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Congratulatory supplement

THE DAILY TIMES, Thursday, May 3, 2012

Advice to Madam Banda

From page 23

NEED MORE IMPROVEMENTMotorists qeue for fuel at the peak of economic problems

C. Exchange rate depreciation In some cases a monetary solution to easing a countrys foreign exchange position is to depreciate the value of the domestic currency. In the present case where the dollar is trading at a higher price on the black market, the central bank can reduce the official price of the Malawi kwacha so that a dollar should start fetching something more than the current K168. The theoretical positive effects are that such an action would encourage those with foreign currency to trade it on the formal market and that producers could gain because they would face better world prices. Depreciation could also punish imports of luxuries hence could control the growth in import demand. However, this is not without problems. In the first place there is no guarantee that once the currency is depreciated enough dollars will be released on the currency market. It may as well be that people will still go to the black market which will still try to hike its prices. Others may still hoard their dollars as they prospect future depreciations. More importantly, whether depreciation would indeed benefit the exporters which in Malawis case are farmers, is not straightforward because, while they may face better prices, farm inputs would become very expensive, and inflation would go up. Very high inflation would not only eat into everyones incomes, but could even have a more negative effects unfortunately on those that society ought to protect-the poor. This would discredit those in power and also significantly undermine future production and exports. But as this is a condition for unlocking donor support, there is need to depreciate the

currency albeit while engaging the donors fully to ensure that they are part of the solution for any problems that could arise following any major depreciation.

Beyond subsidies: industrialization The need for industrialisation in Malawi is real, although a debate about the means through which it may be achieved is ongoing. Here I purport to flag the importance of launching an agricultural and mining-led industrialization program to offset the effects of any future decline in agricultural and mineral terms of trade for Malawi. Going forward let it be known that the West (developed world) spends more than US$380 billion dollars on agricultural subsidies annually to bolster the incomes of their farmers in order that they maintain an artificially high level of prosperity. This is a substantial amount of money that cannot even be compared to the total aid that flows to Africa or developing world annually! For instance in 2007, the total official development assistance from the West to all poor countries amounted to circa US$123 Billion, which is less than half their spending on subsidies. In view of this, arguments about the need for countries like Malawi to remove all barriers to international trade are at best misleading and far from helpful because of the fact that Malawi as well as Africas trading partners in the West do subsidise their agricultural sectors to a great

deal. But, the government ought to note that revolutionising agriculture sustainably and for the good of the whole nation both now and inter-temporally requires another step beyond subsidising agricultural inputs. There is a need to


subsidise those inputs while endeavouring to take advantage of the strong backward and forward linkages that the agricultural sector has with the other sectors to avoid being stuck in the agricultural sector alone, while exporting unprocessed commodities. There is need to launch what we may call agricultural and mineral-led manufacturing rebirth or more simply agricultural-mineral-led industrialization. The problem with solely relying on raw materials in the long run emanates from the very nature of raw commodities (e.g.

agriculture) and trade. Even in our households, we rarely proportionately increase green maize and nsima consumption when our incomes go up or when the price of maize goes down, or to be precise, any increase we may register would be less, relative to the change in our incomes or prices of maize flour. At the macroeconomic level of course that implies that expenditure on agrogoods does not rise at the same pace as the expenditure on manufacturing goods and services. In other words, when world incomes go up, economies that rely on unprocessed agricultural exports alone or primarily are likely to come out as losers of international trade. The problem is the same with minerals in their raw form. In addition to the implied income inelasticity of demand for agricultural goods alluded to above, the terms of trade for agricultural goods in the absence of processing do deteriorate dynamically, sometimes due to oversupply. In the absence of an active manufacturing sector that draws its resources from the agricultural sector, in some cases agricultural growth could be immiserising. To ensure this does not happen at any point and to ensure that subsidies have a lasting positive impact, there is need to rebuild the manufacturing sector which would get its inputs from agriculture. This would further imply that even in the event

of a decline in agricultural unprocessed goods Terms of Trade, Malawi would have all the incentives to increase productivity in the agricultural sector as the nation would be exporting processed products, and there would be no immiserising growth. Although farm parcels are smaller in some areas, we must try where possible to reclaim marginal land including wetlands to try and expand total farmland. We should then seriously think about taking advantage of transgenic technology and irrigation possibilities to increase total factor productivity. To avoid immiserising growth and ensure intertemporal sustainability, we should invest the gains from agriculture into the manufacturing sector hoping that in future the share of the manufacturing sector will be larger than that of agriculture in the overall economy, at which point we will be a developed nation. The other importance of a vibrant manufacturing/ industrial sector is that by providing jobs to both skilled and unskilled personnel, the manufacturing sector has the potential to meaningfully depopulate the rural areas and thereby freeing up more land per capita. There should be enabling environment for encouraging the private and third sectors to participate fully in the drive for increased exports. It may look bizzare to suggest that the third sector (CSOs) have a role in this, but it turns out that real positive changes on the supply side can be had if the state, private and third sectors work in unison. Together, the three sectors are larger than the sum of their individual parts.
*The author is an economic expert currently working with the University of Reading, Berkshire-UK