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 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. - ii - 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