Thursday, March 28, 2024

Featured Video

Top 5 This Week

Top 10 Music

[showmfm]

Upcoming Events

[showevents]

Industrialization and global Value chains in Malawi

Malawi’s economy is highly undiversified, rendering it vulnerable to exogenous shocks. The export basket consists mainly of primary commodities.

The main export commodity is tobacco, which accounts for 60% of Malawi’s foreign exchange earnings. Other key export commodities include tea, sugar, and cotton and uranium. Because of concentration on low-value primary commodities, the benefits to Malawi from globalisation are limited.

Malawi’s industrial base is very narrow. The share of manufacturing in GDP has declined during the past decade from 15% to 10%. Moreover, existing manufacturing activities are limited to low-value products, mainly agro-based processing. These are primarily for the domestic market. Malawi’s production and supply capacity is limited; hence the country’s high import dependence.

Malawi enjoys a comparative advantage in labour-intensive activities, notably agroprocessing and production of less sophisticated consumer products. The shift in the production and export patterns of industrialised countries, as well as emerging economies, such as China, towards higher value and knowledge-intensive products has opened up opportunities for lowincome countries, such as Malawi, to export labour-intensive products and integrate into regional and global supply chains. The challenge facing Malawi is to reposition its economy and build capability to exploit such opportunities through enhanced competitiveness.

Currently, Malawi’s integration into global supply chains is limited to tobacco. Malawi’s tobacco industry is organised around clusters with strong linkages throughout the value chain. Small-holder farmers grow Burley and Virginia tobacco leaf, which is sold at auction. The tobacco leaf undergoes limited processing, involving mainly destemming. The semi-processed tobacco is exported by local buyers to international tobacco companies on a contract basis. When the tobacco leaf reaches foreign markets, it is processed into the final consumer products.

In 2013, tobacco earned Malawi USD 362 million. The direct economy-wide effects to the rural economy of tobacco incomes are, therefore, quite significant. In some instances, the multiplier effect measured as the differential between the unit cost of production and the unit selling price could be as high as 1:3. As tobacco is the main foreign exchange earner for Malawi, the government has developed deliberate policies to strengthen the tobacco value chains. The model adopted involves linking farmers to agriculture research and extension, input suppliers, and other players along the value chain. This model of linking farmers to international buyers through local intermediaries through contractual arrangements could be replicated to other commodities in which Malawi has a comparative advantage.

There is significant potential for Malawi to diversify into the export of higher value products and to join regional and global supply chains. Agri-business, in particular, offers significant potential for value chain development to exploit regional and global market opportunities. Malawi Mangoes, a new agro-processing venture located in Salima along Lake Malawi, is a good example of how such opportunities can be exploited. The venture involves the establishment of a largescale fruit-processing plant to produce banana and mango puree and concentrates for export to regional, Western and Asian markets targeting major retail chains.

The main factors hindering competitiveness of enterprises in Malawi and their ability to move up the value chain and supply regional and global markets are high trading costs, associated high transport costs and NTBs. The other constraint is the lack of skills required to produce products of competitive quality. Therefore, the removal of these constraints is necessary for Malawi to exploit emerging opportunities to participate in regional and global value chains.

The government is taking deliberate steps to address these challenges, including trade facilitation reforms. The government of Malawi has developed a National Export Strategy (NES), which establishes a road map for building Malawi’s productive base to raise exports and reduce demand for imports with the ultimate objective of reducing the trade deficit. The NES identifies three priority export sectors in which Malawi has potential comparative advantage for domestic value addition. These clusters are: i) oil seeds products: e.g. cooking oil, soaps, lubricants; ii) sugar cane products: e.g. sugar, high-value branded sugar, and confectioneries; and iii) other manufactured products, such as packaging. The strategy is to move up the value chain over the longer term as skills are developed and infrastructure improves.

Excerpt from Malawi Country Note, African Economic Outlook 2014

Related Posts

LEAVE A REPLY

Please enter your comment!
Please enter your name here

Popular Articles