Trade Policies, Market Structure, and
Manufacturing Sector Performance in Malawi over
the period 1967-2002
Hopestone Kayiska Chavula
Macroeconomic Policy Division
Economic Commission for Africa
Addis Ababa, Ethiopia.
African Economic Conference, 28th-30th
October 2013, Johannesburg, RSA.
Contents
• Introduction.
• Economic policy regimes and
manufacturing performance.
• Price mark-ups, trade and market
structure hypotheses.
• Methodology and data.
• Empirical results.
• Conclusions.
Introduction
• Like many African countries Mw has gone through
episodes of economic performance over the years;
• However, it is observed to have performed relatively
better in the first fifteen years after independence than
the other periods;
• Malawi’s manufacturing sector has remained relatively
small and underdeveloped, and its performance remains
dismal;
• The paper tries to evaluate the impact of changes in
economic policies and market structure on the
performance of the manufacturing sector in Malawi.
Economic policy regimes and mnfng. performance
Period
Trade Policy Actions
1964-1980
Import Substitution Industrialisation






1981-1993
1994-2004
Overvalued exchange rate system – fixed peg
Limited tariff protection
Non-tariff barriers to trade e.g. import licensing and implicit foreign exchange rationing.
Malawi-Botswana reciprocal trade agreement in 1968.
Active government involvement in manufacturing industries.
Low and stable inflation and interest rates.
Manufacturing Average Growth
rates
12.65%a
SAPs Period



Periodic devaluation of the local currency and liberalisation of interest rates
Liberalisation of output prices and limited entry
Liberalisation into the manufacturing sector.








Introduction of duty drawback system in 1988.
Introduction of surtax credit system in 1989
Bilateral trade agreements
Reduction in tariffs leading to a maximum of 75 percent in 1994.
Elimination of quantitative trade restrictions and foreign exchange rationing.
Abolition of exclusive monopoly rights
Privatisation of state-owned enterprises
Liberalisation of the financial sector and interest rates
2.87%
Complete Open Economy Regime and export promotion







Floatation of the local currency
Introduction of Export Processing Zones (EPZ)
Reciprocal bilateral trade agreement
Base surtax rate reduced to 20%
Malawi joined the COMESA free trade area
Privatisation of state-owned enterprises.
Liberalisation of industry and output/input prices.
-1.01%b
19
6
19 7
1968
6
19 9
1970
7
19 1
1972
7
19 3
7
19 4
1975
7
19 6
1977
7
19 8
1979
8
19 0
1981
8
19 2
1983
8
19 4
1985
8
19 6
1987
8
19 8
1989
9
19 0
1991
9
19 2
9
19 3
1994
9
19 5
1996
9
19 7
1998
9
20 9
2000
01
Price-cost margin
40
30
-10
-20
Price-cost margin
20
0.4
10
0.3
0
0.2
0.1
0
Growth rate %
Price-cost margins and manufacturing
output growth rate trends – 1967-2002
0.7
Manufacturing grow th rate
0.6
0.5
Price mark-ups, trade and market structure
hypotheses
• Debate on competition and market structure in
firm/industry performance;
• Inputs availability (Mw) play a significant ro in
the performance of industry/firm;
• Increase in demand has a positive impact on
performance;
• Imports lead to low p-cost margins due to
increased competition;
• Export market tends to compel monopolists
(oligopolists) to be more competitive in pricing;
Methodology and Data
y  f MC,  X ,  B, e, p
• Y=price-cost margin
(performance)
• MC=market concentration
• X=vector of factors
determining conjectures
• B= vector of barriers to
entry
• e=elasticity of demand
• p=policy variables
Methodology cont….
yit   0  1hhiit   2 impit   3 exp it   4 rmtrsit   5 skill it   6 fink kt
;
  7 klkt   8 meskt   9 demandit  10tariff t  11 DU mt   it
;
,
DU = dummy variables for structural breaks
Fink= finance working capital
Data
• Firm level panel data from NSO through
NES , 1967-2002;
• 141 firms under 14 four digit ISIC
industries;
• Exports and imports are at industry level.
Empirical Results
• 1st carried out the Clemente-Montanes-Reyes
unit root test to establish structural breaks;
• Results showed significant structural breaks in
– 1982 : LR effect of economic instability before
adopting SAPs
– 1991: could be due to accumulation and continued
effects of SAPs.
• Dummy variables were constructed based on
these structural breaks to capture the policy
effects on performance.
Panel Data Regression Estimates
Variables
Model 1
1967-2002
FGLS
Model 2
1967-1982
FE(Robust)
Model 3
1983-1991
FGLS
Model 4
1992-2002
RE (Robust)
Hhi
0.128*** (0.000)
0.175*** (0.000)
0.091*** (0.000)
0.157*** (0.000)
Imp
-0.044*** (0.000)
-0.330*** (0.000)
0.014
(0.425)
-0.086** (0.021)
Exp
-0.006
(0.528)
-0.064*** (0.006)
0.025
(0.174)
-0.055** (0.019)
Rmtrs
-0.225*** (0.000)
-0.488*** (0.000)
-0.186*** (0.000)
-0.241*** (0.000)
Skill
-0.031*
0.038
(0.565)
0.019
-0.081** (0.015)
fink
-0.073*** (0.001)
-0.096*
(0.106)
-0.165*** (0.001)
-0.062
(0.226)
Mes
-0.013
0.090
(0.525)
0.090
(0.362)
0.274**
(0.017)
Klr
0.129*** (0.000)
0.081*
(0.100)
0.255*** (0.000)
0.084**
(0.029)
Dem
-0.008
(0.566)
-0.008
(0.750)
-0.013
(0.650)
0.0001
(0.997)
Tariff
0.008
(0.835)
0.058
(0.314)
-0.074
(0.401)
-0.198
(0.144)
Dummy83-91
-0.005
(0.927)
Dummy92-2002
0.154**
(0.031)
Intercept
1.727*** (0.000)
2.958*** (0.000)
0.924
(0.183)
2.234**
(0.047)
Hausman test
47.09*** (0.0000)
27.19*** (0.0000)
50.19*** (0.0000)
15.34
(0.1202)
Wooldridge test (AR1)
6.729**
0.652
3.423*
17.230*** (0.0001)
Wald test
1.3e+05*** (0.000)
Breusch & Pagan LM
(0.065)
(0.748)
(0.0109
(0.4223)
1.6e+05*** (0.000)
-
(0.644)
(0.0693)
1.5e+05*** (0.0000)
-
-
109.46*** (0.0000)
Observations
1583
678
442
463
Groups
132
88
88
94
Empirical results cont…..
• Policy changes and strategies led to two significant
structural breaks (in 1982 and 1991)
• Mainly attributed to the country’s economic crisis in the
late 1970s and early 1980s, and the accumulation and
continued effects of the SAPs;
• Price-cost margin increased with the degree of market
concentration in an industry;
• Imports and exports are found to have a negative and
significant impact on the firms’ performance in line with
economic theory especially during the import
substitution/protectionist and post-liberalisation periods.
Conclusions
• International trade has considerable impact on
domestic profitability looking at the effects of
import and export intensity;
• Calling for export performance enhancing
policies and import discipline;
• Emphasis on technological transfer of emerging
technologies, the associated knowledge and
expertise;
• Deliberate efforts to enhance the availability of
factor inputs (raw materials, skilled labour &
financing capital & access to loanable funds).