Complexity Index, Malawi

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.


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 1994further 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

  • 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


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 BakiliMuluzi

    • 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 BinguwaMutharika

    • 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 neopatrimonallogic that drives behaviour of ruling elite

    • No strong ideology: though strategists point to Hastings Banda’s model as optimal one


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


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

  • BakiliMuluzi

    • 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

  • BinguwaMutharika

    • 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 today


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 Space


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

  • 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


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

    • Mutharikaable to consolidate corruption at centre of government & secure commitment of elite

    • Mutharika’sdevelopment 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

  • 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


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

  • 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


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’s2nd 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; Mutharikain 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:

Jonathan@imanidevelopment.com

Imani Development

Tel: +265 991896366


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