Malawi Systematic Country Diagnostic: Breaking the Cycle of Low Growth and Poverty Reduction
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Report No. 132785 Public Disclosure Authorized Malawi Systematic Country Diagnostic: Breaking the Cycle of Low Growth and Slow Poverty Reduction December 2018 Public Disclosure Authorized Public Disclosure Authorized Malawi Country Team Africa Region Public Disclosure Authorized i ABBREVIATION AND ACRONYMS ADMARC Agricultural Development and Marketing Corporation ANS Adjusted Net Savings APES Agricultural Production Estimates System BVIS Bwanje Valley Irrigation Scheme CDSSs Community Day Secondary Schools CBCCs community-based child care centers CPI Comparability of Consumer Price Index CCT Conditional cash transfers CEM Country Economic Memorandum DRM Disaster Risk Management ECD Early Childhood Development EASSy East Africa Submarine System IFPRI Food Policy Research Institute FPE Free Primary Education GPI Gender parity indexes GEI Global Entrepreneurship Index GDP Gross Domestic Product GER Gross enrollment rate GNI Gross national income IPPs Independent Power Producers IFMIS Integrated Financial Management Information System IHPS Integrated Household Panel Survey IHS Integrated Household Survey IRR internal rate of return IMP Investment Plan ECD Mainstream Early Childhood Development MACRA Malawi Communications Regulatory Authority MHRC Malawi Human Rights Commission SCTP Malawi’s Social Cash Transfer Program GNS Malawi's gross national savings MOAIWD Ministry of Agriculture, Irrigation and Water Development MPC Monetary Policy Committee MICS Multiple Indicator Cluster Survey NDRM National Disaster Risk Management NES National Export Strategy NFRA National Food Reserve Agency NSO National Statistics Office NDC Nationally Determined Contribution NNS Net national savings NRR Non-resource-rich ODA Official Development Assistance OCL Open Connect Limited O&M Operating and maintenance OPRC Output and Performance Based Road Maintenance contracting PFM Public Financial Management PSR Public Sector Reform MNSSP Reforms on social protection Malawi: Systematic Country Diagnostic ii RMNCAH Reproductive, Maternal, Neonatal, Child, and Adolescent Health RBM Reserve Bank of Malawi RBF results-based financing SCTP Social Cash Transfer Program (SCTP) SAPP Southern Africa Power Pool (SAPP) SADC Southern African Development Community (SADC) SACMEQ Southern and Eastern Africa Consortium for Monitoring Educational Quality SSA Sub-Saharan Africa (SSA) SLM sustainable land management (SLM) SCD Systematic Country Diagnostic (SCD) TVET Technical, and Vocational Education and Training (TVET) TNM Telekom Networks Malawi (TNM) TEV total economic valuation (TEV) TFP total factor productivity (TFP) TFR total fertility rate (TFR) TB tuberculosis (TB) UBR Unified Beneficiary Registry (UBR) WBG World Bank Group (WBG) WDI World Development Indicators (WDI) Malawi: Systematic Country Diagnostic iii Table of Contents EXECUTIVE SUMMARY ................................................................................................................ viii INTRODUCTION ................................................................................................................................. 1 1. MALAWI COUNTRY CONTEXT ............................................................................................... 2 A. An agriculture-dominated economy that is subject to multiple shocks .......................................... 2 B. A landlocked situation and weak export base creates a competitive disadvantage in trade ............ 3 C. The rate of population growth is high and poses a major challenge for poverty reduction ............. 3 D. Malawi’s political economy trap: recurring cycles of crisis .......................................................... 3 2. TRENDS AND PATTERNS IN GROWTH ................................................................................. 7 A. Growth performance has been slow with a noticeable divergence from regional peers ................. 7 B. A stagnant capital stock is the proximate reason behind Malawi’s inability to grow faster............ 7 C. Limited structural transformation towards services, although agriculture still dominates .............. 9 D. Growth has been driven by services on the supply side and consumption on the demand side .... 10 E. Cautious optimism as economy is characterized by repeated external and policy induced shocks12 3. POVERTY AND SHARED PROSPERITY: PATTERNS AND CAUSES................................ 14 A. Ultra-poverty has started to show a reduction, but other poverty measures have stagnated ......... 14 B. Who are the poor? ..................................................................................................................... 15 C. There have been modest improvements in reducing the non-income dimensions of poverty ....... 16 D. Progress in promoting shared prosperity since 2010................................................................... 17 E. Vulnerability to shocks and seasonality ..................................................................................... 18 4. CONSTRAINTS AND PATHWAYS TO ACHIEVING THE TWIN GOALS ......................... 21 Foundational issue I: Weak governance underlies macroeconomic instability and poor policy implementation ......................................................................................................................... 22 Foundational issue II: Gender inequality .......................................................................................... 28 Pathway I: Increasing agricultural productivity ................................................................................ 31 Pathway II: Diversifying the economy and creating jobs ................................................................... 40 Pathway III: Harnessing the demographic dividend & building human capital ................................. 51 Pathway IV: Building resilience against shocks and enhancing environmental sustainability ............ 61 5. PRIORITIZATION OF POLICY INTERVENTIONS .............................................................. 70 Priority Policy Interventions for the Foundational Issues ................................................................... 72 Weak governance underlies macroeconomic instability and poor policy implementation (Foundational Issue I) ...................................................................................................................................... 72 Gender inequality (Foundational Issue II) ........................................................................................ 74 Priority Policy Interventions for Pathways ........................................................................................ 75 Pathway I: Increasing agricultural productivity ............................................................................... 75 Pathway II: Diversifying the economy and creating jobs .................................................................. 77 Pathway III: Harnessing the demographic dividend and building human capital .............................. 80 Malawi: Systematic Country Diagnostic iv Pathway IV: Building resilience against shocks and enhancing environmental sustainability ........... 82 6. KNOWLEDGE AND DATA GAPS ............................................................................................ 83 References ............................................................................................................................................ 85 Annex 1: Malawi SCD team ................................................................................................................ 93 Annex 2: Key Macroeconomic Indicators .......................................................................................... 95 Annex 3: Supplementary tables and boxes ......................................................................................... 96 Annex 4: Constraints Identified for each Pathway ........................................................................... 98 Annex 5: Consultations during the SCD Process ............................................................................ 100 Malawi: Systematic Country Diagnostic v List of Figures: Figure 1. 1: Malawi has had lower average annual growth and higher volatility than the rest of SSA ........ 2 Figure 1. 2: Regionalization of electoral politics ...................................................................................... 5 Figure 1.3: The share of ODA on budget has declined sharply ................................................................. 6 Figure 2. 1: GDP and GDP per capita growth in periods – 5 year moving average .................................... 7 Figure 2. 2: TFP growth has quite closely tracked growth in real per capita GDP ..................................... 8 Figure 2. 3: Malawi’s capital stock has stagnated compared to its peers ................................................... 8 Figure 2. 4: Malawi experienced some structural transformation from agriculture to services, but with only limited gains in productivity .......................................................................................................... 10 Figure 2. 5: Supply side contribution to GDP growth ............................................................................. 11 Figure 2. 6: Demand side contribution to GDP growth Percentage of GDP ............................................ 11 Figure 2. 7: Trade openness (as imports and exports of goods & services relative to GDP), 2008-2016 .. 11 Figure 2. 8: Goods export composition (shares),