Trade and Development When Exports Lack Diversification: A Case Study from Malawi
by
Suresh Persaud,
Birgit Meade, and Saager Meade
Economic Research Report No. (ERR-77) 42 pp, July 2009
In developing countries, export concentration is a critical
obstacle to sustained economic growth. A number of countries in
Africa, Latin America, and the Caribbean depend heavily on a
limited number of cash crop exports and are vulnerable to domestic
and international shocks. Malawi stands out among these countries.
Malawi's agricultural exports averaged 20 percent of gross domestic
product (GDP) between 2000 and 2004, and one commodity, tobacco,
provided over half of Malawi's export earnings.
What Is the Issue?
The contribution of agricultural exports to economic growth in
developing countries has been neglected in the literature on
export-led growth. In addition, past studies have effectively
assumed that an increase in exports would affect GDP to the same
extent as an equivalent decrease. This assumption may not be
correct. For example, if export revenues are inefficiently utilized
(for instance, diverted towards low-return enterprises that are not
consistent with a country's comparative advantage), rising exports
will do little to increase GDP, and the growthenhancing effects of
export expansion may be largely lost. Moreover, inefficient
utilization of export revenues may leave the country's economy
unprepared for unfavorable shifts in market conditions that lead to
falling exports. The economic benefits of export expansion may then
be muted, and the economic losses of export contraction may be
accordingly larger.
This analysis uses Malawi as a case study of export concentration
and heavy exposure to volatility, a topic with broad relevance for
other developing countries that have difficulty in drawing
sustained economic growth from a narrow portfolio of cash crop
exports. The study investigates the relationship between Malawi's
tobacco and nontobacco exports and its GDP, particularly the impact
of rising compared with falling exports. If the economic impacts of
falling exports exceed those of rising exports, how does
variability in foreign sales infl uence the pace of Malawi's
GDP
growth, compared with a scenario in which Malawi's economy is
affected equally by increasing and decreasing exports?
In the absence of offsetting improvements in productivity, a
country that depends heavily on commodity exports is less likely to
experience persistent economic growth because its economic fortunes
would be closely tied to booms and busts in world commodity
markets. In developing countries such as Malawi, considerable
potential exists to enhance the productivity of the agricultural
export sectors by raising farm productivity and marketing
efficiency. If tobacco exports are indeed an engine of Malawi's GDP
growth, might efficiency gains in the tobacco sector reduce the
potentially adverse effects of export volatility on Malawi's
economy?
What Did the Study Find?
The statistical findings of the study bear out anecdotal
evidence that Malawi's tobacco exports are positively related
to its GDP. The analysis, which disaggregated Malawi's total
exports, showed no evidence that nontobacco exports
drive the country's economic growth.
Variability in Malawi's tobacco exports leads to slower economic
growth, because GDP falls by a relatively large amount in response
to a given decrease in exports, while recovering little during an
upswing in exports; the analysis showed that the impact of tobacco
exports on GDP is almost three times greater when exports are
falling than when they are rising (asymmetry). This result for
Malawi provides a cautionary tale for other countries with similar
economic structures: Ineffective management of export revenues,
along with production and marketing ineffi ciencies, may diminish
the positive GDP effects of rising exports without tempering the
negative effects of falling exports.
Such inherent weaknesses may, in fact, exacerbate the negative
impacts of export variability on a country's GDP.
Model results show that Malawi's GDP would be least vulnerable to
volatility in tobacco export earnings if gains
in yield and marketing efficiency were combined with an export-GDP
relationship that was symmetric, that is, with
rising and falling exports having GDP impacts of equal magnitude.
Growth in farm productivity would require
improvements in the availability and quality of resources and
inputs, as well as in human capital. Greater marketing
effi ciency could be achieved by reducing internal costs of
transportation and distribution, which could partially
insulate Malawi's GDP from falling export prices. Lower export
prices would not be fully transmitted to the farm
price if increased efficiency along the marketing chain led to
increases in the farmers' share of the export price.
Consequently, as marketing margins contracted, Malawi's economy
would be shielded to a degree from lower international prices: the
model results indicate that a decrease in the export price would
only slightly reduce farm prices, domestic tobacco production,
exports, and hence GDP.
On the other hand, if export prices rose, increased efficiency
along the marketing chain could amplify the benefits
accruing to growers-an increase in the farmers' share would mean
that farmers received a greater portion of a higher
export price. The analysis shows that this would lead to
relatively large increases in farm prices, production, and
exports, and therefore in GDP. As export variability inevitably
occurs, the combination of margin compression-
which reduces the gap between farm prices and export prices-and
rising tobacco yields can partially offset the negative impact of
falling export prices on Malawi's GDP, while amplifying the
benefits of rising export prices, generating an upward ratcheting
effect.
How Was the Study Conducted?
The underlying framework for empirically investigating the
relationship between exports and economic growth is based on an
extension of an aggregate production function model. The value of
exports is partitioned into rising and
falling components, leading to a more flexible model specifi
cation that allows for differential impacts of increasing
vs. decreasing exports. Although the econometric results clearly
suggest an asymmetric relationship between real
tobacco exports and real GDP, this study does not predict or
forecast the continuation of relationships found in
historical data. Rather, it compares different scenarios involving
asymmetric vs. symmetric export-GDP linkages.
Econometric estimates of the export-GDP relationship for Malawi
are embedded in a simulation model that also
incorporates relationships for the farm supply response of tobacco
and the transmission (to varying degrees) of export
prices to producer prices.