Export Development

Agriculture, which employs about 80% of the Malawian workforce and contributes over 55% of foreign exchange earnings (Ministry of Agriculture, 2016), remains the most important sector of the economy. In fact, for over four decades, the manufacturing sector’s contribution to GDP has been

hovering as low as 4% to 14% (Malawi Annual Economic Reports, 1982-2015). This is evident from Malawi’s narrow industrial base and export basket. Predictably, the agro-processing industry (macadamias²³ since 1996; coffee since 2004; mango and banana puree since 2012; and dhal since 2016) dominates the EPZ programme. It is worthwhile, therefore, to assess the performance of the EPZ programme in terms of how much it has contributed to the development of exports from Malawi.

According to the existing literature on the review of EPZs’ effectiveness for export-led industrialization, development of exports can be assessed not only through gross export growth (Madani, 1998) but also based on how much the exports have diversified²⁴ during the reporting period. Overall, Malawi’s annual exports grew on average in value by 8% between 2006 and 2015 (see Table 8 below). Specifically, while the gross exports expanded by 18% between 2006 and 2011, the periods between 2011 and 2015 and between 2014 and 2015 saw 5% and 24 % declines in the same, respectively. In terms of export performance of EPZ-dominated industries,²⁵ the period between 2006 and 2015 registered an annual average growth of below 1%. Thus, on one hand, the exports in value increased by about 8% during the period 2006 to 2011. On the other hand, they decreased by 8% during the period 2011 to 2015. And, for the last year of reporting (2014-2015), the fall in exported value almost doubled to 16%.

Table 8 Malawi’s Gross Exports (2006-2015) in Thousand US Dollars

Source: ITC calculations based on: (i) UN COMTRADE statistics until Jan 2011, (ii) NSO of Malawi statistics since Jan 2011.

23 As of December 2016, about 39% of the EPFs were processing macadamias for exports under the EPZ programme.

24 UNIDO’s Enhancing the Quality of Industrial Policies (EQuIP) Toolbox.

25 Edible nuts, exotic leather, textile and garments, rubber, wood and wood products (essential oils), and fruit purees.

EXPORTED VALUE IN US$'000

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

EPZ Dominated

In terms of export diversification, among other things, Malawi’s narrow export base is seen by her low diversification index²⁶ of 2.7 – another least developed country (Senegal) could score 26 (Malawi and Senegal Country Strategy Papers, 2010-2015). With limited export diversification, raw agricultural products constitute the biggest chunk of Malawi’s exports (see Table 9 and Figure 5 below for more details). To be specific, from the top 10 exports (which made up about 92%, 88%, and 86% of the total exports²⁷ in 2006, 2011, and 2015, respectively)²⁸ about 82% of export earnings in 2006 were generated from raw agricultural products. Their exported value decreased by 3% in 2015. The manufactured exports (represented by both agro-processed and non-agricultural manufactured products²⁹) accounted for about 18% in 2006 and increased to 21% in 2015.

Table 9 Malawi’s Top 10 Export Products in 2006, 2011 and 2015

“Unit : US Dollar thousand”

Product label Exported

value in 2006 Product label Exported

value in 2011 Product label Exported value in 2015

All products

666,217 All products 1,428,264 All products 1,080,101

Tobacco 409,294 Tobacco 564,402 Tobacco 495,66

Coffee, tea, maté and spices

26 The related measure used by UNCTAD is the concentration index or Hirschman (H) index, which is calculated using the shares of all three-digit products in a country’s exports: the maximum value of the index is 239 (the number of individual three-digit products in SITC revision 2), and its minimum (theoretical) value is zero, for a country with no exports. The lower the index, the less concentrated are a country’s exports.”

27 Tobacco alone constituted 67%, 45% and 53% of the total exports in 2006, 2011 and 2015, respectively.

28 This indicates Malawi’s low export diversification index.

29 These are the manufactured goods from non-agricultural raw materials such as equipment, wood products and rubber.

30 These exports have mainly been of uranium since 2009, but from 2014 the sole uranium mine is in care and maintenance mode due to a depressed uranium market (poor world market uranium prices).

31 * for EPZ dominated industries.

32 Trade Map captures all the exports from a country regardless whether the exports are manufactured in the country or imported from another country. According to Trade Map, while product HS-code 84’s imports into Malawi were US$ 187,459,000 from RSA, China, India, etc., the exports mainly to African countries such as Mozambique, RSA, Uganda, and Zambia totalled US$ 39,147,000. According to the researcher’s knowledge (and confirmed by MoIT), no such products are manufactured in Malawi. Thus, it is presumed that the reported exports are just re-exports and not manufactured in Malawi.

33 Similar to footnote 15, in 2006, Trade Map reports US$ 11,793,000 imports of product HS-code 93 into Malawi from the UK. During the same year, Malawi exported the same product worth US$ 7,518,000 to the UK. And, since no such products are manufactured in Malawi, it is assumed that the reported exports are just re-exports to the UK.

7,131 27,507 24,343 Source: ITC calculations based on: (i) UN COMTRADE statistics until Jan 2011, (ii) NSO of Malawi statistics since Jan 2011.

With regard to the EPZ programme’s contribution, only two EPZ-dominated industries made it to the top 10 exports list,³⁴ and these later dropped to 14^th and 16^th positions, respectively, by the year 2015 (ITC’s TradeMap). Moreover, none of the visited EPFs indicated having introduced a new product during the 2006-2015 reporting period (Interviews, 2016-2017). Also, only one EPF joined the programme in 2012 with a new product – i.e. mango and banana puree (MoIT, 2015)

Figure 5 Value Addition on Top 10 Exports in 2006 and 2015

Source: ITC calculations based on: (i) UN COMTRADE statistics until Jan 2011, (ii) NSO of Malawi statistics since Jan 2011.

From the above analysis and Table 10 below, one can clearly see that the Malawi EPZ programme has failed to stimulate the much-needed substantial growth in gross exports and the diversification of the economy. This is unlike the success stories from countries like Mauritius (1971-1986); Indonesia, South Korea, and Taiwan (mid-1980s); Costa Rica and the Dominican Republic (1990s-mid 2000s);

and Bangladesh (early 1980s-mid 2000s) (Engman et al., 2007; UNESCAP, 2005; Cling & Letilly, 2001; and Hussain, 2005). The programme’s limited performance is evident in the following interlinked areas: (i) the percentage of EPZ exports of total exports is still too low (4.7% in 2006 and 2.8% in 2015 – Table 10 below) to substantially influence export development; (ii) a big portion of EPZ-manufactured exports are agro-processed products and higher-value products are poorly

34 Wood and wood products and textile and garments industries took 4^th and 9^th positions, respectively.

Raw

represented;³⁵ (iii) the Malawi economy still relies on exports of a limited number of commodities in the primary sector³⁶ (see Figure 5 above); and (iv) the share of traditional exports to total exports is still high.

Table 10 Export Performance of EPZ Programme in Malawi

2006 2011 2015

Source: ITC calculations based on: (i) UN COMTRADE statistics until Jan 2011, (ii) NSO of Malawi statistics since Jan 2011.

However limited the contribution the EPZ programme to overall export development is, I find no evidence of a direct impact by the reviewed incentives regime on the performance of the EPFs.

Instead, the limited contribution is due to other factors. Firstly, since the EPFs are not “fenced-in”, it is unsurprising that they encounter the same production and institutional challenges that are common within the manufacturing sector in general (Interviews, 2016-2017). These include issues such as the erratic power supply, which, according to the 2009 World Bank Enterprise Survey, leads to a 17%

sales losses.³⁷ Apart from this, the high cost of business operations, particularly transport costs, on average account for 56% of the total cost of imports and 30% of the total cost of exports (Malawi Country Strategy Paper, 2011-2012). The poor business climate³⁸ also makes it difficult to start and to do business in Malawi (World Bank Development Indicators, 2006-2015), and there is weak political will to develop industries.

35 The EPZ programme still does not provide the engine of growth to propel the Malawi’s economy into industrialization.

36 Lack of export diversification signals the inability of the EPZ programme to induce industrial manufacturing.

37 Malawi is the third highest sales loser among 118 countries included in the survey (World Bank Enterprise Survey, 2009).

38 For instance, it takes longer to start a business in Malawi than in neighbouring Zambia – 39 days and 17 days, respectively (World Bank Development Indicators, 2012). The same applies to other business transactions like land acquisition, licence-issuances, electricity connection, obtaining credit, and cross-border trading, just to mention a few (African Development Bank Data Portal, 2011). This is in agreement with the findings of the World Bank’s Doing Business Surveys, which show that Malawi’s ranking has been steadily declining. The country is now ranked 132^nd out of 183 countries. To some extent, poor working relationships among institutions that provide industrial-development-related support services exacerbate this problem.”

Secondly, the 2008-2009 US economic recession had a substantial impact on EPZ gross exports.

Here, specific reference is made to the textile and garments industry, which in 2006 (and years before that) exported the highest value out of all the EPZ-dominated industries (see Table 9 above and Appendix II). The recession reduced the US’s demand for apparel, which used to be exported substantially to the US under the African Growth and Opportunity Act (AGOA) trade agreement (Interviews, 2016-2017).

Lastly, the acceding of China into the WTO in 2001 and the increased competitive pressure from other lower-cost Asian manufacturers negatively affected the dominant textile and garments sector.

While some EPFs closed shop, others relocated to countries with lower cost structures (MoIT, 2015). This partly explains not only why the number of EPFs in this sector has been dwindling (from eight in 2006 to two in 2015), but also the 80% decrease in exports from the sector during the same time period (see Table 9 above) – the premature de-industrialization of the sector.