World Bank Document

Report No. 3460-MAI Mjawi The DevelocpmenIt of Manufacturng

8, 1981 Public Disclosure Authorized May Eastern Africa Regional Office

FOR OFFOCDAL USE ONLY Public Disclosure Authorized Public Disclosure Authorized

Document of the World Bank Public Disclosure Authorized

This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS

Currency Unit = Kwacha (K)

Exchange Rate Kwacha 1 = US$ US$1 = Kwacha Average 1973 1.2206 0.8193 Average 1974 1.1888 0.8412 Average 1975 1.1577 0.8638 Average 1976 1.0953 0.9130 Average 1977 1.1075 0.9029 Average 1978 1.1851 0,8438 Average 1979 1,2241 0.8169

ABBREVIATIONS

ADMARC - Agriculture Development and Marketing Corporation AMEC - American Management and Engineering Corporation, Inc. BTN - Brussels Tariff Nomenclature CDC - Commonwealth Development Corporation DEG - Deutsche Gesellschaft fur Wirtschaftliche Zusammenarbeit DEVRES - Development Resources EAD - Economic Affairs Division, Ministry of Finance EDD - Economic Development Division, Office of the President and Cabinet EPD - Economic Planning Division, Office of the President and Cabinet FMO - Nederlanse Financierings-Maatschappij voor Ontwikkelingslanden N.V. IFC - International Finance Corporation IMEXCO - Import and Export Company of Malawi INDEBANK - Industrial Development Bank MES - Minimum Economic Size Plant MTIT - Ministry of Trade, Industry and Tourism NSO - National Statistical Office Press - Press Holdings Ltd.

FISCAL YEAR

April 1 - March 30 - i- FOR OFFICIAL USE ONLY

PREFACE

1. This report is one of a series of six special reports that have been produced as the result of the 1979 Basic Economic Mission.l/ The major purposes of the Basic Economic Mission were to review the performance of the Malawian economy since independence (1964) and to assess the future prospects for growth over the next decade or more, identifying the major constraints to development and making recommendations for their relief. The focus of the basic economic mission was upon macroeconomic performance (the national accounts, balance of payments, budget and public enterprises and employment), the development of agriculture and manufacturing; and the provision of government resources for the development of human capital and for meeting basic needs.

2. Despite the country's extremely low level of development at independence, the Malawi Government opted for an outward-looking strategy of rapid growth, based on encouragement of private enterprises, use of the market mechanism, favorable treatment of foreign capital, low levels of protection and wage restraint. The public sector investment program has emphasized the direct support of the commodity producing sectors through the provision of agricultural services, internal and external transport links and power. The development of the social sectors (education, health, etc.) received relatively less attention until recent years.

3. These policies have been successful and the Malawian economy has recorded an impressive list of accomplishments since independence. Real GDP has grown at about six percent per annum and growth in all sectors (except subsistence agriculture) has been rapid. Wage employment has grown almost -as rapidly as modern sector output, suggesting a relatively labor-intensive pattern of development. Export volumes, at least those of the agricultural estate sector, have increased significantly. DOmestic investment has grown from about 9 percent of GDP at independence to an average of 25 percent in recent-years, while domestic savings have increased from virtually nil to 17 percent of GDP. The Malawian economy has also attracted large increases in foreign capital for private/public enterprise investments and for government projects. In addition, the domestic rate of inflation has been relatively low.

1/ The siy. reports are:

The Development of the Agricultural Sector The Development of Manufacturing The Fiscal Performance of the Public Sector Employment Aspects of Economic Development The Development of Human Capital Basic Needs

4. Despite this record of accomplishments, there is now concern about the prospects for future growth owing to:

- the slow growth of smallholder output and exports; - the relatively poorer prospects for traditional estate exports; - the projected decline in the external terms of trade (relative to those of the 1970s); - the continued rapid growth of population and labor force (and the rapid decline of unutilized cultivable land); - the deterioration in budgetary and public enterprise performance; and - the continued shortage of skilled manpower.

5. The basic economic report explores the possibilities for improving the output, trade, and employment performance of agriculture and industry through changes in price-tax-tariff policies, improvements in sectoral institutions, and improved government services. It analyzes the possibilities for improved resource management through better government revenue performance, increased allocations for recurrent operations to raise the payoffs to past government investments and measures to improve the efficiency and profitability of public enterprises; it also analyzes the effects on future budgetary balance of changes in the growth and composition of government investment expenditure or in the amounts and terms of foreign financing. In addition, it assesses the nature and magnitude of Malawi's manpower constraint, estimates the returns to investments in secondary education, examines the costs of expanding social services for meeting basic needs and, in the face of likely government budgetary constraints, explores the possibilities for meeting some of these costs through higher user charges.

6. The basic economic report places the themes outlined in the preceding paragraph in a macroeconomic framework for an analysis of the future economic develapment possibilities in Malawi. We expect that the draft basic economic report will be discussed with Government in July 1981 and that circulation of the final version will shortly follow. The members of the basic economic -mission were:

William A. MIcCleary (Mfission Chief) Gilbert Brown (Basic Needs) Peter Hansen (Public Finance) Kazuko Hashimoto (General Economist, Agriculture) Stephen Heyneman (Education) Richard LaCroix (Consultant, Agro-industry) Ben Lehbert (Industrial Economist) Katherine Sierra (Employment) Robert Wesselman (Consultant, Agricultural Extension) Dennis IW'ood (Consultant, Agro-industry) Shirin Velji (Research Assistant) - iii -

MALAWI

THE DEVELOPMENT OF MANUFACTURING

Table of Contents

Page No. Preface. Summary and Conclusions v

I. PAST PERFORMANCE AND INDUSTRIAL STRUCTURE ...... 1

Background...... 1 Past Performance ...... 1 I-ndustrial Structure ~ ...... *.... 5 Present Situation ...... 18

II. INSTITUTIONAL FRAMEWORK ...o ...... 19

Background ...... 19 Parastatals--General ...... *...... 19 MDC 0- *...... *...... 20 Press Holdings ...... 21 ADMARC ...... o...... 21 IMEXCO ...... 23 INDEBANK ...... 24 The Parastatal's Position in Industry...... 25

III. POLICY FRAMEWORK ...... 29

Institutional Background ...... O.*...... 29 Long-term Policy Background ...... 30 Licensing System ...... 31 Industrial Incentives in the Protection System ...... 32 Price Policy ...... * 35 Tax Incentives ...... 36 Implementation and Practical Consequences of Policies ...... 37

IV. PROSPECTS: CONSTRAINTS AND POSSIBILITIES ...... 41

Constraints ...... 41 Possibilities ...... 44

This report was written by Mr. Ben Lehbert, Senior Industrial Economist, East Africa Projects Department. Table of Contents, cont'd - iv -

Page No.

V. THE NEXT TEN YEARS OOOOOOO-O.OOOO....OOOOOO.OOOOOOOOOOOOOOOOOOOO 48

Background ...... o...... * ...... , . .. 48 Food-related Issues ...... oo ooooo ...... o - 49 Energy-related Issues ...... o...... 56 Wood-related Issues ...... oo ...... oo-ao .... 59 Export-oriented Projects ..... ooo....o.....o...... o.... 61 Projects in Miscellaneous Other Areas ... o...... 0....,, 62 Summary Review of Proposed Projects ...... 64 Some Policy Suggestions o ...... o ...... 66

LIST OF TABLES

No. 1 Index of Manufacturing Output, 1970-78 No. 2 Industrial Licenses for New Investment, 1967-78 No. 3 Manufacturing Sector Reporting Units, Licenses Issued and Employment, 1975 No. 4 Size Distribution by Reporting Units by Average Number of Employees in Manufacturing, 1975 No. 5 Manufacturing Sector, 1975 No. 6 Manufacturing Sector, 1975--Current Assets and Liabilities No. 7 Manufacturing Sector, 1975 No. 8 Manufactring Sector, 1975--Capital Employed and Its Financing No. 9 Gross Fixed Capital Formation, 1973-75 No. 10 Parastatal Holdings in Selected Major Industrial Firms, 1977/78 No. 11 Estimated IRR and Potential Annual Foreign Exchange Earnings of Selected Industrial Projects

APPENDIX I--Industrial Statistics in Malawi MALAWI

THE DEVELOPMENT OF MANUFACTURING

Summary and Conclusions i. Malawi's manufacturing sector grew at an annual rate of 11-13 percent between 1964 and 1975. In 1976, output declined for the first time, due mainly to constraints in the external sector. In 1977/78 growth resumed at an annual rate of 10-12 percent. The sector remained small, however, as its share rose from about 5 percent of GDP in 1964 to slightly over 10 percent during the last few years. ii. Manufacturing growth was fairly evenly distributed over the different industries, as industries serving mainly the domestic market grew only slightly faster than export industries (mainly tea, tobacco, sugar). As agro-industrial processing represents a large proportion of Malawian industry, output is subject to strong seasonal swings following harvesting patterns. Apart from tea and tobacco processing, the location of manufacturing industry is highly concentrated in Blantyre. The size distribution of manufacturing plants is typical, with a few large plants in tobacco processing, sugar refining, cement production and textiles, while small plants are found in the clothing industries, bakeries, furniture and paper products. iii. Management of most industrial enterprises is good and the technology used in industrial processing activities is appropriate to plant scale and maintenance capability available in the country. Operations are well run and preventive maintenance the rule rather than the exception. Spare parts and adequately skilled labor are generally available to operate and maintain the equipment. Capacity utilization in most industries is high, with exceptions mainly due to delays in receiving ordered inputs because of transport problems through Mozambican ports. There are virtually no cases where serious excess capacity has been created through faulty decisionmaking. iv. The ownership and operational control of industrial enterprise in Malawi is heavily concentrated in parastatals and a few large foreign- controlled firms. Parastatals are particularly dominant in mainline products of agro-industries, which they either own wholly or jointly with foreign companies. The five most important parastatals are the following:

(a) The government-owned Malawi Development Corporation (MDC);

(b) Press (Holdings) Ltd., a private company whose shares are held in trust by the President for the people of Malawi;

(d) Agricultural Development and Marketing Corporation (ADMARC), which is government owned; and - vi -

(e) Industrial Development Bank (INDEBANK), which is owned 22.25 percent each by ADMARC, the Commonwealth Development Corporation of the UK (CDC), the Deutsche Gesellschaft fur Wirtschaftliche Zusammenarbeit of West Germany (DEG), and the Nederlandse Financierings-Maatschappkj voor Ontwikkelingslanden N.V. of the Netherlands (FMO) and 11 percent by IFC.

Of the five institutions, Press and MDC are major operational holding companies, that is, they tend to implement and manage subsidiary operations rather than passively taking an equity participation. ADMARC and Import/Export are large trading companies although ADMARC has considerable holdings in numerous agro-industrial enterprises and IMEXCO also has an interest in a few industrial ventures. INDEBANK is a traditional development finance corporation which frequently lends to companies in which one or more of the holding companies have an interest, but has so far limited its equity investments to about one-fifth of total investments. All five institutions are active in many sectors of the economy but all have substantial investments in industry, often in the same enterprise. This is particularly true of MDC, Press and ADMARC which hold a controlling or important minority interest in many larger agro- and other industries. Frequently ADMARC and MDC or MDC and Press together hold the majority in a company and in that case there is usually fairly close cooperation between the holding companies concerned. There is thus a network of interlinked interests which covers a substantial part of Malawi's industry and, combined with ADMARC/MDC/Press majority interests in the two commercial banks, this structure shows considerable stability even in times of stress.

v. Compared to the parastatals, central government institutions exercise little direct (operational) influence on industrial development except through overall industrial policy formulation and industrial investment decisions. Of all agencies involved the Ministry of Trade, Industry and Tourism (MTIT) is most intimately involved with industry, mainly because it is responsible for administering policies like investment licensing, price administration, import and export surveillance, wage and salary guidelines, etc. Of these, licensing is by far the most important. Industries which employ 10 or more persons or which have machinery and equipment with a 25 h.p. rating or over need to be licensed annually under the Industrial Development Act. The annual license renewal is virtually automatic as long as the plant in question remains active. New licenses are required only for new plants and/or new products to be produced in an established plant. Expansions of output in existing plants for items already being produced do not require a license. The main purpose of this policy is to exercise some control over the establishment of new industries, with a view to:

(a) avoiding investments in plants well below optimum size in terms of economies of scale;

(b) preventing investments in ventures which would have low local value added and high import requirements; and

vi. Malawi's protection system uses relatively low tariffs (5-35 percent) and direct import controls are used only for selected items, mainly agricultural products. However, the government uses an informal consultations process with major importers to retain some control on the volume of imports, especially in times of acute foreign exchange crisis. The system provides for some industrial incentives in the form of general and special rebates on import duties on the parts and materials which they must import for their manufacturing activities. Local manufacturers can also claim reimbursement of tariff duties paid on materials which have been used in the manufacture of articles that were subsequently exported. In particular infant industry cases, special protection against imports can also be granted, but such exceptions have been rarely made during the last decade.

vii. Prices of manufactured products are either directly or indirectly administered by the Government. Direct control is used on selected mass produced, fairly homogeneous commodities and on goods which figure prominently in the consumption of lower income groups. For these controls the "cost plus" system is used. Informal price administration is exercised through a reporting system for price increases in which most larger and medium sized firms participate, which gives MTIT an opportunity to object to price increases it considers excessive. The system has recently come under increasing strain as worldwide inflation has translated into more than normal upward price pressures. viii. Industrial tax incentives consist mainly of special depreciation allowances and of special write-offs for expenditures incurred before and during start-up. The latter makes deductible the expenditures incurred by a manufacturing company during the period of 18 months prior to the start of operations to the extent that they would be allowed, had they been incurred after the beginning of business. After start-up, an initial allowance can be claimed which is granted at the rate of 10 percent for industrial buildings and 20 percent on plant and equipment. Depreciation on plant and equipment is graduated depending on whether one, two or three shifts are worked. Rates vary approximately in the proportions of 10 percent, 17.5 percent and 25 percent. While depreciation allowances appear to be generous in Malawi, it should be noted that Malawi does not grant any tax holidays to new enterprises as is done in so many other developing countries all over the world. ix. On the whole, industrial policies have been implemented successfully as manufacturing output has grown satisfactorily since independence. There has not yet been a large industrial investment that turned out to be a "white elephant," and even at the level of medium sized investment projects, real failures have been rare (although some projects have needed prolonged special support). The Government is well aware of the fact that many industries remain "infants" longer than expected, which is due more to unreasonable expectations about what can be achieved within a few (e.g., five) years in the Malawian context, than the result of blatant mistakes in investment decisions and/or inefficient project implementation. x. Malawi's future industrial development faces three principal constraints, which are either quite difficult to overcome or cannot be removed at all:

(a) smallness of the domestic market; - viii -

(b) Malawi's geographical location, which results in:

(i) relatively high transport cost for overseas trade (both exports and imports),

(ii) at least temporarily, because of political factors, a lack of access to markets (and to potential sources of supplies) in neighboring countries; and

(c) shortage of industrial skills on the worker and technician level, as well as a lack of local (African) engineering and managerial talent.

To what extent the industrial sector can contribute to overcoming these constraints is difficult to determine.

xi. The principal objective of Malawi's industrial development should be to contribute to the gradual modernization of its economy, but in doing so never to become a serious drain on the country's limited foreign exchange earnings. To prevent this, the balance of payments effect of each project should be clearly--and conservatively--established, including the more important secondary effects (e.g., needs for spare parts, replacements and supplies). Particular care should be taken to work out the recurrent foreign exchange requirements for inputs, supplies, spare parts, etc. which will be needed annually to keep a plant running at a satisfactory rate of capacity utilization. The requirement that the industrial sector earns a substantial part of its foreign exchange needs, and over the longer term an increasing part, implies that in addition to import substitution, industrial exports should be a focus of sector strategy. In view of Malawi's resource endowment and geographical location, exporting modern, finished industrial products in quantities that will significantly increase the countries overall export earnings will be an extremely difficult task. In the short- to medium-term, only products made mainly from local resources would have any promise and, therefore, attention should be focussed on developing agro-industries both for exports and for import substitution. In the long term, that is, after most agro-industrial possibilities are exhausted, Malawi should strive to develop high quality, high value:weight ratio industrial products for exports in order to have any chance to break into sophisticated overseas markets, to which transport costs will always remain relatively high. Such a policy would require a major effort over the next ten to twenty years to develop a high degree of industrial skills, which are initially needed mainly at the worker and plant supervisor level.

xii. In the 1980s, Malawi should thus focus its industrial development effort on agro-industries, the only broadly resource-based industrial sector it has. This subsector would also be likely to contribute to Malawi's foreign exchange position by providing either new exports or replacing present imports at reasonable cost, that is, at a cost comparable to that of an average foreign producer plus transport cost to Malawi. The agro-industrial development potential has been explored with regard to issues and project possibilities in various agro-industrial sub-sectors, such as (a) food-related projects, (b) energy-related projects, (c) forestry and wood-related projects, and (d) principally export-oriented - ix - projects. In all of these subsectors it was found that promising possibilities exist for projects of relatively modest size--which Malawi could afford to undertake--and with technological and managerial requirements that Malawi can cope with. In particular, with the help of consultants, 35 potential projects (of which 32 are agro-industrial) were analyzed, of which more than half were found to be promising, although with differing degrees of uncertainty. Roughly, these projects might require some US$45 million investment, have rates of return between 8 percent and 35 percent and produce net foreign exchange earnings/savings between US$25 and 40 million within five years after commissioning of plant. Hence, the contribution of agro-industry to economic development could be swift and effective if the necessary policy measures are taken swiftly and are implemented energetically. xiii. While industrial policies and their implementation seem to have worked well, there are two important areas in which improvements could possibly be made in order to either promote development in certain sectors more vigorously through better price policies or to prevent possibly serious mistakes by more sophisticated investment policies. Price policy and, in particular, industrial price policy face on the one hand a dilemma as price controls have been used to protect consumers, mainly those with lower income in the urban areas. On the other hand, these controlled consumer prices often translate into lower producer prices which provide no incentives to expand production and sometimes even discourage producers to such an extent as to induce them to shift their productive capacity to other products. In times of relative price stability the price setting authorities can form a fairly accurate view of the movement of production cost and would theoretically be able to prevent the worst consequences of their controls. In present conditions however, when internationally prices have become volatile, chances are much higher that controlled prices remain too low and ultimately depress output. In such a situation, it would be preferable to provide the necessary subsidies directly to the poor and increase prices sufficiently to stimulate production or even to free prices altogether. xiv. Investment policies so far have worked well. However, as industrialization proceeds, the issues become more complex and the investment risks greater, the system should perhaps be refined by extending the range of issues analyzed before individual projects are approved. In addition two guiding principles designed to minimize risk should be added: a ruling that large industrial projects should be undertaken only if (a) the country does not have to provide substantial amounts of capital for them, since otherwise it would have to come directly or indirectly out of the limited investment budget; or (b) the risk of such investments would be practically nil, since a large scale misinvestment could seriously hurt both the country's foreign exchange balance and its capacity to make other needed investments. The other addition to present practices should be a requirement that the foreign exchange effect of each individually proposed project be calculated under optimistic and pessimistic assumptions over a number of years--say ten--to obtain a clear picture of the foreign exchange implications of each project. The major optimistic and pessimistic assumptions should be made about prices expected for needed imported inputs for the operation of the new plant and eventually for planned exports. In making calculations about the foreign exchange effect of such projects it should be realized that local production usually removes the option of simply not importing a durable consumer good in times of foreign exchange crisis, since closing the local factory because of lacking imported inputs creates unemployment among a group of often relatively well-organized and vocal workers and is therefore politically difficult to do. MALAWI

THE DEVELOPMENT OF MANUFACTURING

I. PAST PERFORMANCE AND INDUSTRIAL STRUCTURE

Background

1.01 With a population of about 5.5 million, a land area twice that of Switzerland and a GNP of less than one-third of that of Luxembourg, Malawi is a small country with a rather small economy and hence a very small manufacturing sector. Except for tea and tobacco processing, bakeries and clothing, industrial branches often consist of only 1-3 firms. Hence, statistical analysis has limited possibilities, since special events on the firm level can influence "national" statistics substantially without reflecting any "national" trend or structural change (i.e., "national" manufacturing statistics contain a much larger random element than is usual in countries with larger economies and manufacturing sectors). The following analysis, therefore, is probably subject to larger margins of error than would normally be expected.

Past Performance

1.02 It is difficult to measure precisely industrial growth in Malawi since independence, because no comprehensive statistics on the sector were collected until 1970 when a first attempt was made to establish an index of manufacturing output. 1/ Prior to 1970, however, overall industrial growth rates were derived from data obtained in the course of estimating national accounts. These data were in current prices and, in the absence of good price statistics had to be deflated in a fairly arbitrary way. Nevertheless, on the basis of these data it appears certain that the rate of growth of manufacturing was quite high (that is, about twice as high as overall GNP growth, which means between 11 and 13 percent annually in constant terms between 1964 and 1975). In 1976, manufacturing output declined for the first time, due mainly to constraints in the external sector. In 1977/78, however, growth resumed at a 10 to 12 percent annual rate.

1.03 The period 1970-78 was documented better through the index for manufacturing output and for several subgroups (table 1). The production of food, beverages and tobacco expanded much faster than that of other goods, but this was due partly to the inclusion in this group of sugar refining. Faster growth, especially after 1972, reflected the rapid increase of sugar production. If sugar were to be included in the export industry, both food, etc. and export industry would have moved fairly closely to the overall index. The

1/ See Appendix I for content and methods of industrial statistics in Malawi. Table 1: INDEX OF MANUFACTURING OUTPUT, 1970-78

(1970 - 100)

3Heiahto 1971 1972 1973 1974 1975 1976 1977 1971 a) Domestic Market Industries 80 1110 121.3 150.0 162.1 186.5 179.8 197.1 220.6

1. Consumer goodss 62 113.2 120.9 150.4 171.7 194.8 194.6 212.8 236.2 of which:

Food, beverages & tobacco 33 112.3 127.6 169.4 192.1 225.7 238.6 259.8 274.4 Footwear, clothing & textiles 14 118.1 118.8 115.2 120.1 130.2 109.9 126.2 148.3 Other goods 15 110.8 108.0 143.2 175.1 189.3 176.8 190.2 234.3

2. Intermediate goods 1/ 18 103.1 122.9 147.6 129.0 157.6 128.6 142.9 166.8 b) Export Industries 20 108.7 125.4 137.7 131.6 154.0 172.3 207.3 - 217.3

TOTAL NAMUFACTUalIG IZDUSTRI2S 100 110.6 122.0 147.4 156.0 l0.0 170.3 199.1 219.9

1/ Mainly for building and construction.

Source: National Statistical Office. - 3 - only important structural change was the declining share of footwear, clothing and textiles and of intermediate goods, which might be an indication that there was still room for further import substitution.

1.04 In spite of its impressive growth record, Malawi's industry remains a relatively small sector of the economy with manufacturing's share in GDP at factor cost having risen from somewhat over 5 percent in 1964 to slightly over 10 percent during the last few years. Industrial employment in "larger" enterprises (i.e., those employing 20 persons or more) rose from about 18,000 in 1969 to about 35,000 in 1976 but remained at 12-13 percent of total wage- earning employment in Malawi while gross fixed capital formation by manufacturing industry appears to have risen from 9-10 percent of overall fixed investment in 1969/70 to about 15-16 percent in 1975/76. 1/ Whether this can be taken as an indication of growing capital intensity is impossible to say in view of the uncertainty of the statistical base.

1.05 Most of gross fixed capital formation takes place in existing plants with the exception of large investments in entirely new ventures like the Dwanga sugar estate in 1977. New ventures have to be licensed and table 2 shows the number of licenses issued since 1967 and the investments connected with these new ventures, 2/ which on average represent between a quarter and a third of overall gross fixed investment in manufacturing, again with the exception for years when a license for a large new plant is given, as in 1977.

1/ The investment figures are estimates of the Ministry of Industry, Trade and Tourism and include all firms not only the larger of the National Statistical Office's "Annual Economic Survey." 2/ Licenses are required for enterprises with more than 10 employees. This should not be confused with the large industry statistics which start at 20 employees and over. "New Ventures" exclude expansions of existing plants. - 4 -

Table 2: INDUSTRIAL LICENSES FOR NEW INVESTMENT, 1967-78

Annual Cumulative Number of Number of Licenses Licenses Investment (K'OOO) a/ Year Granted Granted Domestic Foreign b/ Total

1966 .. 60 ..

1967 9 69 .. 580 1968 8 77 .. .. 1,020 1969 20 97 1,120 1,520 2,640 1970 22 119 2,910 950 3,860 1971 19 138 849 1,043 1,892 1972 12 150 727 141 868 1973 17 167 2,178 726 2,904 1974 18 185 2,891 1,075 3,966 1975 11 196 704 1,337 2,041 1976 11 207 1,883 348 2,231 1977 15 229 .. .. 82,300 c/ 1978 22 244 d/ .. .. 15,300

a/ Figures only include investments in new ventures for which licenses are required, that is, they exclude expansions of existing plants. b/ Refers to funds raised either domestically or externally, not to nationality of investor, that is, it includes foreign borrowing by Malawian firms. c/ Most of this investment was for the Dwanga sugar estate. d/ Total number of active licenses is lower due to non- renewal by firms or production lines that ceased operations.

Source: Ministry of Trade, Industry and Tourism.

1.06 Before 1967 some 60 licences had been issued and by May 1977 the total number of licensed activities was 215. Since some firms have two or more licences, the total number of licence holders was only 170. Employment by these firms in May 1977 was about 40,000, distributed as follows: Expat- riates, 568; Malawian skilled, 7,336; Malawian unskilled, 31,623; and "casual" workers, 9,276 (the latter would not be counted in employment statistics as "regularly" employed). 1/ It should be noted that the number of expatriates is relatively small, especially if pure technicians, estimated at about half the total number, are considered as "inevitable" for many years to come. Thus, expatriate managers clearly play a major role still in industry but at the average rate of 2 or 3 per company their importance should not be exaggerated. Total sales of licence holders during the 12 months from June 1976 to May 1977 were MK 158 million and capital invested by these companies, cumulatively since 1964, amounted to MK 130 million. 2/

Industrial Structure

1.07 Official Malawian statistics on the manufacturing sector are issued only with a considerable delay and at present the latest year for which comprehensive data are available is 1975. While the detail in which they are collected is admirable for a country like Malawi with its lack of long-term experience in collecting and processing statistics, they do not cover the entire sector since smaller enterprises are left out. In fact, the sample was reduced in size in 1974 when the cut-off point for reporting units included in the "Annual Economic Survey" was shifted from an employment basis (20 and over) to a turnover basis (MK 100,000/year and over), which resulted in a reduction in the number of reporting units from 130 to 115. In these circumstances the problems of "grossing up" survey figures to national coverage are substantial and cannot be solved adequately for most of the data published in the survey because of the bias against smaller enterprises, whose structural characteristics are likely to differ considerably from those of the larger companies. Consequently, a description of the structure of Malawi's manufacturing sector will be based on available data for the sample of 115 larger establishments (turnover over MK 100,000/year) in 1975 with an attempt of grossing up made only for employment data because a special sample survey including smaller firms by the MTIT provides the data for such an exercise.

1.08 Table 3 presents an attempt to complement the data on employment provided in the "Annual Economic Survey" for 1975 by estimating employment by license holders not covered in the survey, mainly by obtaining data from companies and/or by estimating the distribution of a company's activities in different industrial branches when data are only available for its overall activities. The two main conclusions to be drawn are that: (a) the National Statistical Office (NSO) data provide a fairly good sample of manufacturing activities as coverage (of employment) is probably within 10 percent of national totals for most industries and (b) the industrial structure is still dominated by the tea and tobacco processing industry (well covered by NSO data) which together account for about one-third of total manufacturing employment and

1/ Ministry of Trade, Industry and Tourism. 2/ The latter figure is based on the sample made by the Ministry of Trade, Industry and Tourism in 1977 and apparently refers to investment net of depreciation. Table 3: MANUPACTURIHG SECTOR REPORTING UNITS, LICENCES ISSUED AND EMPLOYMEmT, 1975 (numbers)

Unito License Employment Estimated Eatimated employment Reporting NoldersHi I by Units employment by os %of (Annual Survey) (Ministry) Re*ortini all licenceeo reported ISIC Groupo

I Food proceosing 6 11 3580 3877 108 3111, 3113, 3114, 3116, 3118 2 bakerieo and Confectionery 8 13 758 915 121 3117. 3119 3 Beveragee 4 5 1211 1300 107 3131, 3133. 3134 TOTAL FOOD (excl. Tce & Tobacco) 1 29 5992 lQ 31 encl. 3121 and 3140

4 Ginning, Spinning, Weoving, Blankets, 4 5 2795 2835 101 3211, 3212 Tovels, etc. S Knitting Hillo. Ropes & Netting 4 4 384 397 103 3213, 3215 6 Clothing 15 18 1898 1950 103 3220 7 Leatber and Footwear 3 3 459 459 100 3233. 3240 TOTAL TEXTILES AND LEATIER 26 30 5536 5641 102 32

a Sawmills &Wooden Articles 4 4 1046 1046 100 3311, 3312 9 Wooden Furniture 3 12 118 220 186 3320 TOTAL WOOD& WOOD pRODUCTS I 1164 1266 109 33 le Paper Products 3 5 246 270 110 3412, 3419 it Printing & Publiohing 5 5 950 950 100 3420 TOTAL PAPER & PRINTING a 10 1196 1220 102 34

11 Ind. Chemicolo, Fertiligero & Points 4 4 200 200 100 3511, 3512, 3521 1S Drugs, Cleaners, Cosmetics 4 6 819 855 104 3522, 3523 14 Hatcheo, Tyre Retreading 3 3 343 343 100 3529, 3551 15 Plnootic Producto 3 4 103 115 112 3560 TOTAL CHEMICALS 14 17 1465 1513 103 35

TOTAL EON-NITALLIC MENERALS 5 6 1732 1751 101 36 t6 Toolo, Metal Furniture, Structural Metal Prod. 2 9 446 560 126 3811, 3812, 3813 t7 Fabricated Metal Producto 4 5 525 550 105 3819 18 Elec. & Non-Elec. Mach. & Equipment 4 11 315 441 140 3822, 3829, 3832, 3833, 3839 19 Motor Vehicle Assembly 3 5 456 480 105 3843 TOTAL METAL PRODUCTS, MACHINERY & 13 30 1742 2031 117 38 TRANSFORT EQUIPMENT

OTNE MANUFACTURE _ 2 - 225 - 39 (3903 only)

GRAND TOTAL (excl. Tea &Tobocco) 91 140 183B4 19739 107

20 Teo Procesoing 19 20 4244 4350 102 3121 21 Tobacco Procenoing 5 7 5376 5600 104 3140

GRAND TOTAL MANUPACTURING 115 167 28004 29689 106.4 3

HDEO: FOOD INDUSTRIES . inrc, tea and tobacco 42 56 15169 16042 105.6 31

1/ Included ore firmo with turnover of 1100,000 or more in 1975. 2/ Licencee are required for firms with more than 10 employees.

Source: Annual Economic Survey 1974-1975, MITr, and mission estimates. - 7 - for more than two-thirds of the food processing industry, traditionally the largest industrial branch at Malawi's stage of industrial development.

1.09 Table 3 shows that only a few industrial branches are underrepre- sented in the survey data. These include, first, branches in which smaller enterprises may play an important role such as bakeries and confectionery and in wooden furniture, and second, in branches where manufacturing (assembly) activities are beginning to grow as a complementary activity to import trade as in some of the simpler electrical appliances, tools, implements, hardware, etc. These latter branches are very young and their manufacturing activities are statistically difficult to distinguish from the commercial--import-- end of their business, but at the same time they may well be the fastest growing segment of Malawian manufacturing. Apart from these branches, however, employment by reporting units is probably well within 10 percent of total employment by manufacturing firms with more than 10 employees. As the underre- presented branches are small, total estimated employment in 1975 comes to about 29,700 to which an estimate of about 10 percent for firms with 10 employees or less should be added for unlicensed industrial activities, 1/ which would bring total employment in the sector to roughly 33,000 and would imply the existence of over 300 small firms with less than 10 employees, a number that Malawian officials consider close to the upper limit of the number of businesses which may actually exist in the SSI subsector.

1.10 Excluding tea and tobacco processing, the food and textile industries are by far the largest industrial employers, accounting for 31 percent and 29 percent of non-tea and non-tobacco) employment, respectively. All other industrial branches range between 6 and 11 percent, except for the small miscellaneous category of other manufactures. An inclusion of firms with 10 or less employees would probably shift the structure further towards food processing, textiles and leather, and woodworking and perhaps metal products, machinery and equipment, although the latter group may be statistically overrepresented because commercial activities have been included under manufacture. Anyway, the absolute numbers are so small that even a substantial margin of error would be of little consequence to the overall picture. However, when passing from employment data to other, more detailed data derived from the accounts of the individual firms, the margin between survey and real national data is likely to increase substantially, but varying in degree from item to item and from industry to industry and there is no statistical method to establish how big these margins might be. Consequently, the following analysis of survey data is relevant only for the larger end of the industrial structure and does not represent the smaller end, that is, the smaller enterprises adequately, although it seems likely that the importance of small scale industry in Malawi is rather limited, as most of the smaller enterprises are found among artisans, craftsmen, commerce and transportation.

1/ This would probably exclude an uncertain number of--mostly rural-- artisans working alone or in a family context mainly in food processing (e.g., maize milling), textiles (tailoring), wood (furniture, etc.) and services. Whether these activities should be included under manufacturing--as they often are--is debatable and would depend mainly on the purpose for which the statistics are used. -8-

loll A particular feature of Malawi's industrial output is its strong seasonality which is due to greatly increased activity in processing agricultural export products (tea, tobacco and sugar) in the months of July to October after the harvests, and agro-industrial production during these months is usually double or more the production of January through March, the bottom of the cycle. Employment follows a similar cycle but in a much less pronounced fashion, which finds its expression in a relatively large number of casual workers not counted as regularly employed by industry (usually about 25 percent of regularly employed).

1012 Outside tea, tobacco and sugar processing, the location of Malawi's industry is very highly concentrated in Blantyre, with only a few plants located in Zomba, Liwonde, etc., all in the southern region. In the last few years, industry has begun to locate in the new capital Lilongwe in the central region and this trend has strengthened as available industrial plots in Blantyre have been taken up and Lilongwe was connected to the railroad system. Industrial activities in the northern region of the country are negligible.

1.13 Little can be said about the size distribution of Malawian manufacturing plants by industrial branches, since, due to the small size of the sector, there are only a few plants in most sectors. Moreover, as shown in table 4 below, the actual distribution does not deviate significantly from what one would expect on the basis of the usual economies of scale conditions in the various industries. Large enterprises with 1,000 employees and more, although

Table 4: SIZE DISTRIBUTION BY REPORTING UNITS BY AVERAGE NUMBER OF EMPLOYEES IN MANUFACTURING, 1975

Less Than 50 50-99 100-199 200-499 Number Number Number Number Number Number Number Number of Units Employed of Units Employed of Units Employed of Units Employed

25 850 28 1,915 25 3,557 23 6,526

500-999 1000 and over Total Number Number Number Number Number Number of Units Employed of Units Employed of Units Employed

8 5,134 6 10,022 115 28,004 only 6 in number, account for more than one-third of manufacturing employment. Three of these units are in tobacco processing and one each in sugar refining, textiles and cement production. There are a further 8 large units with 500-999 employed accounting for 18 percent of employment with one unit each in grain milling, tea processing, tobacco processing, beverages, clothing, sawmills, printing and publishing and in soaps, detergents, etc. At the other end of the distribution, 25 units with less than 50 employees account for only 3 percent and 28 units with 50 to 99 employees for 7 percent of total manufacturing employment. These units are mainly in industries where smaller firms are typical, like bakeries, clothing, furniture, paper products, etc. However, in recent years the activities of some parastatals have begun to encroach on fields traditionally dominated by small enterprises, at least at Malawi's stage of development. A typical example is the rapid growth of and increasing market penetration of Press Bakeries. It is difficult to judge to what extent large scale production responds to (or promotes) changes in consumer's tastes and habits or simply drives existing small bakeries out of business. Moreover, larger scale enterprises are subject to better management, are of more interest to foreign investors and expatriate managers, and are better credit risks for scarce capital resources than small scale enterprises. Nevertheless, a premature movement towards concentration could also have substantial negative effects on employment, on the potential for development of new, small firms with new--additional--Malawian entrepreneurs, on employment, etc. To what extent the Government is aware of these possible conflicts is unclear (para 3.24).

1.14 In 1975 total sales by Malawi's manufacturing industry were about MK 160 million (equivalent to about US$200 million). Of these sales, about one-third were export sales which, however, were concentrated in three industries--tobacco, tea, and sugar l/--accounting for almost 90 percent of manufactured exports (table 5). For the remainder of industry, exports thus represented roughly 5 percent of sales, reflecting the fact that Malawi has not yet gone very far in actively encouraging non-traditional manufactured exports. This situation had not greatly changed by 1979.

1.15 As in many countries in the early stages of industrialization, manufacturing activities often grow out of commercial operations. A rough measure of the degree to which the transition from commerce to manufacturing has proceeded is the percentage of goods resold without further processing to total sales of goods processed (table 5). Only in one industry (industrial chemicals, fertilizers, paints and varnishes) there are more goods resold than sales of processed (manufactured) goods, probably mainly due to fertilizer sales by the mixing plant, whose output is defined as "resold goods." Other industries in which commercial operations are still important include beverages, furniture, machinery and equipment and motor vehicles, which is quite similar to the situation in other countries at Malawi's stage of development.

1/ Included in table 5 under "Food Processing," which cannot be separated out. Exports of sugar export statistics. - 10 -

1.16 A major operational problem for Malawi's manufacturers is the uncertainty of supplies of imported inputs, mainly due to problems of transit of these imports through the ports of Mozambique and of railway transport from the ports to Malawi. As a result manufacturers tend to keep high stocks of inputs. For industry excluding tea and tobacco processing (which use relatively fewer imported inputs than most other industries), stocks of inputs equal 4.5 months of annual input consumption and for some industries the figure is as high as 7-10 months (table 5), while normal stocks for most industries would be about 3 months. The necessity to keep 50-100 percent higher stocks of inputs than normal can have serious implications in terms of the cost of working capital required, especially when interest rates for short-term money are high.

1.17 Apparently many companies are trying to reduce overall inventory cost by keeping stocks of finished products extremely low when they are forced to keep high input stocks (table 5), with the exception of some export industries like tea and tobacco (stocks of 7.5 and 13 weeks of annual sales, respectively), whose stocks of inputs are low. The only industries which apparently feel obliged to keep relatively high stocks for both inputs and finished products are the "modern" branches including electrical and non-electrical machinery and equipment and transport equipment (mainly motor vehicles). Keeping high stocks of finished goods in these industries may well be partly caused by administrative obstacles to importing, although "normally" stocks of finished products in these industries tend to be well above the general industrial average because of slower turnover of highly priced individual items.

1.18 The peculiar situation with regard to stocks is reflected in the current assets and liabilities situation of the various industrial branches (table 6). Industries with above average stocks have of course a large part of their current assets committed to stocks. Industry as a whole (excluding tea and tobacco, which again occupy a special position) has two- thirds of its current assets in stocks, a proportion which is unusually high. The high level of stocks is financed by keeping the level of cash abnormally low and current liabilities abnormally high (quick ratio: 0.4). It is interesting that these overall relationships for the sector as a whole apply also to the majority of individual industrial branches. The few exceptions may well reflect a special short-term situation rather than typical deviations from a remarkably uniform structural situation, 1/ which is characterized by very low liquidity and rather high levels of stocks. 2/

1.19 The dangers of an illiquid position depend to some extent on the type of short-term debt that is used to replace liquidity, since the rigidity of due dates varies widely from one type of indebtedness to another. In this case, intercompany debt obviously is the softest since it can be assumed that the affiliated or parent company would hesitate before forcing its affiliate into bankruptcy. In several of Malawi's industries, this item

1/ A brief review of data for 1974 (the only year with comparable statistical coverage) suggest very similar relationships. 2/ This suggests that the present "liquidity squeeze" in Malawi about which many observers report is probably more of a long term than short term nature. SsImI.! 5ALAMI- OACUOCm1975

sg9 Oeed leldOoodm 9.16 ** e i lefItotla of 1 offt 90169 C~t t oec4 9t@~af of eo h~ ISL..~tiLnL2~u.i ilisi ~~LEtaht :LmIsLU coarod uas &0251.44.1. (ooI. SW cea.1a) a-no I " MiesC ztte ler Bort I of So"c Go"tz 501d kots &d Is my M ktte 1(xil gm tosa ist > zw B I WZALMm lt (os1. ta &t onao 33,234. 12421.9 52.2 53.1 0.3 410.3 0.91 13,469.3 1.933.? 3.30 3,790.90 - 9.5 0.2 4 3.t30.2 sit. 5 t .73

. *o,1. .t E S ftitetm$ 3111.. got" &9e:Uat 1;.945.4 304.1 3.4 - 51.14270.3.1. s9 6. 0134401. _ * 118 * 11__ ktblz d E* §-- i| 2.19.1 410 1 1 Lotesk d6 9.000.0 953 144.4 6.4O01.3 - 107.4 4 .00 4973 4.75 S015 ,fU.977 An L14I l 5 .4 1.544.5 9 9.3 9.1 4.1 37.512 5.13.24 9Veoho 9111e Axtiole. & iIllIiiilkt--E ii.B Iii2 0iiif49dii

90153. An430 Vg,3034.2 122.6 4.O 15.0 1 2.14 3U.2t1 5.8 010.4 7 .4 4.36 10 ta"I o EalilIII II ti56 .0 47342 9 MM212 AM I,428.4_c. 5 4 45.5 1.3 53 13 9. 16440 249 24,43.5 Il,U.S. Is la. C2aalh.w_,1.19 .t11e. 4 LIU -1A if me IItI L 13 keg.. 01.ta. I" . RH it 14 OMaes~. Uwe Retwoodio 5.4467 29.3 0.3 4,292.7 t15.5 121.7 2.12 4,914.3 9.309 32 914~~~44.~~ 9gp4~~~gg 11,466.9~~ 715.7 4.6 1.304.5 13.1 524.9 1.34 7,4622.4 12.79.? 3. it 90O*2 uCNICSSzn nYL (\.tzee4 *.41.0 3.379.? - 348.2 14.6 305.'137? _m BB0II . S)11

36Streototal to.1e. Metal LMiAVeinU...... - - - kiLl LU LJU..L LB&J ELii

Natal k0towtse UYL ki Fabricated Metal pfto&cte 2.4)3.3 276.5 11.4 102.1 f.2 20.M,9.160944 to Mee loOlele 4saa.by 4,125. 2,113.3 44. 155.9 3.3 191.6 .1273303419 toal 1L namrs. Niamt & 1,091.3 140 2.4 MI0 307 123.9 s sis. WA4. 0.94 =&WP262 (o3u 9.6 4 t.24okeo.9co)G.

N0 tee proass44g 113.011.? 117870.4 15.1 14,191.0 143 4,114.1 3.94.4)4.1 23,011.9 21koo.o.1.g to&aeoo ~ ~ 210%3 2.m. 6.4S'u. OLMOmAcnam 2MAL II.04.3,.46. 41. -31 ,7. 13.01 19,253.0 1,9.119

-~~~~~~ .~~~~ ~~~ 159,948.4 51,189.0 33.0 16,341.0 10.2 13.2*1.940 0390?3,65614

9051.0s An..& 9a1o by 1974-1975. 99,499.1 45.532. 51.5 5,409.0 t.1 9,464.9 5.64 00,934.0 11,98.2 33 VIjot 3220 O, . a.. Table 3 - 12 - is fairly large (food processing, knitting mills, leather, industrial chemicals, drugs, cleaners, cosmetics) while in others it is negligible or entirely absent. This disparity reflects the fact that those companies with strong financial ties to a larger (Malawian or foreign) group enjoy much greater financial security than those who try to make it on their own, and consequently can afford to take larger risks on liquidity. 1/ The next softest current liability is provisions (part of profits set aside for dividends, taxes, contingencies, etc.). Again, in a crisis situation it can be assumed that payments coming due out of provisions could be delayed for some time before causing catastrophic consequences. This is probably less true of advances and overdrafts, although Malawi's banking system (consisting of two commercial and one development bank) is heavily influenced by government and/or its institutions and therefore might be more lenient than traditional commercial banks in the industrial countries. 2/ Finally, one-fourth of current liabilities consists of supplier credits, which are telatively inflexi- ble short-term borrowings because even if it is possible to delay payments to the supplier, it can quickly lower the creditworthiness of borrowers/clients, particularly if their purchases are comparatively small.

1.20 With a few exceptions then, Malawi's industry is run with an extremely tight liquidity (cash) position, which is apparently made possible by what might be called a fairly elastic system of short term borrowing. The liquidity thus saved is put mainly into stocks. This business policy is the reaction to an extremely difficult transport situation regarding the outside world, which constantly threatens considerable delays--or even cutoff--of supplies. It probably also reflects the business community's caution vis-a-vis a geographical and political situation which is fraught with dangers of sudden explosion, that is, a situation where the last position in which a businesses would wish to find themselves would be with large amounts of local cash and little on the shelves.

1.21 The share of value added in gross output in Malawian industry is on average about one quarter, excluding tobacco and tea processing which have much lower shares, their value added mainly being generated in the plantations (table 7). Another group with very low value added is industrial chemicals, fertilizers and paints, mainly because of the fertilizer mixing plant, which

1/ It also implies that those (indigenous) entrepreneurs who want to make it on their own probably need considerably more equity (partly in net working capital) to succeed, which can be an additional (and prohibitive) obstacle compared to problems of a technical and managerial nature normally referred to as inhibiting the rapid development of domestic entrepreneurial talent. 2/ The situation is also influenced by the fact that commerical banks in Malawi use the British overdraft system, which make overdrafts (for which no fee is charged) preferable to standby lines of credit (for which a fee would be charged). Within an established limit, the overdraft remains in effect as long as the borrowers service it, that is, pays interest on the outstanding balance, which is the only cost of borrowing to them. This system, is particularly attractive in businesses where credit needs fluctuate strongly, as they do in many agro-industries. For strong, large firms the system of advances can amount to long-term financingo TABLE 6 . AIAWI - MANUFACTURING SECTOR 1975 - Current Asaets and Liabilities 000.)OK'

CURRENT ASSETS CURRENT LIABILITIES Current Advances Trade Intercoy. Assets Supplier'a Interco. and Current Liabiltles Industries Stocks Debtors Cash Debts Total Credit Debts Overdrafts Provisions Tota_ I Food processing 9,633.1 1,508.5 616.4 482.0 12,240.0 3,802.9 5,134.3 2,641.3 2,328.4 13,906.9 2 Bakeries and Confectionery 910.8 341.1 328.8 6.2 1,586.9 817.9 11.7 3 Beverages 353.0 179.5 1,362.1 3,594.4 1,165.3 27.9 0.1 4.787.7 1.892.1 275.6 806.6 1,926.4 4,900.7 TOTAL FOOD (excl. Tea and Tobecco) 14,138.3 3.014.9 973.1 488.3 18,614.6 6,512.9 5,421.6 3,800.9 4.434.3 20,169.7 4 Ginning, Spinning, baving, Blankets, 3,839.1 1,269.6 223.5 - 5,332.2 1,149.3 1,726.7 1,140.0 1,342.8 5.358.8 Towels, etc. 5 Knitting HLil, Ropes and Netting 397.0 237.4 2.6 28.4 665.4 186.3 243.7 69.7 7.5 507.2 6 clothing 3,519.6 2,066.1 117.9 190.0 5,893.6 2,638.6 579.0 478.8 2,143.3 5,841.7 7 Learher and Footwear 1.194.8 219.1 13.1 8.2 1,435.2 216.2 652.5 180.9 96.8 1,146.4 TOTAL TEXTILES AND LEATHER 8,950.5 3,792.2 357.1 226.6 13,326.4 4190.4 3.2019 18694 3590412,854.1 8 Sawmills and Wooden Articles 578.0 310.5 394.0 - 1,282.5 22.8 - - - 22.8 9 Wooden Furniture 288.2 149.5 3.8 - 441.5 314.8 - 64.9 35.7 415.4 TOTAL WOODAND WOODPRODUCTS 866.2 460.0 397.8 - 1,724.0 337.6 _ 64.9 35.7 438.2 10 paper Products 1,930.2 318.9 48.4 70.6 2,368.1 1,151.2 39.7 623.6 309.5 2,124.0 11 Printing and Publishing 1,689.6 668.5 271.4 682.8 3,312.3 953.5 - 476.2 40.4 1,470.1 TOTAL PAPER AND PRINTING 3,619.8 987.4 319.8 753.4 5,680.4 2.104.7 39.7 1,099.8 349.9 3,594.1 12 Ind. Chemicals, Fertilisere and Paints 1,588.9 1,995.8 67.4 - 3,652.1 1,160.1 1.200.6 331.1 557.6 3,249.4 13 Drugs, Cleaners, Cosmetics 3,154.3 749.4 936.5 296.2 5,136.4 748.8 1,544.5 80.3 252.3 2,625.9 14 Matches, Tyre Retreading 612.2 433.2 61.4 4.0 1,110.8 386.3 96.7 188.8 143.4 815.2 15 Plastic Products 229.2 203.0 70.7 3.9 506.8 77.8 86.1 30.4 70.9 265.2 TOTAL Cbl8ICALS 584.6 3.381.4 1,136.0 304.1 10,406.1 2,373.0 2,927.9 630.6 1,024.2 6.955.7 TOTAL NOM-METALLIC MINERALS 1.752.7 1,056.7 4.5 23.5 2,837.4 199.4 362.8 357.5 311.3 1.231.0 16 Tools, Metal Furniture, Structural 1,020.5 474.4 0.5 - 1,495.4 423.8 179.8 151.1 127.8 882.5 Metal Products 17 Fabricated Metal Products 99.8 1,074.6 192.7 - 2,237.1 1,132.5 - 226.7 875.1 2,234.3 18 Blec. & Non-Elec. Mach. &Equipment 600.8 240.2 0.5 - 841.5 406.0 14.0 66.9 62.0 548.9 19 Motor Vehicle Assembly 4,013.4 1,351.0 277.3 - 5,641.7 2,716.0 1,203.6 150.8 84 4.911.9 TOTAL METAL PRODUCTS, HACHINERY & 6.604.5 3.140.2 4- 10,215.7 4,678.3 1,397.4 595.5 1.906.4 8,577.6 TlAN8POIIT EQUISHENT

GRANDTOTAL (sxcl. Te &Tobacco) 41,516.6 15,832.8 3.659.3 1,795.9 62,804.6 20,396.3 13.351.3 8,418.6 11,652.2 53,820.4 20 Tea Processing 9,499.6 2,140.2 654.1 1,063.6 13,357.5 2,521.5 3,175.9 2,929.9 2,913.3 11,540.6 21 Tobacco Procossing 7,564.9 3,791.3 118.2 63.4 11,537.8 1,083.0 3.391.4 4,147.5 1,579.3 10,201.2 GRANDTOTAL MANUFACTURING 58,581.1 21,764.3 4,431.6 2,922.9 87,699.9 24,000.8 19,918.6 15,496.0 16,144.8 75,562.2 MEW: FOOD INDUSTRIES, incl. 31,202.8 8,946.4 1,745.4 1,615.3 43,509.9 10,117.4 11,988.9 10,878.3 8,926.9 41,911.3 Te and Tobacco

Sourcp; #nnual Soonqcic Survey 1974-1975. - 14 - generates little value added. Surprisingly high shares of value added in gross output are obtained in the plastics, metal products and motor vehicle industries. For the latter, this is probably due to high trading profits on goods resold, but for the others, the reason must be that existing Malawian enterprises have so far quite rationally concentrated on the more labor intensive of all the products that their industrial branches produce. For the remaining industries, the variations in the share of value added seem to conform to the pattern observed in other countries.

1.22 The distribution of value added among the factors of production shows very large variations among industries (table 3, Appendix I), mainly because wages and salaries as well as profits vary substantially from industry to industry, although not in a consistent pattern, so that it is difficult to arrive at any significant conclusions, except perhaps the following: wages and salaries paid per operative person tend to be lower in the simpler, more labor-intensive industries (e.g., textiles) than in those that either require higher labor skills (e.g., metal working) and/or relatively higher capital investment (e.g., chemicals). This is even more true for non-operatives, which probably reflects in the modern industries the premium that has to be paid to attract highly-qualified, technical and managerial personnel to Malawi's industry with its internationally relatively low compensation levels. Varia- tions of the share of profits in value added, are apparently unrelated to type of industry or level of wages and salaries paid, but rather reflect in each individual case the quality of management and/or special market conditions.

1.23 Total permanent capital employed in Malawi's industry is about MK 80 million (table 8), of which the largest shares are invested in food processing (MK 27 million) tea and tobacco (MK 5.2 and 8.6 million, respectively), beverages (MK 6.4 million) and drugs, cleaners, cosmetics (MK 4.6 million). Of the permanent capital employed, net fixed assets are the major part (between 60-75 percent in most branches), while net working capital accounts for the rest. In the food processing industries net working capital is negative, apparently because their very large stocks are overfinanced by short-term debt, mainly of the softer type, that is, intercompany debt and provisions. The permanant capital available is provided from share capital and reserves (usually about two thirds) and long-term debt (about one third). Only a few industries diverge from this pattern: above average contribution by share capital and reserves is found for paper products; drugs, cleaners, cosmetics; matches and tire retreading and fabricated metal products which a rather weak equity position with long-term borrowing providing the majority of the permanent capital available prevails for printing and publishing, plastics and electrical and non-electrical machinery and equipment. Thus, on the whole, most of Malawi's industry is solidly financed with long-term funds, except for some younger industries and the ailing printing and publishing trades. With regard to short-term financing, however, industry tends to try to get by with a minimum and, as a consequence, liquidity crisis are relatively frequent, although perhaps often not as serious as they appear.

1.24 Compared to total capital employed of some MX 80 million, annual gross capital formation has been in the MX 13.4-14.8 million range during 1973-75 (table 9), representing about 17-18 percent of capital employed. If tea and tobacco are again excluded, the percentage would be 20 percent. By far the largest share of capital formation takes place in the food processing industries, TABLE 7 : MALAWI - MANUFACTURING SECTOR 1975 (K' 000.)

As I of Value Added: Wages Profits Wages and Salaries per Person (K per year) Gross Output Value Added Value Added as % Salaries Before Benefits Tax All Other Operatives Non-Operatives Industries (K'000) (K'000) of Gross Output 29.0 27.1 41.2 31.7 322 732 I Food procesaing 24,186.5 7,025.5 24.8 33.3 57.2 9.5 370 1,984 2 Bakeries and Confectionery 5,813.5 1,441.8 22.3 28.0 55.9 16.1 616 1.629 3 Beverages 17,895.3 3.982.1 26.0 28.1 47.7 24.2 410 925 TOTAL FOOD (excl. Tea & Tobacco) 47,89S.3 12.49.4 25.7 40.6 43.3 16.1 428 1,006 4 Ginning, Spinning, Weaving, Blankets, 13,534.7 3,480.8 etc. Towels, (11.6) 25.9 251 1,424 Ropes & Netting 877.6 194.4 22.2 85.7 5 Knitting Mille, 75.7 11.7 12.6 319 1,209 Clothing 8,461.4 1,110.4 13.1 6 29.3 53.0 40.8 6.2 257 1,422 7 Leather and Footwear 1.701.0 497.8 21.5 50.8 34.4 14.8 367 1,200 TOTAL TEXTILES AND LEATHER 24,574.7 5,283.4 47.2 27.4 55.4 17.2 251 3,694 8 Sawmills and Wooden Articles 3,193.9 1,507.2 17.5 43.7 .4.4 11.9 497 4.675 9 Wooden Furniture 1,005.7 175.5 40.1 29.1 ,.3 16-6 276 3.795 TOTAL WOOD AND WOOD PRODUCTS 4,199.6 1.682.7 18.4 26.8 02.8 10.4 310 1,984 10 Paper Products 3,826.6 705.6 95.3 (23.6) 18.9 715 4.123 and Publishing 4,630.1 995.3 21.5 11 Printing 66.3 12.3 11.4 645 3.087 TOTAL PAPER AND PRINTING 8,456.7 1,700.9 20.1 8.6 24.2 64.9 10.9 728 3,357 12 Ind. Chemicals, Fertilizers & Paints 11,863.6 1,018.2 21.9 31.9 59.5 8.6 531 2,338 13 Drugs, Cleaners, Cosmetics 13,337.1 2,926.2 21.5 46.1 38.9 15.0 468 1,890 Hatches, Tyre Retreading 2,837.5 609.2 14 18.0 73.1 8-9 291 3.000 Products 857.2 347.7 40.6 15 Plastic 31.1 59.0 9.9 525 2.359 TOTAL CHEMICALS 28.895.4 4,901.3 17.0 42.0 39.5 18.5 297 4.501 TOTAL NON-METALLIC MINERALS 4.991.0 1,893.0 37.9 21.4 50.5 41.3 8.2 297 8,244 16 Tools, Metal Furniture, Structural 2,770.2 592.4 Metal Products 406 3,941 4,900.8 1,513.9 30.9 22.7 71.3 6.0 17 Fabricated Metal Products 4,014 365.8 23.7 59.8 26.7 13.5 625 18 Elec. & Non-Elec. Mach. &Equipment 1,541.2 6.7 588 2.666 4.775.2 1,505.1 31.5 28.8 64.5 19 Motor Vehicle Assembly 32.6 4 7.2 445 3 846 TOTAL METAL PRODUCTS, MACHINERY AND 13.987.4 3,977.2 28.4 TRANSPORT EQUIPMENT 24.0 35.8 46.8 17.4 402 1,473 GRAND TOTAL (excl. Tea & Tobacco) 133,000.1 31,887.9 8.8Y2 58.1 22.7 19.2 211 1,430 20 Tea Processing 24,573.8 2,150.7 13.9 2/ 58.6 28.7 12.7 229 1,790 21 Tobacco Procesaing 28,681.6 3,996.5 39.4 43.5 17.1 335 1,478 GRAND TOTAL MANUFACTURING 186,255.5 38,035.1 20.4 38.4 40.7 20.9 273 1,147 MEMO: FOOD INDUSTRIES (incl. Tea & Tobacco) 101,150.7 18,596.6 18.4

Source: Annual Economic Survey 1974-1975.

I/ Mainly depreciation. 2/ Value added In plantations: 74% and 49K respectively of grosa output of plantatiop. TABLE 8 MALAWI- UANUPACTRINGSECTOR 1975 - Capital Embloyed and Its FinancinR (K' OCOs)

Current Current Liabilities Net Net Fixed Permanent Total Fermanoot Asseto and Proviciono Working Aosets Capital Share Capital Other Long Term Capital Hemo: Long Term Induotries Total Total Capital Total EuPloYed Renerven Liabilitieo Total Available Ftnaoncil Aaooto

I Food Proceoning 12,240.0 13,906.9 (1,666.9) 23,713.2 22,046.3 16,584.3 5.546.5 22,130.8 84.5 2 Bolaerieo and Confectionery 1,586.9 1,362.1 224.8 836.6 1,061.4 882.2 215.1 1,097.3 35.9 3 Beverages 4,787.7 4,900.7 (113.0) 6,506.2 6,393.2 5.094.7 2,059.3 7.154.0 760.8 TOTAL FOOD (excl. Teo & Tobacco) 18.614.6 20.169.7 (1555.1) 31.056.0 29,500.9 22.561.2 7.820.9 30.382.1 881.2

4 Ginning, Spinning, Weaving, Blankets, 5,332.2 5,358.8 (26.6) 7,181.1 7,154.5 3,553.8 3,600.7 7,154.5 - Towelo, etc. 5 Knitting Millo, Ropee and Netting 665.4 507.2 158.2 376.8 535.0 440.3 130.7 571.0 36.0 6 Clothing 5,893.6 5,841.7 51.9 704.0 755.9 480.7 328.4 809.1 53.2 7 Loother and Footwear 1.435.2 1,146.4 288.8 590.3 879.1 720.2 159.6 879.8 0.7 TOTAL TEXTILES 13.326.4 12,854.1 472.3 8,852.2 9,324.5 5.195.0 4,219.4 9,414.4 89.9

8 SBomillo and Wooden Articleo 1,282.5 22.8 1,259.7 1,367.9 2,627.6 1,720.3 907.3 2,627.6 - 9 Wooden Furniture 41.5 415.4 26.1 174.0 200.1 207.1 63.1 270.2 70.1 TOTALWOOD AND WOODPRODUCTS 1.724.0 438.2 1,285.8 1.541.9 2,827.7 1,927.4 970.4 2,897.8 70.1

10 Paper Producto 2,368.1 2,124.0 244.1 653.9 898.0 829.0 118.0 947.0 49.0 11 Printing and Publishing 3.312.3 1.470.1 1,842.2 2.065 9 3 908.1 1 487.2 3,282.0 4,769.2 861.1 TOTAL PAPER AND PEInIN56 3,594.1 2,086.3 2.719.8 42.2 3.400.0 5,716.2 91o.1

12 Ind. Chemicalo, Fertilisero and Painto 3,652.1 3,249.4 402.7 874.6 1,277.3 881.4 411.4 1,292.8 15.5 13 Drugs, Clnanera, Coometico 5,136.4 2,625.9 2,510.5 2,138.3 4,648.8 4,226.9 758.8 4,985.7 336.9 14 Natchoa, Tyre Rotreoding 1,110.8 815.2 295.6 1,080.3 1,375.9 1,257.6 118.3 1,375.9 - 15 Ploatic Producto 506.8 265.2 241.6 269.1 510.7 212.3 298.4 510.7 - TOTAL CHESICALS 0406 6.955.7 3,450.4 4,362.3 7.27 6,578.2 1t5869 8,16S.1 352.4

16 TOTALNON-METALLIC MitNERALS 2,837.4 1,231.0 1,606.4 6,919.8 8,526.2 5,103.0 3.455.1 8.558.1 31.9

17 Toolo, Hatal Furniture, Structural 1,495.4 882.5 612.9 183.1 796.0 560.9 259.3 820.2 24.2 Metal Producto 18 Fabricated Hetol Producto 2,237.1 2,234.3 2.8 1,099.9 1,102.7 948.1 156.6 1,104.7 2.0 19 Elec. & Non-Eloc. Macb.& Equipment 841.5 548.9 292.6 351.3 643.9 234.9 409.0 643.9 - 20 Notor Vahicle Anoobly 5.641.7 4.911.9 729.8 561.1 1,290.9 977.8 330.4 1.303.2 1. TOTAL METAL PR9UT8, MACHINERY & 10,215.7 8,577.6 1,638j. 3,.33.5 2,721.7 .153.353377.0 43.5 T9ANSDMT BQUIPAZBT

GRANDTOTAL (anl. Tea &Tobacco) 62,804.6 53,820.4 8,984.2 57,647.4 66.631.6 46,402.7 25,606.0 69.010,7 2,379.1

21 Toe Procooain 13,357.5 11,540.6 1,816.9 3.363.6 5,180.5 4,504.7 1,924.0 6,428.7 1,240.2 22 Tobacco Procooing L.537. 10,201.2 1,336.6 72,71.5 ,609f1 6.552.5 3,370.4 .j9,iZ 9 R.Q88

GOENDTOTAL MAMUPACTtIMNG 87,699.9 75,362.2 12,137.7 61,282.5 00,420.2 57,459.9 30,908.4 05,370.3 4,950.1

M=D: VWOD mDUSTRIEZ, incl. 43,509.9 41,911.5 1,598.4 41,691.1 43,209.5 33,618.4 13,123.3 46.741.7 3,432.2 Toa &Tobacco

Bourco: Annual Econcaic Survoy 1974-1975. TABLS9: HAWAI - cmOSs YIXED CkPrIAL PATIoN. 1973-73 ( 000')

19731 1974 1975 Total Land Pl1t Total Land Plant Total capital and and Transport Office Capital and and Transport Office Capital log ALu M - Formation BuildinS machinery E5ufjmE1. Equipment Formation Buildings K chinpry Sautinet lautnia F ognt I Food procaaing 6.236.9 1,972.3 7,157:1 8651 77.5 9,292.0 1,492.3 2,556.3 132.7183.9 4,265.2 136.9 7.3 42.4 10.0 1.9 ~~~~~71.832.0 53.7 133.1 5.6 124.4 2 SBaeries and Conf;eco) Y 975,4 237.7 227.1 225.9 27.4 71S.1 1065.) 1.32t.9 656.0 L1 7 ,6. TOTL OO (id Ta TbgdO 7,449.2 2.175 1A20I 106.8 10.081.9 2,0. 4,06. 923.8 107.3 L.6RZJ6 4 Ginning. Spinning. Waving, Blankets. 2,212.8 20.8 591.9 32.9 13.8 659.4 447.6 2,033.4 39.3 35.8 2,556.1

Tovals, at.44.0 47.1 17,3 3.4 0.4 68.7 - 2.3 12.0 0214.5 5 Knitting Hills. Ropn &Setting 90.2) 4.6 .i:o 44.0 8.2 147.8 42.4 150.4 93.7 28.9 315.4 6 Clothing 0313. 78 454. _93____16 2. 7 LeathTAL TT o wLr 2,347.0 7.5b.r nd flet 1r029.1 547.0 27250.6 145.0 69.3 3.012.7

Se ills &wooden ArticleS 57.8 15.1 174.3 30.2 0.1 20.3 22.7 82.9 93.2 1.5 200.3 9 WoodenFurniture ..3ALI1 .L1 f2 2.3 18.3 ad 0.4 _3.3 2.6 iLl- T OTdALWOurnIturMPRDUT 109.0174. Mi4 _ 238.6 41.9 83.3 98.5 4.1 227.8

10 Paper Product 214.9 1.0 4.6 7.9 0.1 13.6 8.5 105.7 18.2 1.9 134.3 11 Ppritn anodutPulsig270 .l 6. 0. 322.2 52.1 2 499.7 TOTAL PkmAOf mnniTND 271.9 416 480 60.2 619.1 58.8 427.9 70.3 ii7.. 634.0 12 Ind. Chbadcals. Fortilisera 4 Fints 39.9 85.6 34.1 14.5 4.2 138.4 231.0 94.5 10.1 4.2 339.8 13 nd. Cl rs. otics 6260.4 4.3 6 26.7 7.8 216.8 41.6 116.9 78.6 20.2 257.3 13 Doruags.PysanRereadoseing 2374.3) 101.9 7. .. )0 216.6 5.0 13.8 4.0 1.8 34.6 rnau... 27 ~~~~~~~I18.36 5. 6067. -=8 13 TPLasiProduts IAi.10- 30l 12.a 624.4DA- i n87u IL Il2-.

TOTALM-NKIALIC UL. 1.007.2 90.0 I22 14.3 S 2.L 1z8. 154.3 0388.

16 Tools. metal Furniture, Structural 73.6) 0.2 6.9 18.6 2.1 27.8 30.3 32.1 14.7 3.4 80.5 Natal Products 17 Fcbricated Natol Products 3 76.2 88.8 7.9 6.3 179.2 43.2 131.6 27.9 5.7 208.4 to Bloc. &Non-flal. Macb. &Squipnt 44.8 9.4 S13.3 13.9 3.5 40.1 40.3 10.3 3.5 54.1 19 mto eiceAsabY 29-nA H. I. 70.1- 4.L. ILl L 5.8 9. toL ^ RuCTS, N104T & 70.1 i i 2 MAM 635.0 11M-i l9BS!aRT BtUQ lT

GIC TOTAL (aicl. Tea & Tobacco) IJJ99I 4 2.855.4 9.346.3 658.5 ULI 13.132.7 3.874,2 7.418.3 1,437.1 3..1 13.033.7

20 Te Procssing 537.7 89.4 284.9 28.62 'J.7 412.2 276.6 970.4 23.1 5.4 1,275.5 21 Tobacco Processing 54..9..I 448.9 492.7 185.6 LA1.1)9.8 11. 149.5 19..3i± --HAi 501.4 GRAND TOTAL AIWACTURUa 13,376.0 3.393.7 10.123.9 872.3 31.8 14.704.7 4,265.3 8,538.2 1,658.5 348.6 14,810.6

MM; lOD LYrISUTSI. incl. 8,832.8 2,753.8 8,204.2 544.8 149.1 11,653.9 2,980.7 5,126.8 1,145.2 151.8 9.5 Tea and Tobacco

Source: Anal ecnmic Srvq 1974-1975. - 18 - although their annual share in the total (excluding tea and tobacco) varied from 52 percent in 1973 to 71 percent in 1974 and down to 33 percent again in 1975, and represented between 20 percent and 40 percent of the permanent capital employed in the food processing industry. The only other industry with an average of over MK 1 million annual investment during the 1973-75 period has been the beverage industry. Most of the gross fixed capital formation during 1974/75 was in plant and machinery, 1/ with land and buildings accounting for more than half of the rest0 Investment in transport equipment occurs at a somewhat higher level in industries which have a larger distribution network for their products, like beverages, bakers, drugs, cleaners and cosmetics, printing and publishing.

Present Situation

1.25 The present situation (1979) of Malawi's industry is relatively satisfactory. Capacity utilization in most industries is high, with exceptions being due to delays in receiving ordered inputs (transport problems through Mozambique ports). There are virtually no cases where serious excess capacity has been created through faulty decisionmaking by the Government or the private sector. Still, some unused capacity exists in industries such as in abattoirs, animal feed production, grain milling, oilseed processing, dairy processing, and in some tea and tobacco processing facilities. In general, however, these overcapacity problems are the result of structural problems, not of planning errors or general lack of demand. Thus, parastatal abattoir capacity, for example, is not used because of effective price competition from local butchers for live cattle, the price policy constraints faced by the Cold Storage Company, and lack of commercialization of the national cattle herd. Fertilizer compounding falls below capacity primarily because of transport problems, as does cottonseed oil processing. Animal feed output is below available capacity mainly because of livestock/feed price relationships and the lack of a rapidly growing poultry industry. Most of these problems can be overcome, but doing so requires action to be taken by those outside the industries that are affected.

1.26 Management of most industrial enterprises in Malawi, if not excellent, is very close to it. 2/ In part, this is the result of Malawi's astute use of expatriate personnel and foreign firms to manage the major industrial enterprises of the country. Such managers are hired as experts and tend to remain in their positions for a fixed time period. They are therefore able to plan and carry out their plan with a certain degree of security and authority. There are other critical aspects that enable good management of industrial enterprises in Malawi as well. They include the flexible and supportive policy framework, an operating infrastructure that removes many of the frustrating problems faced by industries in other developing countries, and the ability to import fairly readily equipment, spares, technical assistance and other support from outside the country. Also, the scale of industrial operations in Malawi, while large in some cases, is not so cumbersome or complex that it cannot be managed. Finally, the major industrial enterprises in Malawi have

1/ The breakdown is not available for 1973. 2/ Compared to performance in other LDCs. - 19 - a very high status and, by offering attractive salaries and prerequisities, are able to attract the best local talent to assist in their managerial and technical operations, especially at the middle levels of company activities.

1.27 The technology used in general in industrial processing activities in Malawi is drawn primarily from developed countries and is appropriate to plant scale and maintenance capability available in the country. In fact, the operations of nearly all larger scale plants viewed by the mission were well run and preventive maintenance was the rule rather than the exception. Spare parts and adequately skilled labor were generally available to operate and maintain the equipment. A growing constraint appearing in this area, however, is the lack of enough indigenous trained persons to deal with both technical processing matters and management issues. Expatriate personnel are still critical to most operations, and their on-the-job training efforts for Malawian personnel have been a very important factor in attaining the successful technical operation of many industrial operations, especially the large-scale ones. Attention will have to continue to be given to assuring that technical skills are transferred to Malawians in every possible case if the relatively successful performance of the industrial sector is to continue as the sector grows.

II. INSTITUTIONAL FRAMEWORK

Background

2.01 The ownership and operational control of industrial enterprises in Malawi is heavily concentrated in parastatals and a few large foreign controlled firms. Parastatals are particularly dominant in mainline products of agro-industries, which they either own wholly or jointly with foreign companies. Wholly-owned subsidiaries produce edible oil, maize meal and flour, fish, bread, coffee, canned fruits and vegetables, milk, fertilizer, rice, etc. Foreign firms are major partners in the production of beer (Carlsberg), textiles (David Whitehead and Sons), vegetable oils and chemicals (Lever Brothers), etc. Today, however, the operations of many industrial firms and most major investment decisions--even those of companies with a foreign majority--are strongly influenced by five parastatals. Parastatals--General

2.02 The five most important parastatals are the following:

(a) The government-owned Malawi Development Corporation (MDC);

(b) Press (Holdings) Ltd., a private company whose shares are held in trust by the President for the people of Malawi;

(d) Agricultural Development and Marketing Corporation (ADMARC), which is government owned; and - 20 -

(e) Industrial Development Bank (INDEBANK), which is owned 22.25 percent each by ADMARC, the Commonwealth Development Corporation of the UK (CDC), the Deutsche Gesellschaft fur Wirtschaftliche Zusammenarbeit of West Germany (DEG), and the Nederlandse Financierings-Maatschappij voor Ontwikkelingslanden N.V. of the Netherlands (FMO) and 11 percent by IFC.

2.03 Of the five institutions Press and MDC are major operational holding companies, that is, they tend to implement and manage subsidiary operations rather than passively taking an equity participation. ADMARC and Import/Export are large trading companies although ADMARC has considerable holdings in numerous agro-industrial enterprises and IMEXCO also has an interest in a few industrial ventures. INDEBANK is a traditional DFC which frequently lends to companies in which one or more of the holding companies have an interest but has so far limited its equity investments to about one fifth of total investments. All five institutions are active in many sectors of the economy but all have substantial investments in industry, often in the same enterprise. This is particularly true of MDC, Press and ADMARC which hold a controlling or important minority interest in many larger agro- and other industries. Frequently ADMARC and MDC or MDC and Press together hold the majority in a company and in that case there is usually fairly close cooperation between the holding companies concerned. There is thus a network of interlinked interests which covers a substantial part of Malawi's industry 1/ and combined with ADMARC/MDC/ Press majority interests in the two commercial banks (National Bank of Malawi and Commercial Bank of Malawi), this structure shows considerable stability even in times of stress. In addition, although the five institutions are relatively free from day-to-day government interference, the Government would have little trouble improving its will as an arbiter, should a fundamental conflict arise between the major partners.

2.04 The following provides a description of the five institutions main characteristics and fields of activities.

MDC

2.05 MDC was established in 1964, is government owned, and its shares are held by the Ministry of Finance, but as a statutory body it also is directly responsible to the President. MDC obtained its original funding from the Government, which provided both annual equity contributions and loan financing. It has increasingly borrowed funds domestically and internationally from private and official sources. At the end of 1976 MDC-s assets were MK 10.6 million for the corporation itself and MK 25.2 for the group, (1977: MK 14.7 and 30.6 million, respectively) which includes holdings in 25 subsidiaries (i.e., companies in which MDC directly and indirectly owns over 50 percent of the shares), and 15 associate companies (MDC share: 20 percent to

1/ A rough estimate based on company annual reports and Ministry of Trade, Industry and Tourism data indicate that in 1977 industrial companies in which one or more of the holding companies had an interest of at least 20% represented over 60% of total sales of Malawian industry (establishments with more than 10 employees). - 21 -

50 percent and a seat on the Board). 1/ Turnover (excluding intergroup sales) for the group was MK 50 million in 1976 and MK 56 million in 1977. MDC operates mainly through equity investments and makes loans only to companies in which it holds shares. It manages its subsidiaries (with the exception of Import! Export) and tends to develop new projects itself, finance them primarily through equity and participate in implementation and operation of the project. In a number of such projects it works closely with Press and ADMARC. It operates in industry (about 60 percent of total equity investments at cost), building and construction, wholesale and retail trade, hotels and catering, finance and real estate, and fisheries, but not in the agricultural sector. In the industrial and most other fields, MDC limits its operations to medium and large companies and does not get involved with small-scale enterprises.

Press Holdings

2.06 Press Holdings began as Malawi Press in 1960 and gradually expanded from purely media operations into other fields. In 1969 the present company was formed and took over Malawi Press Holdings and its development activities. Press today is a private company with considerable autonomy, with its shares being held by the President in trust for the people of Malawi, although it is assumed that ownership will eventually pass to the Malawi Congress Party. Press now has 17 subsidiaries, 11 of which are wholly owned, and investments in 30 associate companies in many sectors of Malawi's economy. At the end of 1977 the assets of Press and its subsidiaries totalled MK 35.7 million, which includes a valuation for surplus value of shares held in other, non-subsidiary companies. Gross sales, net of intergroup turnover (and excluding associate companies) of the Press Group were MK 34 million in 1976 and MK 41 million in 1977. In its operations, Press is fairly similar to MDC in that it also prefers to invest in equity and to develop, implement and operate its own projects. In 1977 Press set up its own projects department to develop and evaluate investment projects and has begun to more actively compete for new projects with MDC, which up to last year had performed the appraisal function for Press. However, there is a gentlemen's agreement that whoever identifies a project first will have the leadership in developing it, so that competition for projects will not become obstructive. Press does not receive financial support from the Government. It finances its expanding activities by retained earnings, foreign borrowing and private local loans and overdrafts secured by debentures over the fixed and floating assets of the group. It operates in agriculture (tobacco, ranching), industry (about 60 percent of total equity investment at cost), wholesale and retail trade (also of petroleum and petroleum products), building and construction, transportation, banking and insurance underwriting. As MDC, Press limits its operations in the industrial field to medium and large companies and does not get involved with small-scale enterprises.

ADMARC

2.07 The Corporation was established by statute in 1971 to take over the responsibilities of the earlier Farmers' Marketing Board. ADMARC administratively comes under the Ministry of Agriculture and Natural Resources and as a statutory body it is directly responsible to the President. 2/ Its main functions are:

1/ MDC does not take a share of less than 20% in any company. 2/ The President is also Minister of Agriculture. - 22 -

(a) to promote the economic interests of Malawi by increasing the volume of exportable crops and improving the standards of agricultural production;

(b) to provide an efficient system for supplying the agricultural requirements of farmers of customary land; 1/

(d) to market scheduled agricultural produce for export, and to promote its consumption in Malawi and abroad; and

(e) to establish and develop agro-industrial and allied enterprises which will more fully exploit the agricultural potential of the country.

To fulfill these functions ADMARC has built up a large network of offices including three regional offices, four divisional offices, 52 main storage depots/markets for various crops and over 960 seasonal produce-buying centers. The major crops traded by ADMARC are tobacco, cotton, groundnuts, maize, cassava and paddy rice, and the minor crops include sunflowerseed, wheat, coffee, beans, peas, oilseeds and miscellaneous other cereal and horticultural products. In the industrial field the most important aspect of ADMARC's activities is its rapidly growing involvement in other sectors, mainly agro- industry both directly and through investments in companies together with other parastatal and private participants. ADMARC's total industrial equity investments in 1977 amounted to about MK 9 million (about 60 percent of total equity investments at cost) and included agro-industrial investments in canning, edible oils, grain milling, cotton ginning, but also investments outside agro-industry as in shoe manufacturing, cement production and other sectors. ADMARC has shares in the two commercial banks, in INDEBANK and the United Transport Company (Malawi) Ltd. In 1977 ADMARC had a turnover of about MK 74 million and some MK 33 million in loans outstanding, of which MK 25 million were to Press Holdings, for which ADMARC is acting as a channel for part of its foreign borrowings. Of the remainder a considerable part went to industry. ADMARC itself borrows only occasionally in small amounts from the Government and the Reserve Bank and has only one major external loan as it generates most of the funds it needs from the substantial profits it makes. In 1977/78 ADMARC began to contribute 40 percent of its net operating profits to the Government, that is, of MK 29 million net profits MK 11.6 million went to the Treasury, leaving MK 17.4 million for its own reserves. While ADMARC deals predominantly with smaller farmers on customary land in agriculture, its industrial activities are limited to medium- and large-sized firms.

1/ There are four types of land tenure in Malawi: freehold (private, free to be sold), leasehold (private, long-term leased), public and land held, used or occupied under Customary Law, which is owned in community and cannot be sold but allotted to individuals belonging to the community. Individual farmers under the latter category are usually smallholders. - 23 -

IMEXCO

2.08 The Import and Export Company of Malawi (IMEXCO) was established in 1971 as a wholly-owned subsidiary of MDC, but in the course of a capital increase in 1975 Press Holdings acquired an interest of 49 percent. The company enjoys, however, a very substantial degree of autonomy in managing its operations and in negotiating--both locally and internationally--its financing. 1/ In 1977 its assets were about MK 18 million. Indeed, with an annual turnover of MK 55 million in 1978, IMEXCO is considerably larger than its parent MDC and about as large as Press Holdings, but smaller than ADMARC (turnover of MK 74 million). 2/ It is mainly a trading company, but its objectives significantly include:

(a) giving preference to overseas suppliers who are prepared to consider local manufacture in Malawi once a viable internal market has been established;

(b) supporting and encouraging maximum development of Malawian industry and of export markets for Malawian products; and

The company functions through five separate operating divisions:

(a) Main Trading Division with 62 CHIPIKU wholesale stores (of which 61 operated with a profit in 1978) with a total sales in 1978 of MK 32.5 million. Of these sales, 84 percent represented products that had been purchased locally. Through this Division IMEXCO has implemented the Government's policy to replace the Indian traders in the rural areas by Malawian businesses.

(b) Marketing Services Malawi which sells nationally 50 international brands of various imported products (except pharmaceuticals). Sales in 1978 were MK 10 million. Within this group of products import substitution possibilities are constantly being surveyed.

(c) Malawi Pharmacies Ltd., which sells nationally imported pharmaceuticals and related products (1978: MK 2.25 million) and is planning to commence production of selected pharmaceuticals in Malawi.

1/ The Company does not borrow from MDC or Press, nor does it receive government contributions. 2/ The largest part of ADMARC's turnover is in agriculture. - 24 -

(d) Malawi Motors Ltd., which sells imported motor vehicles (1978: MK 6.5 million). A truck assembly plant began operation in 1977 to assemble the Japanese 7-ton Hino truck. The number of assembled trucks was 48 in 1978 and 75 in 1979. 1/

(e) Radio and Electrical Services Ltd., which sells imported equipment in 3 retail shops and provides electrical contracting services (mainly airconditioning/refrigeration). Sales in 1978 were MK 3 million.

2.09 Despite its name, IMEXCO is not involved in exporting and is thus almost exclusively a local and imported goods trading company with the added mandate of displacing imported goods by local manufacture as soon as possible. It has two import monopolies (second-hand clothing and light-gauge iron roofing sheets) and the monopoly for three locally manufactured goods (sugar, matches and agricultural hoes). For all five products there is strict government price control. All other merchandise which IMEXCO handles, however, are sold at administered market prices, that is, at landed cost plus a fixed margin. In addition to the above activities IMEXCO has leased from MDC an industrial estate at Liwonde where brushes and brooms and plastic sandals are being produced, while part of the estate has been rented back to MDC for a can-making operation. IMEXCO is providing the manufacturing units (except the can maker) with finance and assistance in buying raw materials and marketing the finished products through its CHIPIKU chain. Finally, IMEXCO is the only one of the five institutions that has a sizeable training program for its Malawian employees at its training center in Blantyre where basic courses in accounting, administrative systems, for depot supervisors, cashiers, sales assistants, costing clerks, etc. are given. The company hopes to expand the activities of the center (which it finances out of its profits) to include training of Malawian businesspeople and their staff through courses and seminars open to everybody. Thus, although the company's purely industrial activities are limited, its impact on industrial development, both through identification of potential industrial projects and its capability to offer purchasing as well as marketing assistance may well be considerable and its influence may increase even further if its training programs and its involvement in the development of small-scale industry are eventually successful.

INDEBANK

2.10 INDEBANK was formed in 1972 as a traditional DFC active in all sectors of the economy except basic infrastructure, mainly through lending to well- established medium- to large-sized firms. It was originally jointly owned by ADMARC, CDC, (UK), DEG (Germany) and FMO (Netherlands). Recently, IFC has also taken a share in INDEBANK (11 percent, all others 22.25 percent each). Its total assets as of December 31, 1978 were MK 11.3 million, of which MK 8.8 million were in loans and MK 2.5 million in equity investment. The latter remain somewhat limited because INDEBANK does not take equity positions in parastatals or in enterprises in which MDC has a majority, although it does lend to other government

1/ Compared to total sales of 347 Hino trucks in 1977. - 25 -

controlled enterprises. Its project approvals have increased substantially in recent years, reaching nearly MK 4 million in 1978/79, and are expected to rise to about MK 7 million per year by the early 1980s. Its portfolio contains a rising share of industrial and in particular agro-industrial projects. INDEBANK has thus remained close to the functions of a development bank, in that it does not get involved in the management of the companies it finances, but through its stringent requirements regarding the financial viability of projects submitted for financing, contributes to improving the quality of resource allocation in the industrial sector. This function is apparently appreciated by the Government and it has made no attempts to substantially influence INDEBANK which, among the five institutions discussed, is undoubtedly the one furthest removed from direct Government interference.

The Parastatal's Position in Industry

2.11 The parastatals exert their influence on the industrial sector in a variety of ways, the most important of which are:

(a) equity participation in industrial companies;

(b) term lending to industrial companies;

(d) indirect influence on project selection and investment licensing.

The extent of direct influence exercised via equity participation can be appreciated from table 10, which shows parastatal holdings in major industrial firms in 1977/78. As can be seen, parastatal holdings are most important in the agro-industrial food and beverage industries (excluding tea and tobacco), but holdings in several other industrial branches are also important, particularly when they occur in the only firm in the field, such as Agrimal (agricultural implements), Enterprise Containers (plastic bottles, etc.), Nzeru Radio, Optichem (fertilizer mixing), and Portland Cement. The extent of holdings varies from one parastatal to another, with PRESS, for instance, having the largest number of exclusively (100 percent) owned subsidiaries but none in the range of 51-99 percent. MDC has fewer totally owned subsidiaries (only three), but controls several others through holdings of more than 50 percent. Except for its canning operation, ADMARC does not control any industrial company and neither does INDEBANK. In many companies two of the three major parastatals have a share, with Press usually combining with either MDC or ADMARC, the only exception being the Portland Cement Company which is jointly owned by MDC and ADMARC; there are only two firms in which all three hold shares: National Oil Industries Ltd. and the Commercial Bank of Malawi, Ltd. Whether the seemingly central position of PRESS implies any "leadership" in the sector or not is difficult to establish. -26-

TABLE 10: NALrX - Pat ttatl Eeld±aiw iA SCLIlcead Mlor Industrial Fifta,, 1977/78 ( % of total bhara capital)

1mc PUSS A2flC 'IDmA7 Ki1lnt. Food and Bt3veraaea ADIARC Caning Co. 100o Carlsberg I(ala BrGisry 27% 23Z Cold Storaga Co. 100% Chibhul Producta Ltd. 30% DSQga Sugar Corporation 20% 38% Grain and NMlLUng Co. 50% 502 Lawar Brothtxu MmIm-71 Ltd. 20% MalarI Diatillarim Ltd. 40.8% 20% Halani Tea Factory Co. 40Z NationaL OSL Indotrima Ltd. 302 20Z 502 Press BakariGo Ltd. 1002 Sugar Corporation of Mlaw Ltd. 298 43Z Southern Bottlora Ltd. 2% BAT (Malaui) Ltd. 24%

Textiles and Leather David Whitehead &-Sons CMala¶1) 29% 202 Marolga Kniteoar Ltd. 51% Bata Shoe Co. 49% Cotton GQinner Ltd. 492 Preas & Shirs Clothing Ltd. 100% Preso Fashiona Ltd. 100%

All Other Industrfas Agrimal Gialati) Ltd. 40% 40% B & C Metal Products 25% Can Makers Ltd. 100% Encor Products 23.3Z Enterprise Containara 302 20% 30Z Brick and Tile Co. 66.7% The Match Co. CMalaui) 26.3% Malai Motors Ltd. 51Z 49% NMaru Redio Co. 64.5% 31.25% Nzeru Racord Co. 10Qg Opticahe (Malaui) Ltd. 20% 20Z PEW OMetal Products) Ltd. 50% Pipe Extrudare Ltd. 26.3% Plaotic Products Ltd. 100Z Portland Camnt Co. 49% 50Z Pres Engineering Ltd. 1002 Press Furniture & Joinery Ltd. 100% Press Steel & Wire Ltd. 50% 28.6% Packaging Industries (iaLai) Ltd. 76.3%

Mono Itesa Co=rmrcial Bank of Ralaui, Ltd. 20Z 402 10% National Bank of Malai, Ltd. 47.35% 33%

1/ IIDBAIM holds 680,000 sharsG inn Mandala Ltd. The pGrcentage chakr thia repreoenta iL total equity of the conpany iB unkmocn. - 27 -

2.12 The parastatals' influence on industry is further strengthened by their lending to industry, mainly for long term but occasionally also on short term. 1/ Moreover, their presence on the boards of the commercial banks is likely to increase their standing in the industrial community and therewith the influence they can exert on decisions regarding difficult individual cases. A special phenomenon is the large amount of loans outstanding from ADMARC to Press (MK 25.6 million on March 31, 1978; the figure has been in this range for years). These are mainly foreign borrowings which are passed on to Press through ADMARC. The reason for this procedure is not clear. On the other hand, judging from ADMARC's investments in the industrial sector, and bearing in mind that ADMARC is highly profitable and its profits are generated mainly in agriculture, there is in these activities probably an element of transfer of savings in the agricultural sector to investments in the industrial sector, a phenomenon that is frequently observed at the earlier stages of industrialization.

2.13 As mentioned before, the interlocking pattern of ownership described above probably contributes considerably to the stability of the system. While the motives for its creation are probably largely political, it also reflects the reality of Malawi's small market which for many industrial products poses severe production cost problems because of the limited potential to take advantage of the economies of scale. As a consequence many markets, particularly for industrial mainline products (including agro-industrial consumer goods) are monopolistic or at least oligopolistic, which in turn requires some sort of regulation. 2/ Similarly, the narrowness of the market and the com- plications arising from having to carefully study the impact on unit cost of smaller than optimum size plants also requires some regulation of--or at least increased attention to--the choice of industrial investment projects. In response, the parastatals have over the years tried to improve their capacity to identify, prepare, and particularly appraise industrial projects. 2/ MDC, the oldest among the existing institutions 3/ was first to develop some project appraisal capability, although this was only a second priority after implementation (or management) capability, which the institution needed to fulfill its mandate to provide management to all of its subsidiaries. Over the years, MDC's capacity for appraisal has slowly increased and with the addition of further staff is expected to reach a quite satisfactory level of appropriate appraisal techniques in the near future. The next institution to develop appraisal capability was INDEBANK which, as a development bank, needed it as a precondition of its establishment in 1972. In the meantime Press relied on both MDC and INDEBANK for its appraisals and started to develop its own appraisal capabilities only in 1978. Finally, ADMARC never developed any formal appraisal capabilities and is said to have been subject to government directives regarding investment decisions. Inside the Government, investment proposals need to be approved by the Ministry of Trade, Industry and Tourism which reviews the proposals, obtains comments on them from other government departments and makes a decision which, however, is rarely negative in the

1/ Detailed data on loans are not available. 2/ Policies regarding these subjects will be discussed in chapter III. 3/ Disregarding "previous life" in another form of ADMARC and Press. - 28 - case of small to medium projects, since its attention tends to focus on large projects which might influence the overall national economy. Thus, the decisions of parastatals, with the exception of very large projects of national importance tend to stand0

2.14 However, appraisal of projects takes place only after they have been identified, prepared and selected for appraisal and thus, the decisions about the direction in which industrial investments may go is influenced at a much earlier stage than appraisal since the latter in the last analysis, means nothing more than saying yes or no to a project that has been identified and prepared and is being presented for a decision. If the emphasis on analyzing the decisionmaking process were accordingly shifted to an earlier stage, ADMARC may well emerge--at least in the agricultural and agro-industrial field--as the most important institution, since through the work of its development division, whose work is mainly technical up to the point of engineering economics/cost calculations, it independently generates a large number of new project possibilities. An intermediate position is apparently occupied by Press which tries to develop some new projects of its own, but also investigates the feasibility of projects brought to its attention by outsiders. MDC so far--and probably correctly--relies mainly on scru- tinizing ideas developed by either private interests or foreign and international advisors. INDEBANK, as a development bank, quite properly stays out of the engineering side of generating new projects, although it is of course involved in promotion by investigating any proposal that is brought to its attention and encouraging it when it finds it promising. 1/

2.15 ADMARC's development division is a hybrid between operational and research activities, the latter being much less known--and appreciated-- than the former. Operationally, the development division is in charge of operating ADMARC's estates, the most important of which are the tobacco estates, but others grow tea, macademia and cashew nuts, cotton, and particularly seeds (hybrid maize, cashew seedlings, groundnuts, etc.), while dairy cattle, hogs and poultry are the focus of activities on other estates. Many of these estates have a substantial experimental component in that new varieties are tried out (and occasionally developed), as well as planting of existing varieties in new regions of the country, research regarding diseases (as for African swine fever) is carried out, new uses of agricultural products are sought (as for tung oil for paint manufacture), etc. Out of these activities projects are developed whenever feasible. There are often projects that the private sector in Malawi would be incapable of developing and/or unwilling to implement which ADMARC considers as necessary and in the long term useful because of the urgent need for Malawi to seek out new possibilities to both substitute for imports and develop new export products.

1/ The promotion issue in DFC's activities tends to ignore the problem of where the choice is made. If out of a sea of theoretically possible projects only the suboptimal are actually identified, prepared and presented for appraisal, no sophistication whatsoever in the appraisal process can avoid the approval of second-best, submarginal projects. In reality, only the common sense of engineers identifying projects can assure that identified projects are not all suboptimal. - 29 -

2.16 As a final point, the only institution receiving some modest government contribution on a regular basis is MDC. ADMARC, DMEXCO and INDEBANK are making reasonably good to excellent profits. Press appears to have been financially troubled in 1976/77 when all but two of Press' companies made losses, but by 1979 the situation had been turned around and all of Press' companies made profits. Since ADMARC began transferring 40 percent of its profits to the Government--which in 1978 amounted to MK 11.6 million-- there can be little doubt that the group of parastatals engaged in industrial development as a whole is not a drain on government resources but rather a net contributor to government finance. Even if some government funds were chan- nelled indirectly to these institutions--and there is no evidence of this-- this conclusion would probably stand. From a sectoral viewpoint, however, there is clearly some transfer from agriculture to industry, since ADMARC's profits, which determine the overall balance, are mainly derived from agricultural activities.

III. POLICY FRAMEWORK

Institutional Background

3.01 Compared to the parastatals, central government institutions exercise little direct (operational) influence on industrial development except through overall industrial policy formulation and--perhaps even more-- through a process of subtle persuasion. Within the Government, the agencies most concerned with industrial policy--and industrial investment decisions-- are the Ministry of Trade, Industry and Tourism (MTIT), the Economic Planning Division (EPD) and the Economic Development Division (EDD) in the Office of the President and the Economic Affairs Division (EAD) in the Ministry of Finance. Other ministries and specialized agencies are involved in special aspects of industrial policies (as the Malawi Export Promotion Council in export promotion) and/or are consulted on an ad hoc basis on specific problems (e.g., the Ministry of Agriculture regarding agro- industrial projects), but as a rule do not contribute to general policymaking and its overall implementation.

3.02 Of all agencies involved the MTIT is most intimately involved with industry, mainly because it is responsible for administering policies like investment licensing, price administration, import and export surveillance, wage and salary guidelines, etc. In contrast, EPD and EDD get involved only on the more general level of policymaking and design and occasionally in investment decisions for large projects of national importance. 1/ EPD is

1/ Formally, all major projects of the parastatals need EPD/EDD approval of their (project) budget as well as Ministry of Finance (EAD) approval of the foreign exchange required, but extensive discussions of such projects takes place only for the larger ones. Investments by private firms--other than investments that need to be licensed--would be caught at the Central Bank and EAD when the application for the required foreign exchange is made. There is no official definition of national importance, but it is established by characteristics like the size of the project, how many people are affected by the project, its eventual contribution to exports, etc. - 30 - responsible for overall economic research, planning and policy formulation, in the course of which the industrial sector is reviewed and analyzed just as all other sectors are. It might be fair to say that, as long as the sector does not attract negative, that is, critical attention, it will be pretty much left to its own (and MTIT's) devices, although any fundamental changes in policies proposed by industry (and/or MTIT) will require EPD review and approval. EDD on the other hand is mainly involved with the implementation of the long-term development plan and the allocation of funds to sectors and individual projects. The latter function EDD fulfills mainly through commenting on investments proposed by the various ministries and parastatal bodies. Finally, the Economic Affairs Division of the Ministry of Finance deals with financial planning for development projects, with the finances of Malawian statutory bodies and with international financing institutions. Although this Division becomes involved only at the "technical" level, the very practical nature of its job probably provides it with more opportunities to actually influence events than the more esoteric units active in the decisionmaking process on general issues can exercise, except in the case of large projects of national importance.

Long-term Policy Background

3.03 The broad base of industrial policy was outlined in the "Statement of Development Policies 1971-1980" (DEVPOL) which--with some subsequent amendments--defined the objectives of official industrial policy as:

(a) encouragement and promotion of private investment;

(b) growth of an export-oriented industrial base, as opportunities for import-substitution diminish;

(d) a more balanced regional distribution of industrial activity;

(e) an increase in industrial efficiency; and

(f) coordination of industrial planning and a clearer demarcation of responsibilities between individual government agencies.

The second DEVPOL for 1981-1990 is presently under preparation. Except for an even stronger emphasis on export orientation and agro-industries it will probably not prescribe any drastic departures from DEVPOL I.

3.04 To a large extent, the achievement of DEVPOL objectives depends, of course, on the effectiveness of the institutional framework described in chapter II, but nevertheless specific policies have been adopted to provide incentives for industrial development and/or to control its direction. The more important of these policies are described below. - 31 -

Licensing System

3.05 Industries which employ 10 or more persons or which have machinery and equipment with a 25 h.p. rating or over need to be licensed annually under the Industrial Development Act and pay an annual license fee of MK 150. 1/ The annual license renewal is virtually automatic as long as the plant in question remains active. New licenses are required only for new plants and/or new products to be produced in an established plant. Expansions of output in existing plants for items already being produced do not require a license. 2/ The main purpose of this policy is to exercise some control over the establishment of new industries, with a view to:

(a) avoiding investments in plants well below optimum size in terms of economies of scale;

(b) preventing investments in ventures which would have low local value added and high import requirements; and

3.06 So far the system seems to have worked reasonably well as processing of license applications usually takes only 4-6 weeks, and thus there are no undue bureaucratic delays. The number of applications rejected has remained very low. 3/ License requests are apparently informally discussed before the application is formally submitted which helps to keep the rejection rate low. MTIT tries to judge each case on its merits and looks in particular at (and in this order of priority):

(a) financial viability of the project;

(b) competence of management;

(d) strategic importance of.the project for the development of the Malawian industrial sector.

Although this may not seem to be a very impressive yardstick from a theoretical point of view, it certainly is respectable from a practical point of view, particularly if the relative shortage of new industrial investment proposals is taken into consideration, which must provide some temptation for loose rather than stringent evaluation of project merits.

1/ Any industry of any size which is in private Malawian ownership is exempted from the industrial licensing regulations during the initial development period. A definition of this period is not available but general practice is to waive the license requirement until the firm can afford to pay the license fee. This applies mainly to small enterprises, although larger firms experiencing financial difficulties occasionally also avail themselves of this privilege. 2/ The system may suggest some element of inbreeding, that is, licenses are granted only to existing industrial firms. However, this is not so. For example, of a total of 27 licenses issued in 1976/77, 17 were granted to new entrants in the manufacturing field. 3/ According to MTIT, below 10 percent. - 32 -

3.07 Finally, the licensing system contains a few protective clauses which are designed to prevent abuse of the system, two of which are particularly important: first, a license can be cancelled for a variety of reasons, usually non-compliance with laws, but also if the licensee has "failed within a reasonable time to commence to manufacture the product;" secondly, a transfer of a license is possible, but requires ministerial approval, and this applies particularly to any attempt to indirectly sell a license ("In the case of a license granted to a company, a transfer of the control of the company shall be deemed to be a transfer of the license," that is, the license would need to be reapproved by MTIT).

3.08 Finally, in exceptional cases where it is felt that an additional incentive is needed to establish major enterprises of national importance, provision is made for a licensee to be granted providing exclusive production for a limited period of time (maximum 5 years). When such protection is given to a firm, no other licences are issued for products deemed to be competitive with those manufactured by the protected firm. 1/

Industrial Incentives in the Protection System

3.09 Malawi operates a two-column tariff on the basis of the Brussels Tariff Nomenclature (BTN). The countries falling under these columns are the EEC member and associated (ACP) states, the Commonwealth countries (including their protectorates, territories, etc.) and any contracting party to the General Agreement on Tariffs and Trade (GATT) under column 5 and all other countries under column 4. 2/ At present, column 4 rates generally vary from 10-35 percent with lower rates levied on capital goods, inputs, etc. and higher rates on consumer goods. For column 5 countries, rebates of 5 percent are granted frequently on goods which are subject to tariff at the 10 percent rate level, while no rebates are granted at the 30 percent level. 3/

1/ Nine licenses of this sort were granted during 1967 to 1970 and no more were issued after ihat. None are in force today. Exclusive production is sometimes complemented by granting an exclusive import license to the producer concerned, should his production capacity not suffice to cover domestic demand. Exclusive import licenses have also been granted for importing the main required raw material (e.g. leather for shoe manufacture). 2/ This system was introduced as of January 1, 1978 under "Government Notice No. 155," "Customs and Excise (Tariffs) Order, 1977" replacing the previous three column tariff, which divided countries roughly into: (a) sterling countries; (b) most non-communist countries (GATT members); and (c) communist plus non-communist countries not members of GATT. 3/ Some imported goods (as well as goods manufactured in Malawi) are subject to a surtax of 15 percent on 1.2 times value of the goods plus duty. Goods attracting a rate of duty of 5 percent and inputs used by manufacturers to produce goods subject to surtax are not subject to surtax. Some foodstuffs, basic metals and most capital goods are also free of surtax. - 33 -

3.10 Officially, it is not the policy of the Government to use direct import controls but for certain items (mainly agricultural products) import licenses are required, regardless of the country of origin. Licenses are also required for all imports from communist countries. The goods not requiring a license may be imported (from non-communist countries) under "Open General License," which apparently means "no license required". However, the official "Memorandum for the Information of Importers and Exporters" of July 1, 1978 begins under Part 1, GENERAL INFORMATION with a "Warning to Importers," which under point 4 "Goods Imported under Open General License" states:

To avoid subsequent embarrassment importers are urged to approach the Ministry and clear the importation of all goods about whose qualification for entry under Open General License they have any doubts whatsoever. Furthermore, unnecessary delays in the processing of applications for import permits would be reduced if all applications were accompanied by a full and accurate description of the type of goods to be imported.

Under these circumstances it seems clear that many--if not most-- importers would rather apply for a license they may eventually not need, than run the risk of discovering too late that one was indeed needed, particularly since point 1 of the "Warning to Importers" states clearly:

Import licenses may be refused by the responsible authority without any reason or prior notice being given. Importers are warned that, in such circumstances, any importer who places a firm order for goods or allows goods to be shipped, without first obtaining an import license (where such is required) in respect of the particular goods, faces the possibility of financial loss through having to return the goods to their supplier or having them declared forfeit.

It should be stressed that this does not provide for payment of a penalty and subsequent release of the goods to the importer. Both possibilities mentioned, that is, returning the goods or having them declared forfeit represent of course extremely stiff penalties. 1/ However, in practice the system has been applied quite liberally and import licenses have been granted freely. It seems likely that the potential for restricting imports will be used only in moments of acute foreign exchange crisis.

1/ There is a further hitch to importing: except by special permission of the Exchange Control, payments for imports from all countries must be made after the arrival of the goods in Malawi. In view of the geographical location of Malawi and the transit problems through Mozambican ports, this requirement may well be quite burdensome for imports arriving by sea. - 34 -

3.11 Direct industrial incentives within the protective system include:

(a) Special Protection

Local manufacturers (mainly infant industries, but also those threatened by dumping) may apply for special tariff protection, sufficient to protect the local producer against imported products. To obtain special protection, the applying firm must: (i) be able to satisfy local demand for the product in question; (ii) meet standard product quality requirements; (iii) price its products within a reasonable range of the c.i.f. cost of imports. 1/

(b) General Rebates on Import Duties

Local manufacturers may apply for rebates of any duties which would otherwise be chargeable on the parts and materials which they must import for their manufacturing activities. Rebates vary from item to item with the effect that either reduced tariff rates apply or no duty is payable. There is no formal system for rebates and decisions are made ad hoc for each individual case. Almost all industrial units are registered for these rebates which they receive on specified, although not all imported inputs.

Transfer to a special item (100.15) with tariffs of only 10 percent and 5 percent, respectively for columns 4 and 5 can be granted for goods (with normally higher rates) needed for the establishment or development of any industrial undertaking or enterprise deemed by the Minister of Finance to be of national importance, and similarly under tariff item 100.16 also in respect of parts and materials (excluding fuels) for consumption in a process of manufacture deemed to be of national importance. 2/

(d) Industrial Drawbacks

Local manufacturers can claim reimbursement of tariff duties paid on materials which have been used in the manufacture of articles which have been exported.

1/ Some 50 such applications were approved between 1967 and 1972. No official definition exists of reasonably close to cost of imports, but it is said to vary according to the importance of the product and to find its upper limit at what would be considered outrageous (50 percent would certainly be outrageous). 2/ Both concessions have lost value in the tariff reform of 1977 since most industrially important goods now have duties of only 5-10 percent anyway and the concessionary rate was raised from the original 5 percent and "free" to the present 10 percent and 5 percent, respectively. - 35 -

3.12 The authority on tariff protection is the "Tariff Advisory Committee," which has met only twice in the last 5 or 6 years. It appears that since the early '70s applications were discussed at a high level with the applicant and were usually subsequently withdrawn as it became clear that the Government had become less willing to provide exclusive and special protection, although some protection seems to have been provided via import licensing in individual cases.

Price Policy

3.13 Prices of manufactured products are either directly or indirectly administered by the Government. The MTIT is principally responsible for price administration with EPD and the Ministry of Finance being consulted on methodological issues (cost calculations, justification of different levels of profits, etc.) or on price increases for products of national importance as cement, sugar, beer, petroleum products, etc. Basically, the system can be subdivided into a formal part which is characterized by published laws, decrees, regulations, etc. and an informal part which is based on tradition, custom and often negotiation. The formal part of the system is concerned with outright price control, the informal part with price administration based on informal agreements.

3.14 Price control is exercised first, on some mass produced, fairly homogeneous commodities as cement, fertilizer, petroleum products, sugar, vegetable oils and maize meal and second, on goods which figure prominently in the consumption of lower income groups such as bread, milk, tea, fish, meat, edible oils, beer, matches, candles and soap. For all these products maximum selling prices are set, but for the second group prices are often controlled at both the retail and wholesale level. For locally produced goods prices usually are set at cost plus 12 to 18 percent, the lower figure being used for companies enjoying a relatively secure market, that is, running only a low risk, while the higher figures is used for riskier (often newer) activities. MTIT's check on cost figures appears to be relatively thorough and objective 1/ but complaints are often heard about the time it takes to get a decision (allegedly up to one year). For imported goods prices are set by fixing margins applicable to the c.i.f. cost of individual imports. Such margins are fixed, for example for pharmaceutical products, passenger cars, commercial vehicles, automotive spare parts, metal roofing sheets, second hand clothing, etc.

3.15 Historically, informal price administration goes back to MTIT practices which required a relatively large number of manufacturers, whose products were not subject to direct price control, to notify the Ministry of any intended increase of selling prices. Originally, MTIT

1/ Most controversies arise over the question of which costs are admissible in justifying a price increase. Practice varies but basically MTIT accepts only increases in direct manufacturing cost. Overhead cost increases, such as in administration, advertising cost, etc. have to be absorbed by the company in question. - 36 - requested this information mainly in order to keep its statistics of price mavements up to date and thus have a more effective instrument to monitor inflationary tendencies than it had by relying exclusively on price series issued with considerable delays by the National Statistical Office. However, over the years the practice of MTIT commenting on intended price increases developed, the number of firms participating increased (voluntarily or by prodding) and eventually the point was reached where most larger and medium sized firms would hesitate to increase prices unless a notice of "no objection" was received from the Ministry. Thus, although the system remains informal, a substantial part of the industrial sector today is subject to either outright direct price control or indirect price administration0 Only products which are manufactured within a wide range of qualities (e.g., shoes, furniture, sweets and bisquits) can escape control by changing the composition by quality grades of their output. Moreover, strict surveillance of their pricing policies would be extremely difficult, since frequently a relatively minor change in quality can be declared to constitute a new product for which no previous price existed in regard to which any increase could be measured.

3.16 In spite of the informality of price administration for non- controlled products, its procedures have been more and more adapted to those ruling price control decisions. Although even these procedures provide considerable latitude for judgments on the justification of an individual application for a price increase, the system over the last few years has been somewhat formalized and an evaluation today will almost always include (at least for more important products): (a) a check of claimed cost increases through an examination of audited accounts, costing sheets, invoices, etc. and a check of input prices; (b) a check of the profitability of the company, including a check of its investment/dividend policy; (c) a check of the company's efficiency, mainly through comparison of various ratios, technical and financial; and (d) an evaluation of the importance of the product in question for the national economy, with particular attention paid to the effect of a price increase on lower income groups of the population and on any particular sector for which it may have special significance, as building materials would have for construction, tires for transport, etc.

3.17 Finally, projected future cost increases are not taken into consideration unless they can be substantiated by copies of legally binding new contracts with suppliers of inputs, in which case MTIT is generally inclined to accept the evidence and grant advance price adjustment in order to avoid reapplications in a few months time.

Tax Incentives

3.18 Industrial tax incentives consist mainly of special depreciation allowances and of special write-offs for expenditures incurred before and during start-up. The latter makes deductible the expenditures incurred by a manufacturing company during the period of 18 months prior to the start of operations to the extent that they would be allowed, had they been incurred after the beginning of business. After start-up, an initial allowance can be claimed which is granted at the rate of 10 percent for industrial buildings and - 37 -

20 percent on plant and equipment. It is applicable in the tax year in which the capital expenditure was made but can be carried over indefinitely. In addition to the initial allowance, there is an investment allowance of 10 percent for new plant and equipment other than motor vehicles, which is applicable in the tax year in which the expenditures are made. Again if no profits are made in the first year, these allowances can be carried forward and offset against future profits. Normal annual depreciation allowances are calculated as a percentage of the written-down value of the asset and range from 5 percent on certain industrial buildings up to 33-1/3 percent on certain pieces of equipment, depending on the type of equipment. A special feature is the graduation of depreciation on plant and equipment depending on whether one, two or three shifts are worked. Rates vary approximately in the proportions of 10 percent, 17.5 percent and 25 percent. The annual allowance is officially "as may be determined by the Commissioner of Taxes," that is, it is individually assessed and therefore may well carry an element of incentive in cases of investments of national importance. While depreciation allowances appear to be generous in Malawi, it should be noted that Malawi does not grant any tax holidays to new enterprises as is done in so many other developing countries all over the world.

Implementation and Practical Consequences of Policies

3.19 Malawian policy makers, particularly in the industrial field, are faced with a dilemma: on the one hand, the Malawian economy, and even more so the industrial sector, is very small, indeed so small that the economies of scale for production of many goods, particularly manufactured, justify a few plants or only one to satisfy demand in the local market. In such a situation a considerable degree of regulation of the economy is necessary unless the government is prepared to accept monopolistic or similar pricing practices with all the attendant consequences for growth, income distribution, equity, etc. - 38 -

3.20 In Malawi's situation then, mainly two types of activities of the industrial sector need to be regulated from an economic point of view: allocation of investment and pricing. From a sociopolitical point of view another facet of the situation needs some surveillance: the concentration of economic power produced by development in the form of monopoly or cartel-type organizations.

3.21 Regarding the economic problems, the most direct policy to regulate allocation of investment is licensing of new investments. The other incentives for industry could be said to play a subsidiary role to licensing in this function, but even that would probably be an overinterpretation. The real role of customs and tax incentives for industry is rather to provide some additional attraction to establishing manufacturing enterprises in Malawi over and above what the regulated market can offer. 1/ In many cases it will be possible to support such a policy with the infant industry argument and that indeed is done by EPD and MTIT. With regard to price regulation the most direct policy is price control which, however, applies only to relatively few, though important, commodities. Therefore, control has been supplemented with the informal system of price administration which enables MTIT to intervene whenever it feels that price increases are beyond what is needed to keep enterprises financially sound.

1/ In this case, the administrative flexibility in granting incentives serves as a bargaining point: the authorities in dealing with local or foreign potential investors, try to grant privileges only to the extent necessary to attract said investors4 - 39 -

3.22 The merits of the industrial policy system thus cannot be judged mainly on the basis of its structure and consistency but should rather be evaluated by its implementation and the results achieved. This is difficult to measure but there are several facts that support the view that policies have been implemented fairly well and wisely. First, there is the fact that manufacturing output has grown quite satisfactorily since independence. Second, there has not yet been a large industrial investment that turned out to be a white elephant and third, even at the level of medium sized investment projects, real failures have been rare, 1/ although some projects have needed prolonged special support. The government is well aware of the fact that many industries remain "infants" longer than expected, which is due rather more to unreasonable expectations about what can be achieved within a few (e.g., five) years in the Malawian context than the result of blatant mistakes in investment decisions and/or inefficient project implementation. 2/

3.23 Thus, so far the system of policies as implemented appears to have worked reasonably well. However, it depends substantially on skillful economic political management by a group of technicians who share the strong basic commitment, laid down in DEVPOL, to a free enterprise system in which the government keeps a relatively low profile even though it may exercise considerable regulatory functions. Obviously, the present system could easily be misused by people with different objectives or it could be mis- handled by less competent people and this decisive dependence on a relatively limited number of highly competent and motivated individuals might be considered its major weakness. 3/ Technically, the most difficult task for policy makers is undoubtedly making decisions with regard to new industrial projects when problems of economies of scale are involved which, in view of the size of the Malawian market, occurs relatively frequently. Unfortunately, economy of scale questions, while easily solved in theory, are among the most difficult to answer in reality because intricate engineering and cost problems almost always arise and technical development constantly shifts the limits of "economic" size, not only upwards but also downwards. 4/ With inflation,

1/ The rate of actual failures should anyway not be compared to some purely theoretical standard which, of course, has a 100 percent success ratio but rather to experience, for example, in developed industrial countries where mis- investments are not entirely unknown in spite of the application of highly sophisticated project appraisal techniques. 2/ These expectations are greatly influenced by theoretical thinking, which tends to underestimate the time required for the learning process in a developing country, particularly in manufacturing processes requiring substantial labor skills and workmanship. 3/ In principle, of course, the success of any policy depends on the quality of its implementation. The point here is that highly qualified people are scarce in Malawi and might easily be attracted to other positions and difficult to replace. 4/ This point is sometimes overlooked. Technical development during the last decade or so has increasingly produced economic solutions for so-called "mini-plants" in various industries, such as in steel, various chemicals, etc. - 40 - rapid rise in real energy prices and the unusually high transport cost Malawi incurs for both exports and imports, these problems are further compounded. Consequently, investment decisions on projects where economic size of plant is a major issue must be among the most difficult--and most consequential-- to make. As industrialization proceeds and the easy and clear options are used up (i.e. those cases where plant size poses no problem), this question will assume increasing importance and require careful attention, particularly because the Malawian economy is so small that a major mistake on a large project could have very serious consequences.

3.24 Malawian authorities have tried to counter the sociopolitical problem of potentially excessive concentration of economic power mainly through creation of the parastatals described in chapter II. Although fairly autonomous, these institutions in the last analysis remain responsible to the Government and therefore the latter should be in a position to prevent abuse of their power. Nevertheless, the mere size of the parastatals tends to introduce a bias against small-scale industrial enterprises, as larger scale enterprises can attract better management, are better credit risks and, if in any way linked to the parastatals, have access to their entire network of participations, connections, etc. Thus, as a result of this constellation, plant sizes in some branches are today larger than required for minimum-sized economic plants. This is true, for instance, for bakeries, seed processing, fish processing and other agro-industrial activities. It is not clear what the overall effects of these developments are with regard to industrial efficiency and employment, but so far the Government has not been particularly concerned with the issue.

3.25 On the other hand, the objective potential for small-scale industrial enterprises (i.e., excluding artisans, craftsmen, etc.) is limited since Malawi's industry in general has not yet reached a size where it would seek to farm out production of parts and components to small scale firms, as is the rule in industrial countries. In principle, the Government wishes to promote small-scale enterprises owned and run by Malawians, but while there are substantial numbers of artisans and craftsmen, Malawians capable of financing, starting up and running a small industrial enterprise are rare and whatever talent exists, is rapidly absorbed into larger industrial enterprises, which are all eager to increase the number of Malawians in middle and upper management positions. In spite of the Government's basic commitment to the development of small-scale enterprise (of all types, that is, not only industrial), it has so far not succeeded in preparing a comprehensive plan to implement this policy, although several studies of the problem are underway to determine the merit of alternative schemes.

3.26 Serious private sector criticisms of industrial policy implementation (as gleaned from interviews) are limited to a few points, the most frequent and important of which relates to the time it often takes to get a ministerial decision, particularly in answer to an application for price increase, where delays of up to 12 months have occurred. While the method of delaying decisions certainly contributes to restraining inflation it can also decisively weaken a company's financial position. Reportedly, firms that originally manufactured mainly essentials which are subject to particularly stringent price controls, are diversifying into non-essentials which offer better profitability prospects - 41 - and are less subject to price restraint, in order to crosssubsidize their output of essentials. The danger of this development, if it becomes widespread, is that eventually the firms concerned might decide to reduce or even drop production of essentials. The Government thus needs to find a workable balance between its desire to keep down the inflation of living cost for lower income groups and the need to provide sufficient incentives for producers to continue--or even expand--their production of essential, but stringently price controlled goods.

3.27 In conclusion, industrial policy in Malawi appears to be surprisingly lean compared to the wealth of laws, decrees and regulations that characterize the situation in many other countries (developed and less developed alike). This moderation in formal policymaking is, of course, made possible by the substantial and variable informal influence the Government can exert on industrial developments. However, in the special situation that Malawi finds itself this may well be the most effective way of dealing with policy problems and, as long as the system is handled with reasonable restraint it is likely to produce reasonably good results.

IV. PROSPECTS: CONSTRAINTS AND POSSIBILITIES

Constraints

4.01 Malawi's future industrial development faces three principal constraints, which are either difficult to overcome or cannot be removed at all:

(a) smallness of the domestic market;

(b) Malawi's geographical location, which results in:

(i) relatively high transport costs for overseas trade (both exports and imports),

(ii) at least temporarily, because of political factors, a lack of access to markets (and to potential sources of supplies) in neighboring countries; and

(c) shortage of industrial skills on the worker and technician level, as well as a lack of local (African) engineering and managerial talent.

These constraints have some important consequences which cannot be quantified, but their general implications for Malawi's future industrial development can nevertheless be summarily evaluated.

4.02 The most important consequence of Malawi's small market for industrial products is the constraint it puts, via the economies of scale, on efficient import substitution. The smaller the market, the fewer the number of industrial - 42 - products that can be produced for domestic use in economically sized plants. 1/ However, this effect is to some extent counterbalanced by the extremely high transport cost for imports from overseas sources into Malawi, as they provide substantial "extra protection" for many Malawian industries.

4.03 Regarding high transport costs for overseas exports and imports, they can be considered to have a permanent"and, in addition, a temporary cause. In view of its geographical location and taking into account the high probability for further increases in the real price of fuels, Malawi is likely to always have relatively high transport cost for goods exported or imported. But in addition to these permanent cost there are temporary costs due to the political and economic situation in neighboring countries, the most important of which are the difficulties experienced with transit through Mozambican ports (mainly Beira and Nacala). These include substantial delays, damage and theft, the cost of which vary greatly and cannot be measured exactly, but in many cases are known to be quite high.

4.04 Pure (permanent) transport costs vary widely from product to product. For example, in May 1979 transport costs (including ocean freight, port charges, railage, insurance, clearing, etc.) represented about one- third of f.o.b. cost for imported photocopy paper (from Rotterdam), one-half for steel (Durban), three-fourths for a 1-ton Datsun pick-up (Japan) and almost 100 percent for single superphosphate (Durban). These permanent transport costs have increased at an annual compound rate of 13-15 percent between 1974 and 1979, that is, far more rapidly than world market inflation and are likely to continue their increase indefinitely.

4.05 The cost effect of the temporary transport problems can only be illustrated, not calculated. Industrial firms interviewed unanimously confirmed that because of uncertainties and delays in deliveries of imported goods they hold larger stocks of inputs, varying from a minimum of 3 months more than needed under normal circumstances to 6 and even 9 months more. With a cost of borrowing for working capital purposes of 15 percent, this means a cost increase from 4 percent to 10 percent of c.i.f. value (or 8 percent to 20 percent of f.o.b.) for high-transport-cost goods. These delays are due to a variety of factors affecting operations in the ports, the most important of which are congestion, bad management, particularly regarding the flow of shipping and customs documents (mainly because of inexperienced dispatchers), inadequate port equipment, pilferage, etc. Delays usually cause cost increases through losses on perishable goods or damage to non-perishables

1/ The difference between economic plant size and domestic needs often is very considerable. For example, the present (1979) minimum economic size (MES) plant to produce bolts, nuts, rivets, etc. could produce Malawi's annual requirements of these products in one month. Since the diseconomies of undersized plants often grow very steeply when plant sizes of less than 50 percent of MES are involved, a case like the above (one twelfth of MES) means that a bolts, nuts, rivets plant would be uneconomic in Malawi for a long time to come, unless technological progress succeeds in bringing down MES substantially, which present technological efforts to develop miniplants may well achieve. - 43 -

(e.g., rust on metal products), which in turn has resulted in insurance rate increases to the extent of 25 percent for Malawian imports through Mozambique. This extra cost can amount to a substantial sum on high value products (motor vehicles, machinery, etc.) for which insurance payments are relatively high already. Furthermore, the rate of daily storage charges increases with time and the cost effect of this and of higher insurance rates is compounded when duty has to be paid on imported goods, because duty is calculated on c.i.f. value, which includes insurance and storage charges. Finally, losses often increase further during railage from ports to Malawi through pilferage and weather damage, as tarpaulins covering goods on railroad cars are a favorite object of theft. The extent of these losses of course vary widely from high value products like durable consumer and capital goods where they can reach 25-30 percent of the value of the shipment to low value products like fertilizer where they are relatively small. In many cases the delays have led to less than full use of capacity in Malawian plants or even to interruptions in production of varying length in the plants affected. As a last resort, manufacturers have begun to have their imports shipped in containers (or even by air) with an attendant substantial increase in transport costs which, however, in quite a few cases is partly or wholly compensated by savings on the losses from delays and pilferage. Estimates (by manufacturers and government officials) of the overall impact of all these factors vary greatly from about one-third of permanent transport costs to 100 percent or more in exceptional cases. Be that as it may, it can probably be safely concluded that in considering economy of scale question, Malawi can count on transport cost protection of 50-100 percent of f.o.b. cost for most products.

4.06 At present, industrial skills do not present a serious bottleneck for Malawi's industry, but future expansion of the sector is likely to be seriously hampered by a shortage at the skilled worker (machinists, lathe operators, tool makers, etc.) and technician level. Similarly, local engineers and managers are difficult to find and, while expatriate personnel has successfully filled the gap in the past, any rapid sustained expansion of industry over the next five to ten years will eventually require quickly increasing numbers of local personnel in technical and managerial positions. Moreover, requirements for skills will increase even faster if Malawi should embark on an industrial export drive, since in most export markets product quality will be decisive in determining success or failure. Finally, the development of Malawian-owned small scale industry 1/ will require the development of indigenous entrepreneurial talent which, however, over the past 5-10 years has been largely absorbed into commerce as the Government's policy of replacing Indian traders by Malawians was being implemented.

4.07 These existing constraints on Malawi's industrial development also have important implications for Malawi's future exports. High transport costs reduce the competitive edge of various Malawian agricultural exports and would probably prove to be prohibitive for industrial exports involving

1/ As distinct from small-scale enterprises in the artisan, crafts, commercial and service sectors, where skill requirements are much less demanding. - 44 - products with a low value:weight ratio. The small domestic market limits the number of economically viable industries and thereby reduces the potential to export surpluses of various industrial goods at prices based on marginal rather than full cost pricing. Finally, the political situation in neighboring countries has deprived Malawi of potentially interesting markets at least for the time being and perhaps even in the longer run.

Possibilities

4.08 In considering possibilities for further industrial development in Malawi the most difficult question is to what extent the present temporary constraints (transport problems, access to neighboring countries, political risks, etc.) can be assumed to really be only temporary. Clearly, a peaceful solution of existing political problems and the subsequent opening of borders and resumption of normal trade relations would have a profound effect on the pattern and pace of Malawi's industrial development. Therefore, it is necessary to consider the implications of different political scenarios, of which one extreme would be the indefinite continuation of the present situation and the other a movement toward peaceful solutions in the region with reopening of borders and resumption of intraregional trade.

4.09 Should the region remain closed, Malawi would have to continue to direct its development effort exclusively towards exchanges with the industrially developed countries and would be--perhaps increasingly- hampered by the constraints mentioned in para. 4.01. However, should the region open up, Malawi's prospects would be very good indeed for the following reasons: (a) transport costs should come down as alternative import/export corridors become available and new investments are made (eventually) in transport infrastructure. On the other hand, problems might initially arise in Mozambican ports if Zimbabwe traffic returns to normal, since 70 percent of Beira's traffic used to go to Zimbabwe and a return of all of this traffic to the port would probably cause at least temporary chaos; (b) exports to neighboring countries (including industrial exports) should increase quickly as Malawi would have a considerable competitive edge in many products with a low value:weight ratio mainly because of high transport costs for products imported from outside the region; and (c) even if the region opens up, uncertainties and insecurity in many of its countries are likely to remain substantial for some time to come and Malawi, with its stability and security, may therefore be in a position to attract regional business in various sectors, ranging from manufacturing plants to banking and other services.

4.10 For practical purposes, and to preserve an appropriate degree of conservatism in making investment decisions, future possibilities should be explored initially only on the basic assumption of "no change in the present situation" and all possibilities specifically related to optimistic assumptions about regional political developments should be treated separately as a potential bonus over and above the basic case, which implies very little trade with immediate neighbors and hence the need for Malawi to earn its foreign exchange principally through exports to industrial countries. - 45 -

4.11 The principal objective of Malawi's industrial development would be to contribute to the gradual modernization of its economy, but in doing so, never to become a serious drain on the country's limited foreign exchange earnings. To prevent this, the balance of payments effect of each project should be clearly--and conservatively--established, including the more important secondary effects (needs for spare parts, replacements and supplies). Since, while it is often possible to borrow the foreign exchange required for constructing a new plant, borrowing is more difficult for recurrent costs, particular care should be taken to work out the recurrent foreign exchange requirements for inputs, supplies, spare parts, etc. which will be needed annually to keep a plant running at a satisfactory rate of capacity utilization. In addition, to determine how well the industrial sector is performing, periodic foreign exchange budgets for the sector should be drawn up showing its foreign exchange earnings and requirements for operating costs and debt service.

4.12 The requirement that the industrial sector earns a substantial part of its foreign exchange needs, and over the longer term an increasing part, implies that in addition to import substitution, industrial exports should be a focus of sector strategy. In view of Malawi-s resource endowment and geographical location, exporting modern, finished industrial products in quantities that will significantly increase the countries overall export - 46 - earnings will be an extremely difficult task. In the short to medium term, 1/ only products made mainly from local resources would have any promise and therefore, attention should be focussed on developing agro-industries both for exports and for import substitution (for a more detailed analysis and some proposals chapter V)0 As agro-industries produce mainly for basic needs (food, textiles, fuel, housing), counting the part of their output used locally as foreign exchange savings is far more justified than doing so for consumer durables and luxury goods.

4.13 In the long term, that is, after most agro-industrial possibilities are exhausted, Malawi should strive to develop high quality, high value:weight ratio industrial products for exports in order to have any chance to break into sophisticated overseas markets, to which transport costs will always remain relatively high. Such a policy would require a major effort over the next 10 to 20 years to develop a high degree of industrial skills, which are initially needed mainly at the worker and plant supervisor level. 2/ Management and other more esoteric skills can initially be hired from abroad. Some early specialization of these efforts in specific industrial branches would be necessary as Malawi is too small to aim at full industrialization, that is, capability (and capacity) in most of the important industrial branches. In choosing the direction of specialization, the native talents of the population (for working with metals, wood, other materials, etc.) should be taken into account, but most importantly, specialization should be directed to industrial branches where the manual skills of the worker are likely to remain of considerable importance for the quality of the product, that is, manufactures that permit total automation of production should be--at least in the earlier stages--excluded, as automated production lines often require a far too heavy investment expenditure compared to the savings available for industrial investment and secondly, products from an automated line more often than not are likely to have a relatively lower value:weight ratio, that is, they would be handicapped by high transport costs in export markets.

4.14 The strategy for developing industrial exports other than agro- based, should be market rather than production oriented, that is, pure export industries should be started only after thorough studies have been made of potential markets and their requirements, particularly with regard to

1/ In this context short, medium and long term are defined as up to and including 5 years (short), 6 to 10 years (medium) and beyond 10 years (long), because in terms of economic (and industrial) development, commercial banking definitions of "term" are simply too "short." In addition they tend to create unrealistic expectations about what can be achieved in those terms called medium and long in the banking business. 2/ Except for basic industrial skills, training of industrial workers should largely be left to industry, but the Government should support such training by appropriate policy measures, for which there are many examples in other LDCs and industrial countries. - 47 - quality. 1/ In trying to determine which industrial products or product groups (other than agro-industrial) should be produced for exports to the developed countries, it would probably be better to avoid consumer goods (except for genuine specialties), since competition has become stiff as more and more developing countries vie for a share in these slowly growing and increasingly protected markets (e.g., for textiles and leather goods) and Malawi would have a disadvantage vis-a-vis many competitors because of high transport cost. It would probably be better to employ experienced marketing consultants who would prepare proposals for eventual export production on the basis of a thorough market study, taking into account Malawi's industrial capabilities. This approach would still involve considerable risk. A safer method would be to seek out--or have consultants seek out-- industrial firms in developed countries which would be prepared to contract out the production of parts and components with a relatively high value:weight ratio and/or producers who are willing to consider assembly operations in Malawi for exports and who might be willing to participate financially in the Malawian venture and provide technical assistance. For such operations the creation of free zones in Malawi might be useful. In negotiating agreements with foreign firms for such ventures, two major principles should be observed: (a) the operation should generate substantial net foreign savings, and (b) Malawian workers, technicians and eventually middle managers should be trained in all relevant industrial skills.

4.15 In spite of this stress on developing industrial exports, import substitution will remain for some time the more important issue, since in the short to medium term there will be many more industrial projects for import substitution than for exports. As the process of import substitution proceeds, however, its problems will become more difficult since cases where economies of scale pose no problem will progressively be used up and increasing attention will have to be paid to finding technically and economically viable solutions at the lower end of plant scales. While substantial progress has been made-- and continues to be made--in circumventing the limitations of the economies of scale and in developing economic, small-scale plants for many products, the techniques involved not only are sometimes new and unproven but small plants (or "miniplants") often require more technical labor skills than the operation of fully automated production lines. 2/ The eventual need for qualified,

1/ Reliance on the magic of comparative advantage alone promises only limited success in wealthy markets, where demand/price elasticities tend to be quite low compared to the preference for quality. For example, Malawi's attempt to export canned pineapples to the Middle East failed, not for reasons of price, but because: (a) the can had a black label, which is unpopular in the Middle East, and (b) because the percentage of sugar (17 percent in Malawi's cans) was too low for the taste of the market. 2/ The latter, of course, require some highly qualified engineering/electronics personnel, but they could be hired from abroad, if such plants were found to be economically desirable for the production of specific manufactured goods in Malawi (which seems at present unlikely). On the other hand "microengineering" is constantly developing small, but economically efficient production equipment which in all probability will substantially reduce the MES for many types of industrial outputs, but would require much more skill at the worker and supervisor level. - 48 - experienced industrial workers and technicians in this field would further intensify the need for a deliberate policy to educate and train such workers. This emphasis of training at the workers level is often neglected while attention is focussed on turning out academically trained managers and-- usually at a later stage--engineers. However, their effectiveness at the plant level will remain relatively limited as long as qualified personnel on the plant floor is lacking.

4.16 Finally, a word of caution is in order. In more advanced stages, industrial development is often connected with building large industrial complexes, whose cost can easily run into the hundreds of millions of dollars. Particularly in countries where most clear.ut possibilities for import substitution have been utilized, the temptation to "go big" becomes stronger, particularly if domestic industrial capabilities are overestimated. These very large investments, represent of course, a very considerable economic risk for the country in question, even if they are partly or totally externally financed, since most of the economic cost of eventual failure has to be carried by the country, although perhaps indirectly. Moreover, such projects often preempt investment resources available for general industrial investment and hence their very existence may prevent the implementation of several-- perhaps even many--smaller, and less risky industrial projects. These considerations apply, with even greater force, in a small country, where projects that would cost more than one year s entire GNP may well become a national disaster if they turn out to be failures. Therefore, Malawi would be well advised to concentrate on the possibilities to distribute the relatively high risks of industrial investment in the early stages of economic development over many industrial projects. In Malawi's situation, with all the special constraints and difficulties it has to face in its industrial development, diversification of investment and therewith spreading the risk would be the most prudent procedure. In searching for industrial projects, it would pay to look toward the seemingly unimportant and small products for domestic production before moving into large and basic industries.

V. THE NEXT TEN YEARS

Background

5.01 In the eighties, that is, the short to medium term, Malawi should focus its industrial development effort on agro-industries, the only broadly resource-based industrial sector it has. Most other important industrial branches (e.g., metal working, capital goods, chemicals) require a degree or new skills and industrial sophistication that cannot be developed so rapidly. In contrast, many agro-industrial (and related) projects can be implemented in the next ten years and many of the skills required can be drawn from already existent enterprises. Happily, this subsector would also be likely to contribute to Malawi's foreign exchange position by providing either new exports or replacing present imports at reasonable cost, that is, at a cost comparable to - 49 -

that of an average foreign producer plus transport cost to Malawi. 1/ The following discussion will concentrate on selected, agro-related subsectors of Malawi's economy, in which a number of project possibilities have been identified and/or detailed project proposals have been made or are already being implemented. This discussion is based to a large extent by a study prepared by consultants to the Bank on "Malawi: Agro-industrial Development" (AMEC and DEVRES, November 1979). These subsectors are as follows: (a) food-related; (b) energy-related; (c) forestry and wood-related; (d) principally export- oriented projects; and (e) some miscellaneous projects in other sectors. It should be noted that--following the observations made at the end of the last chapter--the projects suggested here are all relatively small, even when they represent an action program for an entire subsector (e.g., for fisheries). Moreover, while quite a few of the projects proposed would require some difficult policy decisions and actions to be successfully implemented, most of them could be technically implemented in a few years. Hence, the contribution of agro-industry to economic development could be swift and effective if the necessary policy measures are taken swiftly and are implemented energetically. A discussion of potentially beneficial policy measures will conclude the chapter.

Food-related Issues

5.02 One of the Government's basic economic objectives is to maintain and/or achieve the country's self-sufficiency in all major foodstuffs, that is, mainly in staples. This has already been achieved for the main staples, although occasional shortages have occurred in consequence of bad harvests. With growing population and increasing living standards--including shifts in consumer's tastes--self-sufficiency may well be threatened in the medium to long term, especially for the fancier components of a modern diet, as animal proteins. However, to a considerable extent, the Government's policies in this field are exposed to strong political forces with different aims and hence to logical inconsistencies because some of the objectives involved (as self-sufficiency versus social pricing) are clearly in conflict. Industry, and particularly agro-industry are both the subject and victims of these conflicts as self-sufficiency demands increasing output (and capacity), while social objectives demand price controls on many products of the food industry to protect lower income groups. In consequence, agro-industries more often than not are caught in the squeeze between low,controlled sales prices and controlled minimum farmgate prices for their raw materials that are kept as high as possible. Unfortunately, all these controlled prices have a tendency to drift lower in real terms as world inflation (and hence the rise in industrial production cost) continues unabated. In turn, low controlled prices, especially when falling in real terms, tend to discourage production both by primary producers and processors. With regard to animal protein supply a critical point has already been reached as a potential export prospects (at incentive pricing) will soon be replaced by the need for either substantial

1/ The term competitive as compared to the world market has been consciously avoided since so much of international trade today is priced below total domestic production cost of the exporter. - 50 - imports of meat and meat products or lowering of consumption (at controlled pricing). The latter possibility is likely to be viewed with some concern since animal protein consumption per capita in Malawi is considered relatively low.

Crop-based Foods

5.03 Malawi is at present self-sufficient in grains and its grain milling capacity is adequate to process substantial additional quantities of maize and wheat, so that no additional grain milling facilities are needed, particularly if milling capacity is calculated on a three shift basis. The same applies to rice milling capacity up to about 1985, after which new milling capacity might be needed, if rice production continues to expand at the projected rapid pace. These conclusions could only be wrong if sudden, unexpected and quite extensive shifts in tastes should occur, which seems unlikely, at least in the next 5-10 years. For instance, in Malawi the substitution of traditional staple foods as maize meal, cassava, etc. by rice is limited, especially among lower income people. Rice is a more expensive commodity and is less widely used. It tends to be important only in areas where it is grown and in urban areas where upper income groups are shifting to higher priced rice and away from cheaper maize meal and cassava as their incomes rise and their tastes and preferences change. This, however, is a fairly gradual, slow process. Concerning wheat-- and consequently bread--shifts in consumer tastes are similar, although somewhat more rapid. Demand for bread and bakery products and for flour for home use is growing rapidly, not only in urban but also in many rural areas, supported vigorously by the expansion of Press Bakeries and other, independent bakeries. Nevertheless, it seems unlikely that additional wheat milling capacity would be needed before the mid- to the late eighties.

5.04 Malawi-s self-sufficiency in basic staples is occasionally threatened by crop shortfalls, mainly due to unfavorable weather. In view of uncertain conditions in the world, and particularly in its region, the government has decided to create a strategic reserve in maize with a grain storage project. This is basically a political decision, 1/ but the project will have substantial favorable impacts on the commercial activities of grainmilling, vegetable oil extracting and agricultural marketing by assuring them of stable availability of one of their main inputs. For the time being, exports apparently

1/ Economically, the internal rate of return of the project proper is negative under the assumption of no real crisis, but this is not a relevant assumption unless it is quite unlikely that a crisis would occur. Any other assumption, however, would make the rate of return totally dependent on the degree of crisis presumed, which is a highly qualitative, judgmental decision, not reasonably quantifiable. - 51 - are considered as the proper way to dispose of such eventual surpluses, but the question arises whether a low value/weight product like maize could be exported advantageously in competition with other, much higher priced commodities when the available transport system is very expensive, overcrowded and export prices in years of surplus may be unfavorable. It seems necessary to consider other potential uses for such surpluses and to evaluate their benefits to establish the economic cost of a strategic reserve.

5.05 Having achieved self-sufficiency in staples, one of the main pre- occupations of the Government is at least to maintain this situation and, if possible, improve the productivity of the related agricultural activities. In this context, the Government is implementing a project of seed processing in order to improve the quality of a crucial input in Malawian agriculture. High quality seed will improve yields and quality of crops and thus bring more and better products to agro-processing industries. The new National Seed Company of Malawi will produce and process a wide range of certified seed for a variety of crops, as maize, beans and peas, soybeans, sunflower, tobacco, grasses and legumes, groundnuts, and various vegetable species. Most of these seed crops will be produced to international standards and certified by the Malawi Government Certification Scheme. If this scheme of improving seeds and-- subsequently--agricultural products succeeds, agro-industries may receive both a considerably expanded supply of standard raw materials and new or additional supplies of crops which might be exportable after being processed. The extent and direction of such developments (with regard to products), however, can only be determined when the practical results of the seed project in terms of agricultural output are known.

5.06 In a similar vein, productivity in agro-industry could be considerably raised in the field of vegetable oil production by improving extraction of oil from oil-bearing seeds. At present, Malawi exports oil bearing seeds as well as cottonseed cake with a high residual oil content while importing annually some US$1-2 million worth of crude vegetable oils to be refined locally. Furthermore, all the margarine consumed in the country is imported. Finally, some oil bearing materials, such as maize germ, are fed to cattle although their oil content does not contribute to the feed's nutritive value and rancid oil (which it often is) can actually be detrimental to the animals. This situation of deficient oil production can be remedied through extracting the oil from locally available oil bearing materials by solvent extraction to complement--and complete--the presently employed methods of mechanical oil extraction. Malawi's existing oil extraction operations are inefficient as they leave up to 30 percent (in the case of cottonseed) of the available oil in the cake. Using solvent extraction would increase production of vegetable oil from the same raw material base by some 25-35 percent. With better yields of extraction, cultivation of oil bearing seeds would become more attractive and thus, a situation of actual import dependence might be turned into a situation where exports of vegetable oils eventually become economically feasible. As for many other agricultural outputs, such an increase could, however, be permanently achieved only if the Government decided to change its price policy from low prices to protect vegetable oil consumers to higher prices to encourage producers. - 52 -

5.07 Another project that could turn a presently net import situation into a net export situation is development of the domestic honey and beeswax industry. Malawi's honey and beeswax, according to several experts who have visited the country, is of high quality and should be attractive in world markets. Numerous inquiries as to the availability of both products are received by various government agencies each year. Honey is primarily used as food, but can also be used to make beer, vinegar, purified molasses, cough syrup and other medicines. Beeswax also has a multitude of uses ranging from candles to the balancing of aircraft engines. Finally pollen, a by-product of beekeeping, is used in the cosmetic and health food industries. Honey production in Malawi today is drawn almost exclusively from traditional or wild hives using simple gathering techniques, mainly by traditional village beekeepers, whose productivity and technical skills are low. Honey sold in Malawian stores is almost exclusively imported and ADMARC purchases of local honey have been negligible.

5.08 At least 125 tons/year of quality honey would be necessary to economically justify a honey project and there is no question that this amount and much more can be produced in Malawi. The issue is how to organize and encourage its production to justify the associated processing and marketing effort necessary to establish a regular supply of high quality products. The simplest method would be to develop commercial beekeeping in the forest and national park areas of Malawi and provide village beekeepers with effective hives and some initial technical assistance to introduce efficient management procedures. As neither predators, pests, diseases nor pesticides are a problem in Malawi, no particularly difficult technical problems are likely to be encountered. The project would require at least one processing facility, which should be in the neighborhood of ADMARC's canning factory to take advantage of its bottling and marketing systems and its location on Malawi's export corridor. When the program has developed successfully, a second processing facility might be necessary to serve village beekeepers in the northern and central regions. About one-fifth of honey output would be needed domestically and the rest could be exported. Local use of beeswax would be negligible, so that all of it could be exported. With appropriate marketing, exporting all available surpluses should pose no problem.

5.09 Eventually, Malawi should consid(er the development of high value vegetables and fruits for domestic use and exports, fresh or canned. At present only 1-2 tons of vegetables per week are flown fresh to London during the winter season, but this market has been established and is maintained mainly through a few personal contacts. There are two food canning plants in Malawi, a fish canning plant in Salima on the lake and ADMARC's fruit and vegetable cannery near Mulanje. The latter so far is essentially a pineapple canning plant, but also produces small lots of tomato-based products from imported concentrates. Canning in Malawi is hampered by two complementary factors: first, demand for canned products is limited to urban areas as general acceptance and use of canned food is still in its early stages; and second, cans at present are extremely expensive and sometimes even unavail- able, which greatly increases the cost of canned food. Until recently, cans were imported either by the unreliable and expensive surface route through Mozambican ports or flown in (in emergencies). The new can-making plant of - 53 -

MDC in Liwonde has still to reach regular, full capacity operation before a judgment can be made whether this operation can help to bring down the cost of cans, which is essential for any further development of Malawi's food canning industry. As demand for canned food is probably fairly price elastic, any decrease in prices may well result in a more than proportionate increase in demand.

Animal-based Products

5.10 Malawi's population has been supplied with the needed proteins mainly through groundnuts, pulses and fish, while the consumption of beef, pork and poultry, as providers of animal proteins, has been relatively low. For reasons of price policy with regard to meat this situation is likely to continue and most probably to worsen. While the actual physical need for animal proteins is a myth (as the survival rate of vegetarians will attest), the economic advantages of meat production and consumption and the inevitable influence of worldwide popularity of meat consumption poses some problems for agricultural price policymakers in Malawi. Meat prices have been kept artificially low to enable lower income groups to participate in the consumption of this nutritionally not required but socially highly prized product. As a consequence of this price policy producers of animal protein in all forms (beef, pork, poultry, fish, etc.) have to some extent, and in certain instances almost totally, lost interest in producing very much of these animal proteins for the market. Unfortunately, the animal husbandry sector not only provides a highly prized product for the food market but also forms the basis for many important (in part potentially export-oriented) agro-industries. Also, if efficiently pursued, animal husbandry is a very effective way of providing economic nutrition to the population as well as many useful byproducts, which are the prime reasons why projects in this subsector should be considered seriously and favorably, but only in conjunction with a fundamental change in government price policy.

5.11 The cheapest source of animal protein in Malawi is fish, which contributes over 75 percent of all animal protein consumed. About 70,000 metric tons of fish are landed every year, mostly by artisan fisherman and additional production on a significant scale may in future be possible from Northern Lake Malawi, as well as on a smaller scale from fish culture. At present, the principal task for the industry, however, is to preserve all the fish landed through improvements in fish handling, processing, transportation and marketing.

5.12 The major part of Malawi's fish production comes from Lake Malawi, although other lake and river fisheries are also important and a small quantity of fish is supplied from fish ponds. However, most of the fisheries have already reached or nearly reached their maximum sustainable yield. Any major increases in output will thus have to come mostly from the central and northern parts of Lake Malawi, the productive potential of which is presently being explored with UNDP assistance. However, to complement output increases from the lake in the longer run, fish ponds should be encouraged in the northern and central region, as many locations are suitable for fish farming and economic analysis of integrated fish/chicken/vegetable operations under field conditions have been shown to be quite profitable. Such expansion of fish farming should be based on extension efforts via demonstration farms and should become a continuous, long term development effort. - 54 -

5.13 Efforts to reduce present high rates of spoilage should concentrate on ice manufacture, fish drying and preservation. Ice is presently not readily available to fish traders and processors, as it is produced only at a few locations and additional ice points should be created at other places and be relatively simple technically, so that they could be operated by private parties, a parastatal, or the Department of Fisheries. But even more important would be to expand progressive techniques of fish drying and preservation among traditional processors. Extensive research and trial work on this question has already been carried out in Malawi and elsewhere and it was found that a combination of simple drying and smoking methods, treatment for insect infestation and improved handling techniques reduce losses of fish by more than two thirds, a savings of about 20 percent of the total fish catch much of the year and more in the rainy season.

5.14 There is one fish cannery on Lake Malawi which in the past has had trouble obtaining consumer acceptance for its product, but as increasing sales in the last few years indicate, the problem appears to be resolved. However, as with ADMARC's cannery, the lack of cans (and their high cost when available) remains a problem to be eventually solved by MDC's Liwonde can-making facility. Moreover, the fish canning company has been plagued by a shortage of working capital, occasionally inadequate supplies of spare parts and other critical supplies and competition for fish supplies during the high (rainy) season from commercial and traditional processors. The fishing project should explore ways and means to support the company so that it can contribute effectively to preserving the fish catch in Malawi and thereby help to even out the huge seasonal fluctuations of supply.

5.15 A comprehensive fisheries project would also require a substantial increase in Malawian production of fish nets, which are presently in short supply. The situation can probably be best overcome by some expansion of the local net manufacturing plant, mainly by introducing production in three shifts. Eventually, there might be a resumption of fish net and twine exports to neighboring countries.

5.16 Finally, the fisheries project should have an expanded credit program for fishermen, fish processors and fish traders. Limited credit has been available to fishermen from the Department of Fisheries, especially to buy trawlers, but that scheme is not designed to reach all those who need credit in the overall fisheries system. In particular, credit would be needed for building fish farm facilities, purchasing improved fishing equipment, constructing improved traditional fish processing facilities (fumigation, pyrethrum-treatment, storage, wet weather drying racks, etc.), purchasing improved fish transport equipment, and developing improved wholesale and/or retail fish handling and storage facilities.

5.17 Apart from fish, animal protein is available mainly from beef, pork and poultry. However, the livestock and poultry sector in Malawi has developed only slowly and in a rather sluggish manner. Although there are various natural difficulties to developing this sector--as there are in many countries of the world--the main factor in Malawi has been a lack of government interest and consequently government price policies which have - 55 - discouraged meat production through keeping consumer prices--and hence producer prices--artificially low. There is little disagreement among experts that a vigorous livestock industry in Malawi is economically feasible, even yielding an export surplus if the Government decided to support the subsector with appropriate incentives, since both natural factor endowment and the available skills indicate that Malawi could be competitive in many livestock-related industries.

5.18 With regard to cattle, the national herd is located mainly in the northern and central regions and is mostly within the smallholder sector. Farmers like to retain their stock, although they do sell some male animals, if cash is urgently needed. As a result, the herd has been growing at about 5 percent, but off-take has remained at only about 10 percent. Overgrazing is noticeable in some areas because of herd buildup. Commercial cattle operations have been limited so far, since beef prices are unattractive. Recent attempts to promote cattle ranching have been losing propositions for the same reason, although also because cold storage capacity is insufficient. Finally, fattening and stall-feeding projects are also quite uneconomic for both reasons.

5.19 Hogs and goats are important sources of meat supply in some rural areas of Malawi and a few organized commercial hog and poultry operations supply urban areas with meat, although not always adequately as again the appropriate price incentixres are missing. Hogs are subject to a particular disease problem, that is, African swine fever, which cannot be controlled except by physical isolation of infected stock. The Government needs to issue strict regulations requiring the isolation of infected herds. This problem of disease is unfortunate as pork production could contribute considerably in supplying the local market with reasonably priced meat and could even be competitive for exports if the fever were controlled. Poultry, on the other hand, which is an important low-cost supplier of meat in most developed countries, has been held back mainly by government price policies, although some growth in the poultry industry has taken place, mainly on the basis of government persuasion.

5.20 From an agro-industrial viewpoint, the present state of the livestock industry poses only a few problems. Cold storage capacity is somewhat low, but in the absence of price incentives to produce more meat, a few make-shift adjustments should suffice. Stockfeed production is already too high, since accelerated fattening by stall feeding is uneconomic; stockfeed is difficult to export as it tends to become rancid because of its relatively high residual oil content. As meat production remains low, existing slaughter capacity is grossly underutilized, so that no additional capacity will be needed. The fact that abattoirs at present cannot meet international inspection standards is of no importance so long as the Government does not wish to encourage the production of livestock surplus for export. However, should the Government decide to take a more dynamic attitude vis-a-vis the livestock sector and its related agro-industries, very rapid development could follow; therefore all above- mentioned activities should be kept under review in preparation for any necessary expansion (or improvement) in order to avoid bottlenecks which might othewise stifle any new growth momentum. - 56 -

5.21 Two further agro-industries will be greatly influenced by developments in Malawi's livestock industry: dairying and tanning and leather goods. At present, shortage of dairy capacity results in considerable import needs for dairy products which, in view of Malawi's severe transport problems, can be covered only at very high cost. An additional dairy is under construction in Blantyre, but it seems doubtful that it can be supplied with sufficient raw milk, since a 40 percent gap exists between milk supply from local sources and the amount of milk needed. Price controls again have reduced incentives for milk producers and thus put the financial viability of any investment in dairying into question because insufficient milk supply is likely to lead to uneconomic low-capacity utilization. However, should the Government change its price policy, the dairying industry would probably grow quickly and provide the country with substantial foreign exchange savings.

5.22 With regard to tanning and leather working industries, the situation is somewhat more complex, as became apparent in the course of a recent feasibility study for a tannery in Malawi. Currently the country exports raw cattle hides and goat skins and imports all leather requirements for its leatherworking industry (one shoe factory and one producer of leather articles). The proposed tannery project is likely to run into difficulties with domestic raw material supply for various reasons. One reason is the operator of the Blantyre and Lilongwe abattoirs, the Cold Storage Company, is the main collector of hides and skins, which it exports with very good profits. These profits are used mainly to subsidize its unprofitable slaughter operations, which are because of price controls on meat. Mainly because of this linkage, the prices offered to butchers and graders for hides have been kept so low that they provide little incentive to deliver hides to collection points; hence, supply is lower than it would be at more economic prices. Thus, a tannery and an expansion of leather working industries in Malawi will also depend (decisively) on government price policies in the livestock sector. If this problem can be solved, the remaining project issues would pose no serious problems, as higher prices could be offered and more hides collected.

Energy-related Issues

5.23 As many developing countries today, Malawi faces a serious and potentially severe and crippling energy problem. It has few domestic energy resources beyond wood and some hydroelectric potential. 1/ It imports all its liquid fuel and has to pay extremely high transport costs on top of cartel prices for refined products. Fuelwood is the major source of energy for most rural households, but at the same time there is a heavy commercial demand for fuelwood, mainly for fire- and flue-cured tobacco production, but also for brick making, bakeries, sawmills, ceramic manufacture, etc. At present, fuelwood is being taken from forests on customary land at a rate beyond the sustainable yield of these stands, thus destroying the forests' long-run

1/ There is some coal in the northern region but it is of poor rather quality and no infrastructure exists to exploit it on a larger scale. - 57 - production capability. If this trend continues, the country will have to rely increasingly on imported fossil fuels, possibly with dire consequences for the balance of payments and with the added risk of interruptions in supply by other than economic forces. 1/

5.24 Even without an in-depth study it is possible to conclude that urgent attention is necessary to (a) reduce Malawi's dependence on imported energy, but (b) prevent permanent damage to Malawi's forest resources. This can be done by exploring possibilities of producing energy products from domestic renewable energy resources, rationalizing and improving efficiency in the use of fuelwood, and by encouraging conscientious management of wood resources. 2/

5.25 Regarding energy generation from renewable resources, only the production of fuel alcohol from agricultural wastes--in Malawi's case molasses-- is already economic. With further shifts in relative prices toward even more expensive energy, exploitation of other renewable resources may soon become economic. However, solar energy, bio-gas plants and windmills, despite the rapid progress being made in their development, are not yet sufficiently economic on a scale large enough to be of substantial help to industry; however, technical progress along these lines should be carefully watched. Greater use of hydro-electricity is of course technically possible in Malawi, and is likely to remain relatively competitive, although requiring very large capital investments. Electric power, whether hydro or thermal, will have to provide much of the energy needed in urban/industrial centers. Rural electrifi- cation would, however, requi.re major investments in generation and distribution systems which would be unlikely to be economic at this stage of Malawi's economic development, so that electricity is unlikely to meet the needs of the average rural Malawian in the foreseeable future. Thus, immediate possibilities to reduce dependence on imported energy are (a) fuel alcohol production, and (b) better utilization of firewood resources.

5.26 Fuel alcohol can be produced from a wide variety of agricultural products and wastes and with every new increase in oil prices it will become more competitive. As of the early eighties, Malawi will produce more than 65,000 metric tons of molasses yearly as a byproduct of its efficient and competitive sugar industry. The domestic market for molasses in its natural form is--and will remain--only a fraction of its production. 3/ Exports of molasses are difficult, not very remunerative (the producer receives at best 50 percent of the world market price) and depend on the continued availability of transport to the port of Beira. Moreover, local disposal of large quantities of unsold molasses would result in unacceptable pollution hazards. On the other hand, molasses can be converted into fuel alcohol, which can be mixed with gasoline up to 15 percent without any modifications in motor vehicle

1/ During a two-month period in 1979, petroleum products had to be flown in, as rail connections between Beira and Malawi had been interrupted. 2/ See also section on wood-related issues below, which deals with wood as a raw material rather than a source of energy. 3/ Molasses is used in small quantities as a cattle feed ingredient. - 58 - engines being required and without reducing engine performance. Under present circumstances a fuel alcohol plant would already be quite economic in Malawi, particularly as it can be built to simpler and much less expensive standards than those needed for traditional industrial and beverage grade alcohol. The plant's alcohol output would replace some US$3 million worth of annual gasoline imports and produce as a byproduct some 300 tons of yeast, a high protein additive for animal feed, which would also replace imports of fishmeal.

5.27 Another possibility of making savings on oil imports would be to rerefine used lubricating and transformer oil, which is done increasingly in many countries, including in Europe and the US. Lubricating oils are used not only in the transport sector, but also on stationary equipment in manufacturing plants, power stations, etc. Power transformers use oil as a dielectric and as a cooling agent. These oils must be replaced continuously as they deteriorate in service due to oxidation and pollution with extraneous matter (dust, dirt, rust, etc.) but discarding used oils in greater quantities over longer periods of time can pose serious environmental problems. On the other hand, rerefining oil is not particularly complicated, as it requires neither sophisticated skills nor complex equipment and a process can be used that has been in operation in India for many years under circumstances similar to those in Malawi. The major problems of such a project would be to devise an efficient system for collecting at least 25 percent of the used oil and organize the transport to Malawi of sulphuric acid (needed for the process), which is difficult and hazardous to transport. However, even under conservative assumptions, these problems can be solved at reasonable cost 1/ and in addition to its direct benefits, the project would contribute to reducing Malawi's dependence on imported petroleum products and have a beneficial environmental effect.

5.28 As noted above, fuelwood is the most important single source of energy for rural households in Malawi as well as for a number of commercial and industrial uses. However, a substantial amount of wood is wasted each year, both by inefficient use and when natural forest land is converted to industrial timber plantations, which happens at the rate of some 4,000 acres per year. These wastes could be used to produce charcoal, which has a calorific efficiency 7.5 times higher than that of dry wood in an open cooker. Moreover, charcoal provides a much better, more even heat with little smoke or flame and is easy to store because it is non-hygroscopic. As it is a much more compact fuel than wood, its use becomes more economic with increasing distances between the source and the consumer of wood. 2/ Thus, using wastes from nearby consumer centers and wood from forests further away (particularly in national forest reserves), a considerable amount of charcoal could be produced

1/ For details see Richard L. J. Lacroix, "Re-refining of Used Oil," (Consultants report), November 1979. 2/ A rule of thumb based on East African data is that charcoal production cost plus transport equal fuelwood production costs plus transport when trees are 50 miles from the final users of their energy. Within a 50 mile radius of final users fuelwood is cheaper, whereas beyond a 50 mile radius, charcoal is cheaper. - 59 - for consumption by both rural (and eventually urban) households and selected industries. An initial project might start with, say, 10 charcoal units of 9 kilns each and would supply a total of about 11,000 tons of charcoal at full capacity. In addition to its primary benefits, such a project would increase total fuelwood-based energy supply, since its raw material source would be wood that is otherwise wasted or not exploited, while in the absence of the project imports of fossil fuels (or fuelwood) would have to increase.

5.29 The largest individual consumer of fuelwood is the tobacco curing industry, which accounts for about half of total consumption, the value of which has been estimated at MK 23 million (1978) or 54 percent of the export value of flue- and fire-cured tobaccos. Obviously, even small improvements in the use of firewood for tobacco curing will produce large savings not necessarily in production cost but in consumption of a domestic renewable fuel that is presently being overexploited. 1/ Such improvements could be both technical as by structural modifications of existing curing barns, improved furnace design (including eventual shifts to other fuels such as charcoal), or organizational improvements like pooling of several growers to adopt bulk curing systems. Savings in fuelwood that could be achieved by a comprehensive program would be substantial, ranging from 20 to 60 percent, depending on technical factors and the participation rate of tobacco growers. Preliminary studies have been made and a nationwide action program should be developed as soon as possible, especially before long lasting damage is done to Malawi's forest reserves by present practices of overexploitation. 2/

Wood-related Issues

5.30 Total wood production in Malawi is about 11 million cubic meters of which 9.5 million is used as fuelwood, 1.5 million for poles and 100,000 cubic meters for commercially produced sawn timber. About 16,000 cubic meters of finished wood products are imported annually. Demand for sawn timber now exceeds supply by a substantial margin and demand is expected to grow rapidly in the future. Prices of domestically sawn timber are well below imported lumber prices, so that major foreign exchange savings could be realized by additional domestic production. Dimension lumber is presently used for construction, furniture, agricultural packaging, boat building, railroad cars, etc. and large diameter timber for further processing into plywood.

1/ To give an idea of the proportions involved: 10 hectares of firewood are required for each hectare of flue-cured tobacco grown, and 5 hectares per hectare of fire-cured tobacco. The problem has become so serious that a major commercial bank will lend to tobacco growers only if they add 2.5 hectares eucalyptus planting for fuelwood to each hectare of their proposed tobacco planting. 2/ It has been roughly estimated that about 2.2 million cubic meters of firewood are being consumed annually by reducing forests below their sustained yield basis. - 60 -

5.31 The first step to better exploitation of wood resources for these uses would be new sawmills. The potential supply of saw logs is large enough for one such mill to be located in the Zomba forest and another one at Viphya and perhaps for some smaller mills in other locations. The supply of saw logs will be assured not only by existing forests but also by an afforestation program, which calls for planting of 1,200 acres per year from 1976 to 1985 together with plantings in another area which were started on 2,200 acres of softwood in 1975, and continue at this rate plus an additional 100 acres every year until the year 2005. This program, if completed, would supply enough sawn timber to meet projected softwood construction timber requirements and might be considered a minimum planting program. Whether this ambitious program can be implemented remains to be seen. However, sizeable existing plantations in Viphya have been set aside for a possible pulp project and these might alternatively be considered as a reserve for saw milling and further processing should the demand for sawn timber greatly outstrip availability, since their use for the latter purpose would probably provide Malawi with safer economic benefits than an export-oriented pulp mill, which would require huge investments.

5.32 Apart from use as sawn lumber, wood can also be transformed into plywood, while residues from sawmills and plywood mills can be used for other kinds of panel boards (e.g., particleboard). However, the market in Malawi being small and the degree of substitutability between the different kinds of panel board not being known with certainty, it is difficult to determine at this point which projects (in panel board) would be feasible. Nevertheless, it is reasonably clear that demand for panel board of various kinds is growing quickly and might grow even much faster if low-cost housing in urban areas were to be built from wood (treated against insect pests) instead of masonry. As wooden houses cost less than 40 percent of equivalent cement! brick houses, the Government might seriously consider promoting this possibility to use a domestic resource in an activity which would create substantial employment and probably a variety of beneficial secondary effects in the form of increasing demand for other industries, services, etc.

5.33 The only panel board presently produced in Malawi is plywood which, however, suffers from the lack of trees large enough in diameter to permit economic peeling; thus, the existing plant can only provide less than half of Malawi's needs for plywood, but the only other existing stand of timber with a diameter large enough to justify peeling is within the Viphya pulp project area. Because of this situation and because plywood can be substituted to a large extent by particleboard, the question of whether to construct another plywood mill or not has remained pending for the last few years0 Plywood is clearly the most popular panel board with the fastest rate of growth in recent years. So far no attempts have been made to complement and/or replace it in selected applications with particle (or other) board, which could be produced from available waste wood and sawmill waste. If using waste for panel board production is considered, the problem of competition for inputs between board and charcoal production needs attention. Therefore, the overall requirements for panel board, their potential growth, the degree of substitution that is economically feasible between the different types of board and the availability - 61 - and likely uses of raw materials must be studied in the context of an overall wood policy. On the basis of such studies, investments should be made in the appropriate plants as soon as possible to avoid unnecessary foreign exchange expenditures for importing wood and energy products.

Export-oriented Projects

5.34 So far, development and project possibilities in Malawi have been looked at mainly from the point of view of what Malawi can produce from its own resources for its own needs. This viewpoint should of course be supplemented by the constant search for products the country can competitively export, that is, where only a small part of national output would be retained to cover domestic demand while most of the output would be exported. Again, agro-industries offer the best chance to increase exports and could do so on the basis of domestic resources without inducing sizeable imports of inputs.

5.35 One of the best examples of deliberate development of a new, agri- culturally based export product is the introduction (in the mid-sixties) of macadamia nut cultivation in Malawi. Macadamia nuts are the highest priced confectionery nuts in the market, both because of their delicate flavor, pleasant texture and their relative rarity. Large-scale commercial production is undertaken only in Hawaii, but production has been started in a few tropical and subtropical countries. However, by beginning cultivation in the mid-sixties Malawi has obtained a lead time of at least 15 years as trees take 15 to 30 years to mature, efficient processing is difficult and markets need to be firmly established for this luxury product. All this has been achieved in Malawi by a judicious combination of government action and competent private initiative. The Tree Nut Authority of Malawi has been instrumental in establishing this beneficial combination and remains the coordinating agency for macadamia nut development. As a consequence, Malawian macadamia nuts have established a high quality image in foreign markets, propagation of macadamia trees is carefully controlled to preserve quality and optimum conditions of fertilization, weed and pest control, etc. for growing trees have been established. The next step will be to establish the first industrially sized macadamia processing plant in Malawi as the maturing trees will soon begin to produce far more nuts than can be processed by the present pilot facility. In view of their initial success, cultivation of macadamia nuts should be further expanded in the future.

5.36 Another relatively new and quite successful export product is the guar bean, which is used as raw material to produce vegetable and industrial gums. Its cultivation in Malawi was started only a few years ago and proved unusually successful as many farmers quickly turned to this new crop after ADMARC set an attractive buying price. At the moment the beans are being exported unprocessed. The next step should be to initiate processing in Malawi which would increase the value of the exported product two to three times and widen marketing possibilities considerably, particularly for food grade gum. - 62 -

5.37 Malawi could probably earn an appreciable amount of foreign exchange by reviving its coffee growing and processing. During various periods in the past coffee of high quality has been grown successfully by estates and by smallholders, but organizational and pricing problems have discouraged farmers from continuing with this crop, as they received disproportionately low prices for their output and were paid only after long delays. The Government has now decided to provide a new--and hopefully permanent--impetus to coffee growing, especially by smallholders, by reinstituting the former Smallholder Coffee Authority and by upgrading smallholder coffee enterprises and coffee processing plants and by improving marketing arrangements. Future demand for coffee produced in Malawi will, of course, depend on world demand and supply, but since Malawi produces an insignificant amount of coffee (of excellent quality) in global terms, it should be able to sell its output at world market prices without difficulties.

Projects in Miscellaneous Other Areas

5.38 Apart from the major priority areas of food, energy and wood-related issues discussed above, there remain a large number of possible industrial projects in various other sectors, mostly for import substitution, which cannot be directly linked to any of these areas of major concern, but nevertheless can serve as examples for the type of small to medium-sized industrial project that would be most suited to Malawi's conditions.

5.39 With its agricultural resource base, Malawi is a large user of bags for transportation and storage of the majority of its products and many of the needed inputs. Traditionally, the country has relied on imports mostly of jute bags, but at the current level of technology and with a market of 3-4 million bags annually, a possibility exists to substitute imports by producing woven polypropylene bags in Malawi. At present, domestic bag manufacturing is restricted to paper and smooth plastics film bags, which are not suitable for most of the purposes envisaged. Woven bags have the strength to withstand abusive treatment and their breathing properties are needed for live materials and/or fumigating their contents, etc. Collection and transportation in bags, at least up to main buying and assembling points, will remain necessary in Malawi for the foreseeable future, since a large proportion of output originates with smallholders and is thus produced over extensive areas. Moreover, bulk handling facilities for many plantation products do not exist, such as for sugar, which is exported in bags. Production of woven polypropylene bags would thus have a fairly secure market on the one hand and on the other would provide a measure of security of supply greater than that for jute bags. l/ Preliminary indications are that polypropylene bags can be produced in Malawi at a cost competitive with imported jute bags.

5.40 The use of pesticides in Malawian agriculture has gradually increased over the years and is likely to grow much more in the future. Based on fairly conservative assumptions, the market for insecticides will soon reach a point

1/ On several occasions bags have had to be flown in due to interruptions of land transport. - 63 - where small-scale production of Malathion will become economic. 1/ Malathion is a widely accepted insecticide with a broad range of activity against many pests, is relatively safe for mammals and has a low residual toxicity. Its production is technically simple as process conditions do not require high temperatures, nor high pressures or very critical controls. While most of the inputs will have to be imported initially, there is a possibility for producing some from byproducts of breweries or sugarmills at a later point in time. At prices paid for imported malathion today, a Malawian plant should be able to earn a satisfactory economic rate of return.

5.41 A substantial part of imported pesticides is used by smallholders and is applied with portable sprayers. At present such sprayers are imported into Malawi and sold to smallholders at a price which is subsidized in varying degrees according to type of sprayer and buyer. Local production of a sprayer might be economically feasible if demand were high enough, one type of sprayer would be selected and/or it would be possible to export part of the output to neighboring countries. Production of such a sprayer would involve sheet metal cutting, stamping, welding, galvanizing, painting, etc. A large part of the activity would also be assembly of imported parts and an important question concerns the chances of replacing imported parts gradually by locally made parts over the years. However, since any significant increase in agricultural output for many crops would depend on greatly expanded use of insecticides (among other things), and thus, sprayers would have to be imported anyway. Thus, the proportion of foreign exchange savings that can be achieved by manufacturing them locally should not be given too much weight in the decision on such a project, as long as the local sprayer can be produced at a cost comparable to the imported one.

5.42 Malawi has an ancient rubber plantation which was started in the early 1900s and progressively reached the end of its useful economic life in the 1960s and early 1970s. Some replanting with higher yielding varieties has taken place and the new trees are now beginning to produce rubber. As Malawi is importing substantial--and quickly growing--amounts of rubber, further plantings are underway and scheduled to continue up to 1985, when the country will not only have substituted for all imported natural rubber, but also be in a position to export to neighboring countries. Exports should be possible since Malawi is the only country in East and Southern Africa producing rubber. This development will require a considerable expansion (and reshaping) of present rubber processing facilities.

5.43 As a final example of an industry which today can be started on a relatively small scale and yet be competitive, production of aluminum conductors might be mentioned. A relatively small plant could probably satisfy the requirements for all types of aluminum conductors employed in the country. The machinery would be of a relatively unsophisticated nature, all processes are cold, that is, neither steam nor any other heat source is required and raw

1/ For details see Richard L. J. Lacroix, "Malathion Production," (Consultants report), November 1979. - 64 -

material supply should not be a problem, as aluminum rods and steel wire are widely available. The plant might have a capacity range between 1,200 and 2,000 tons/year, depending on the range of cable sizes produced, would employ about 65 workers and be an appropriate addition to the metal processing industries in Malawi.

Summary Review of Proposed Projects

5.44 All the projects proposed for consideration in this chapter have one common feature: they are relatively modest in size, the amount of each investment being relatively small compared to that required for standard large-scale industry projects. This is no coincidence, but rather an attempt to show that one of the main recommendations resulting from the analys:ie can indeed be implemented, namely that Malawi should--at least in the medium term--avoid the adventures and above all the risks of large industrial projects. 1/ Table 11 presents rough estimates for selected projects of investment cost, internal rates of return, and eventual foreign exchange earnings (and/or savings) that these projects are likely to achieve under favorable or less favorable conditions. 2/ It should be borne in mind that the figures for individual projects are preliminary estimates only, based on conditions as they were in mid-1979 and probably subject to some margin of error. Nevertheless, the totals show that even with small projects, properly selected, a considerable impact on the balance of payments can be achieved as foreign exchange earnings of these projects of US$30-43 million would be about 17-25 percent of total commodity exports or more than half of commodity exports excluding estate crops (tobacco, tea and sugar). Moreover, they would exceed the present level of manufactured exports of about US$10 million.

5.45 The projects presented above also were selected to illustrate how several related projects might be combined to improve the structure and efficiency of an entire subsector. Since internal rates of return are usually calculated to reflect only primary effects of a project, that is, those strictly limited to the internal effects, important linkages to other projects and all kinds of secondary effects (e.g., regarding job creation) are left out. Yet, it is practically certain that a series of projects that would correct a presently unsatisfactory situation, for instance in Malawi's forestry/wood subsector, would produce an economic return for the subsector and the country as a whole which would be much greater than the sum of individual project returns. An additional advantage of an integrated subsector approach is that it would contribute to clarifying the general issues involved and provide practical guidance to setting policies affecting the subsector.

1/ "Large" should be defined in relation to Malawi's annual industrial investment rather than by the absolute size of an individual industrial project. 2/ Mostly derived from "Malawi: Agro-industrial Development," ibid. TABLE 11: MALAWI - Estimated IRR and Potential Annual Foreign Exchange Earnings of Selected Industrial Projects

Internal Annual Gross Annual Net Rate of Foreign Exchange Earnings 2/ Foreign Exchange Earnings 2/ Investment Return (US$'000) (US$'000) (MK'OOO) 1/ (X) Low High Low High

Seed processing 2,500 10.0 1,500 2,500 1,300 2,200 Solvent extraction 2,400 12.1 1,000 1,800 900 1,700 Honey and beeswax 680 18.8 400 700 400 700 Fisheries 3,200 21.8 1,600 2,500 1,300 2,400 Dairying 2,100 14.0 2,000 2,500 1,900 2,400 Leather 1,200 24.0 1,200 1,500 900 1,100 Fuel Alcohol 1,760 22.0 3,500 5,500 3,000 5,200 Rerefining Oil 720 12.5 900 1,500 700 1,200 Charcoal 630 16.5 900 1,600 800 1,500 Sawnilling 2,200 20.4 1,000 1,700 900 1,600 Plywood 3,500 36.4 2,500 2,800 2,100 2,400 Particle board 2,200 20.4 900 1,200 700 900 Macademia 300 n.a. 800 1,500 800 1,500 Guar beans 500 n.a. 2,000 2,800 1,800 2,600 Coffee 3,600 13.5 6,000 8,000 6,000 8,000 Malathion 2,290 14.3 1,700 2,000 900 1,600 Rubber 6,300 3/ 7.6 3/ 300 500 300 500 Polypropylene bags 2,300 17.7 1,500 2,200 1,200 2,000 Sprayers 90 20.0 200 400 100 300

TOTAL 38.470 - 29,900 43,200 26,000 39.800 in US$ (46,164)

1/ At MK = 1.20 US$ (1979). 2/ When reaching full capacity utilization or in 5th year, whichever comes first. Low and high estimates under pessimistic and optimistic assumptions regarding project implementation, prices, world market conditions, regional political climate, etc. (in 1979 Dollars). Net earnings estimated on a current-basis, i.e. debt service, dividends and repatriation of capital are disregarded. 3 Includea cost of rehabilitating and expanding plantation. - 66 -

Some Policy Suggestions

5.46 In the course of this report questions have occasionally been raised about a few policy issues and their developmental efficacy. While industrial policies and their implementation seem to have worked well there are two important areas in which improvements could possibly be made, in order to either promote development in certain sectors more vigorously through better price policies, or to prevent possibly serious mistakes through refined investment policies. Another major area where increased efforts might be made would be export promotion. In addition to these major areas, there are a number of smaller policy items that will be mentioned for consideration.

5.47 Price policy, and in particular industrial price policy, faces a dilemma as price controls have been used to protect consumers, mainly those with lower income in the urban areas. On the other hand, these controlled consumer prices often translate into producer prices which provide no incentive to expand production and sometimes even discourage producers to such an extent as to induce them to shift their productive capacity to other products. In times of relative price stability the price setting authorities can form a fairly accurate view of the movement of production cost and would theoretically be able to prevent the worst consequences of their controls. In present conditions, however, when internationally prices have become volatile, chances are much higher that controlled prices remain too low and ultimately depress output. In such a situation, it would be preferable to provide the necessary subsidies directly to the poor and increase prices sufficiently to stimulate production or even to free prices altogether. In this context it should not be forgotten that increased agricultural output as a consequence of incentive pricing will help to keep more of the rural population from migrating to the cities, as rural income would be higher than they would be under price controls. The latter in fact contribute to stimulating migration to the cities by depressing agricultural output and hence, rural incomes.

5.48 While price controls to protect the poor may have some merit when applied to essential goods, their social and economic justification is more dubious in the case of non-essentials. This distinction, of course, leads up to the difficult task of establishing what is essential and what not, but for a country in Malawi's position it seems advisable to restrict rather than to expand the list of essentials. This argument has a particular bearing on controlled prices set today for livestock products, most of which can only be considered as essential under fairly exaggerated assumptions about adequate consumption patterns. Thus, the principal recommendation in this field is - 67 -

to use price policy to stimulate production rather than to protect consumers-- if price controls are needed at all. Where they have been employed for the sole purpose of preventing monopolistic excess profits, the Government should consider appropriately taxing such profits rather than risk withdrawal of the producer in response to excessively harsh price controls.

5.49 Investment policies so far have worked quite well. As industrialization proceeds, however, and the issues become more complex and the investment risks greater, the system should perhaps be refined, 1/ mainly by extending the range of issues analyzed before individual projects are approved and by adding to existing priorities two guiding principles designed to minimize risk, that is, a ruling that large industrial projects should be undertaken only if (a) the country does not have to provide substantial amounts of capital for them, since it would have to come directly or indirectly out of the limited investment budget, which is badly needed for many small and medium projects; or (b) the risk of such investments would be practically nil, since a large-scale misinvestment could seriously hurt both the country's foreign exchange balance and its capacity to make other needed investments.

5.50 The other addition to present practices should be the requirement that the foreign exchange effect of each individual proposed project be calculated under optimistic and pessimistic assumptions over a number of years-- say ten--to obtain a clear picture of the foreign exchange implications of each project. The major optimistic and pessimistic assumptions should be made about prices expected for needed imported inputs for the operation of the new plant and eventually for planned exports. Particular attention should be paid to projects for the production of durable consumer goods, where the price of the CKD (completely knocked down) package is traditionally higher than that of the assembled finished output and where only minimal "deletion allowances" (reductions in price) are granted for leaving out of the package any component the country can produce itself; in these cases, locally assembled product often costs more foreign exchange than the imported assembled product would have cost. On the other hand, there should be a diligent search for possibilities of substituting (over the years) some of the imported inputs with local supplies, a possibility which might be contractually fixed by certain stipula- tions in investment agreements between investor and the government agency issuing the license. In making calculations about the foreign exchange effect of such a project it should be realized that local production usually removes the option of simply not importing a durable consumer good in times of foreign exchange crisis, since closing the local factory because of lacking imported inputs creates unemployment among a group of often relatively well-organized and vocal workers and is therefore politically difficult to do.

5.51 Since, because of the small market, the possibilities for economic industrial projects in Malawi remain rather limited by economies of scale constraints under traditional technology, the authorities charged with

1/ But not necessarily formalized, which would promote bureaucratization and probably destroy the informality of the system which has been so effective in the past. - 68 - industrial investment policy should consider creating a unit (not necessarily with a permanent staff, which might be too expensive) to follow the latest technical advances in the development of miniplants in all those industries that would be of potential interest to Malawi if the minimum efficient size for a plant were to be appreciably lowered0 This unit should follow the technical literature on the subject, develop contacts with the appropriate trade associations in the industrial countries and eventually discuss possibilities of designing miniplants for specific products with manufacturers specialized in this field.

5.52 Finally, in cases of marginal projects, and in particular for a large project which seems likely to be approved in spite of the reservations mentioned above, two further aspects deserve attention: first, the question to what extent the project would contribute to creating linkages to other-- economic--industrial projects, and second, how much the project would contribute to the acquisition of industrial skills by Malawians. To illustrate the difference between the two extremes: (a) a project requiring completely automated production that can be run only by expatriates and whose inputs can never be produced locally, as against (b) a metalworking plant that would require a great variety of skilled metalworkers and use a type of steel as input which could eventually be produced locally from domestic scrap by a small rolling mill.

5,53 A third major industrial policy area concerns the question of export promotion for industrial products. As has been pointed out, there is little chance that Malawi can become an exporter on a substantial scale of industrial products (other than agro-industrial) in the near to medium term future, since the country is hampered by an unfavorable geographic location and hence unfavorable transport cost to most export markets and also because it lacks the industrial expertise to produce modern industrial products with a high value:weight ratio that would meet the stringent specifications required in most markets for such products. Some exports of industrial products may become possible to neighboring countries if and when the political problems in the region are solved, but these are unlikely to be of a volume large enough to really make a profound difference in Malawi's balance of payments. It would probably be better to explore possible markets (including deals with firms which might be willing to establish assembly operations in Malawi, perhaps in a free zone) and initiate production only after such markets have been found and--ideally--some contractual arrangements have been made to provide for a minimum of export sales.

5.54 While Malawi has defined export orientation as one of the major elements in its development strategy, there has been relatively little reaction to this in the institutional framework. IMEXCO has never seriously engaged in promoting exports--in fact, onlv one staff member was working on the subject in 1979. In 1971 the Export Promotion Council was created, but it did not become active before 1974 and has remained a rather modest institution compared to, for instance, the parastatals. 1/ The council so far has done

1/ The council has a staff of about 12-13 people and its major problem is the rather limited budget it has within MTIT's budget, which explains its other major problem--staffing. - 69 -

little more than to distribute information, mainly on technical/legal aspects of exporting (documents, laws, tariffs, etc.) and encouraged manufacturers to export. Its own efforts have been limited to searching for export markets for products already being produced in Malawi while, due to budget and staff limitations, no attempt has been made to explore foreign markets in order to find possibilities for new export industries. If appropriate staff could be found it might be useful to increase the council's budget and encourage it to become an aggressive export promotion agency via search for markets, which should include the mandate to employ experienced consultants in developed countries to provide the type of market studies needed. The Govern- ment has wisely refrained from special export promotion measures, limiting incentives to a drawback system, much the same as is used in many other LDCs. If the need for further support to export industries were to arise the Govern- ment might wish to consider exempting from corporate income tax profits made on exports of specified manufactured products or subsidizing the value added created in their production. For quite some time to come the amounts involved are likely to be small, and some losses would be recouped, because this measure would provide a counter-incentive to the practice of underinvoicing of exports.

5.55 In conclusion, there are of course a host of smaller, detailed points which a comprehensive industrial policy should address. These cannot be treated exhaustively in the context of this report, but a few might be mentioned as their practical importance often is much greater than that of highly political, fundamental policy issue. First, the authorities concerned should establish and introduce industrial standards. In doing so, it would be far more efficient to adopt initially standards already used in another country than to try to develop special Malawian standards immediately. Once in use, the chosen standard can be adapted to special Malawian needs and conditions whenever warranted. Second, the country should conduct a comprehensive geological survey, the results of which can be used in a great variety of projects and activities, even if no valuable mineral resources are discovered. It might be worthwhile to consider employing consultant services for this exercise to obtain results in a few years instead of waiting for decades which the present piecemeal approach--based on available budget resources--implies. Finally, a word might be said about the promotion of small-scale enterprise (SSE), which is one of the Government's objectives. For the modern industrial sector that has been the subject of this report, much depends on the definition of small scale. If it is wide (e.g. net assets up to US$250,000 or employment up to 100 workers), much of Malawian industry is small scale and does not need extra promotion. If, however, the definition is restrictive it would apply in Malawi mainly to commerce, handicrafts and artisans, whose promotion would be of interest to Malawian industrial development only as these sectors may be considered as a breeding ground for future entrepreneurs. The typical small-scale industry that can be observed in more advanced countries mostly exists as subcontractor to large- scale industry or serves specialized--usually non-essential--consumer demand. Such small-scale industry does not yet exist in Malawi. - 70 -

Appendix I Page 1 of 3

Industrial Statistics in Malawi

General

General industrial statistics collected from a fairly large number of industrial firms (with more than 20 employees) reporting on gross and net output, employment and wages, stocks and capital formation in the following detail:

1. Number of reporting units

2. Gross output, of which: (a) Goods sold: (i) locally, (ii) for export; (b) Increases in stocks and in value of work in progress; (c) Service and work done for others; and (d) Capitalized work done.

3. Net output, of which: (a) Materials purchased, purchase of goods for resale, fuel (not for resale); (b) Changes in stocks of materials and goods for resale; and (c) Electricity and other services.

4. Number employed.

5. Wages and salaries.

6. Stocks: (a) Materials and goods for resale, and (b) Finished goods and work in progress.

7. Gross fixed capital formation:

(a) Plant and machinery, and (b) Other.

This information is collected by the National Statistical Office and published in the "Annual Survey of Economic Activity" and in the "Malawi Statistical Yearbook," usually with a delay of about three years. The figures represent the sum of replies received and are not necessarily representative of total manufacturing. In fact, the movement of net output differs substantially from that of the index of manufacturing output described below. - 71 -

Appendix I Page 2 of 3

Index of Manufacturing Output

1. The index is based on information about monthly production of about 50 firms with over 100 employees. The firms covered account for approximately 75 percent of net output of all larger manufacturers (i.e. those with 20 or more employees) and for over 60 percent of total monetary net output of the manufacturing sector.

2. Most firms supply information on the quantity of goods produced, but for a few firms whose output of different items varies considerably from month to month, other types of indicators such as consumption of materials or staffhours, are used.

3. The weighting of the index is done in three stages:

(a) Item weights within industries (e.g., shirts, shorts, etc. in the clothing industry).

(b) Industries within divisions (e.g., clothing within textiles, footwear and clothing).

4. At stage (a) wherever possible the weights are based on value added. However, where an individual company produces more than one product the value added is split between products in the same proportion as the gross value of their sales.

5. Once the items in each industry have been aggregated the industry is weighted according to the proportion of its value added in the total value added of the division to which it is allocated. The industry weight is based on the value added for all firms in the industry according to the coverage of the "Annual Survey of Economic Activities" and the output of firms in an industry with an employment of less than 100 persons is assumed to move in the same way as the output of those with more than 100 employees.

6. Some smaller companies are in industries not covered by any larger representative. In these cases the industry value added is included in the total for the appropriate division, and the weight for the division is increased by the imputed production of the additional industry, the assumption again being made that output in the industry which is not covered moves in the same way as the output of industries in the rest of the division. - 72 -

Appendix I Page 3 of 3

7. The main types of goods covered by each industry division are as follows:

Food, Beverages and Tobacco covers meat, dairy, grain mill, and bakery products, edible oils, sugar, malt liquors, soft drinks, cigarettes and pipe tobacco0

Footwear, Clothing and Textiles covers cotton piece goods, blankets, ready-made clothing and shoes.

Other Goods (mainly for final consumption) includes soaps and detergents, matches,.furniture and printing and publishing.

Intermediate Goods (mainly for building and construction) covers sawn timber, cement, metal doors, frames and windows.

Export Industries covers tea manufacturing, post-auction tobacco processing, cotton ginning and cattle-cake.

This index is published by the National Statistical Office of the "Monthly Statistical Bulletin." Base of the index is 1970 = 100.

Miscellaneous

Additional information on industry can be obtained from statistics under other headings, such as, value and number of industrial buildings completed in the cities of Blantyre and Lilongwe (annual and monthly), electricity consumption, import and export data (not much detail), etc. All these are published by the National Statistical Office, mostly in the yearbook. Publications can be obtained from:

National Statistical Office P.O. Box 333 Zomba Malawi, Central Africa I B R D 15219 32 * ;3I4* JULY 1900

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