Lea, NicholasHanmer, Lucia2012-03-192012-03-192009-10-01https://hdl.handle.net/10986/4289This paper applies a growth diagnostics approach to identify the most binding constraints to private-sector growth in Malawi - a small, landlocked country in Southern Africa with one of the lowest per capita incomes in the world. The approach aims to identify the constraints (in terms of public policy, implementation, and investments) most binding on marginal investment, and therefore whose relaxation would have the largest impact on growth through the investment channel. The authors find that growth in Malawi has been primarily driven by the domestic multiplier effect from export revenues. The multiplier effect is particularly pronounced due to the high number of smallholder farmers, which produce Malawi s main export crop, tobacco, and consequently results in the widespread and rapid transmission of agricultural export income. Furthermore, despite changes in the structure of agricultural production from estate to smallholder farming and liberalization of prices and finance, a longstanding relationship persists between exports in real domestic currency and overall gross domestic product. This central role of exports in creating domestic demand highlights the importance of the real exchange rate in Malawi s growth story, which directly increases the strength of the export multiplier. The most pressing constraint to growth in Malawi continues to be the regime of exchange rate management. Despite good progress, there is compelling evidence that the rate is still substantially overvalued. Furthermore, it is also likely that the inflow of foreign aid - in excess of 50 percent of exports -contributes to the overvaluation through its large component of recurrent expenditures.CC BY 3.0 IGOACCOUNTINGAGGREGATE DEMANDAGRICULTUREASSET BASEAUCTIONAUCTION FLOORAUCTION PRICEBALANCE OF PAYMENTSBANKING SECTORBARRIERS TO ENTRYBASE YEARBINDING CONSTRAINTBINDING CONSTRAINTSCAPITAL ACCOUNTCAPITAL FLIGHTCAPITAL GROWTHCARTELCENTRAL BANKCHECKSCIVIL WARCOMMODITYCOMMODITY PRICESCOMPETITIVENESSCONTRACT ENFORCEMENTCOST OF CAPITALCOST OF FINANCECREDIT INFORMATIONCURRENT ACCOUNT DEFICITDEBTDEBT SOURCEDEPOSITDEPOSIT ACCOUNTSDEPOSIT INTERESTDEPOSIT INTEREST RATESDEREGULATIONDERIVATIVEDEVALUATIONDEVALUATIONSDEVELOPING COUNTRIESDEVELOPMENT ASSISTANCEDEVELOPMENT ECONOMICSDEVELOPMENT STRATEGYDISBURSEMENTSDOLLAR PRICEDOLLAR PRICESDOLLAR VALUEDOMESTIC CREDITDOMESTIC CURRENCYDOMESTIC DEBTDOMESTIC ECONOMYDOMESTIC FINANCIAL MARKETSDOMESTIC MARKETDOMESTIC PRICEDOMESTIC PRICESECONOMIC THEORYECONOMIES OF SCALEELASTICITYEQUIPMENTEXCHANGE MARKETSEXCHANGE RATESEXPORT GROWTHEXPORT MARKETSEXPORT SECTOREXPORT SECTORSEXPORTERSEXPORTSEXPROPRIATIONEXPROPRIATIONSEXTERNAL FINANCINGEXTERNALITIESEXTERNALITYFACE VALUEFACTORS OF PRODUCTIONFINANCIAL INSTITUTIONFINANCIAL INSTITUTIONSFINANCIAL REFORMFINANCIAL SECTORFINANCIAL SERVICESFINANCIAL SYSTEMFISCAL DEFICITFISCAL DISCIPLINEFIXED CAPITALFIXED EXCHANGE RATEFLOATING EXCHANGE RATEFOREIGN CURRENCYFOREIGN EXCHANGEFOREIGN EXCHANGE MARKETFOREIGN EXCHANGE RESERVESFOREIGN INVESTORSFUTURE GROWTHGDPGDP DEFLATORGDP PER CAPITAGOVERNMENT BORROWINGGOVERNMENT DEFICITGOVERNMENT EXPENDITUREGOVERNMENT EXPENDITURESGOVERNMENT FINANCESGOVERNMENT INTERVENTIONGOVERNMENT POLICIESGOVERNMENT POLICYGROSS DOMESTIC PRODUCTGROSS FIXED CAPITAL FORMATIONGROWTH RATESHEDGESHOLDINGSHOUSEHOLD WEALTHHUMAN CAPITALHUMAN DEVELOPMENTILLIQUIDITYINCOMEINDUSTRIALIZATIONINFLATIONINSTRUMENTINSURANCEINTEREST INCOMEINTEREST PAYMENTSINTEREST RATEINTEREST RATE PARITYINTEREST RATE SPREADINTEREST RATESINTERNATIONAL BANKINTERNATIONAL DEVELOPMENTINTERNATIONAL FINANCIAL STATISTICSINTERNATIONAL MARKETSINTERNATIONAL TRADEINVENTORYINVESTINGINVESTMENT CLIMATEINVESTMENT DECISIONSINVESTMENT RATESINVESTOR PROTECTIONLACK OF COMPETITIONLAND HOLDINGLAND POLICYLEGAL RIGHTSLENDING INTEREST RATELENDING INTEREST RATESLIABILITYLIBERALIZATIONLIQUIDITYLIQUIDITY CONSTRAINTLIVING STANDARDSLOANLOAN QUALITYMACROECONOMIC ENVIRONMENTMACROECONOMIC INSTABILITYMACROECONOMIC MANAGEMENTMACROECONOMIC RISKMACROECONOMIC STABILITYMARKET FAILUREMARKET FAILURESMARKET PRICEMIGRANT LABORMONETARY FUNDMONOPOLYMONOPOLY RENTSMULTIPLIER EFFECTMULTIPLIER EFFECTSOIL PRICEOPEN ECONOMIESOPTIMIZATIONOUTPUTOVERHEAD COSTSOVERVALUATIONPER CAPITA INCOMESPOLITICAL ECONOMYPOLITICAL STABILITYPOSITIVE EFFECTSPOWER PARITYPREFERENTIAL ACCESSPRICE ELASTICITYPRICE ELASTICITY OF SUPPLYPRICE STABILITYPRIVATE INVESTMENTPRODUCT MARKETSPRODUCTION INCREASESPROFITABILITY ANALYSISPROPERTY RIGHTSPUBLIC BORROWINGPUBLIC FINANCEPUBLIC INVESTMENTPUBLIC INVESTMENTSPUBLIC POLICYPUBLIC REGISTRYPURCHASING POWERRAPID GROWTHRATE OF RETURNRATE OF RETURN ON CAPITALREAL EXCHANGE RATEREAL GDPREAL INTERESTREAL INTEREST RATESRECURRENT EXPENDITURERECURRENT EXPENDITURESREMITTANCEREMITTANCESRENT SEEKINGRESERVERESERVE REQUIREMENTRETURNSRULE OF LAWRURAL MARKETSSHAREHOLDERSMALLHOLDER AGRICULTURESOCIAL DEVELOPMENTSTOCKSSTRUCTURAL CHANGETAXTAX RATETAXATIONTOTAL FACTOR PRODUCTIVITYTOTAL REVENUETRADE BALANCETRADE DEFICITTRADE REFORMSTRADINGTRANSPARENCYTREASURYTREASURY BILLSVALUE ADDEDVOLATILITYWAGESWEALTHWORLD MARKETWorld Bank10.1596/1813-9450-5097