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Banking on entrepreneurship is not industrialisation

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Roll back the time to April 2016, one is reminded of the commitment by the Malawi Government to address challenges in industrialisation in the country. The commitment is contained in the National Industrial Policy (NIP). The policy document sets out the government’s industrialisation strategy for the economy. There is no denying that the country cannot develop with the level and nature of industries in place. It is common sense that, with more light manufacturing and processing of the country’s primary product, Malawi could significantly lower its import bills. Malawi’s merchandise imports are mainly manufactured goods. Even after 53 years of independence, the country still relies on production and export of primary products.

Malawi in 2017 still exports tobacco leaves and not cigarettes; it still exports tea leaves and not tea bags. In Malawi, tobacco alone contributes 60 percent of the traded exports in total exports, and only three products (tobacco, tea and sugar) make up over 75 percent of the total exports. Even with these three, it is only tobacco that one can claim to be directly produced by the local Malawians and, hence, can be expected to contribute directly to poverty alleviation. As for sugar and tea, it is an open question whether the proceeds from these exports even come back into the coffers within the boundaries of Malawi.

Malawi has suffered from sluggish productivity growth and export diversification over the years. In 2015, about 56 percent of Malawi’s exports were raw materials and only 21 percent were intermediate goods. This is an indication that the country has missed the industrialisation boat, especially when 73 percent of the country’s imports are made up of intermediate and consumer goods. The question that comes to mind is what are the policy-makers doing about this? To be fair to the authorities that be, the NIP does a good job of analysing the challenges the country has to overcome to industrialise. The NIP lists a number of constraints. One of the constraints is the lack of access to credit facilities and capital investment. In addition, the NIP rightly observes that, in Malawi, interest rate margins (the difference between the lending and deposit rates) are some of the highest in the world, resulting in one of the lowest private sector credits to GDP in the world.

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The only problem with this analysis is that the government identifies only two main causes of the lack of access to credit as lack of competition in the financial sector and information asymmetry (the fact that banks have little knowledge of their clients, which increases risk and drives up the interest rate spread). Perhaps one would assume that the solutions, as far as government actions are concerned, would be a pragmatic intervention in the financial market. To the surprise of many development analysts, the solutions do not include the creation of a National Development Bank (NDB).

The current institutions such as MEDF are mainly geared towards entrepreneurship. There is a clear difference between strategies for entrepreneurship and industrialisation. Entrepreneurship strategies are mainly geared towards poverty alleviation at the individual level, hence the majority of the type of businesses funded by financial institutions in Malawi are trading enterprises or, indeed, farming enterprises. Only affordable long term finance through a specialised development bank is capable of supporting industrialisation in Malawi. While these enterprises can create employment, they are not a route to industrialisation. While these entrepreneurial strategies have reduced poverty at household levels by stabilising incomes for survivalist micro enterprises, they have not succeeded in increasing wage employment and productivity necessary for industrialisation.

What Malawi needs in order to industrialise is to establish urgently the NDB or a Specialised Industrial Development Bank (SIDB). Almost all of today’s industrialised countries achieved this status through some form of a development bank or a specialised industrial development fund. Development banks are financial institutions that are concerned with the provision of long term loans towards both profitable and non-profitable projects including socially beneficial ones. The rapid industrialisation in many countries in the 19th century was achieved by State provision of long term loans to risky projects via development banks.

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Enough of this nonsense that has proliferated in the advent of liberalisation, which has seen State involvement in the financial sector gradually diminishing in line with the neo-liberal shift in economic policies. Financial activities have been directed by free market dynamics rather than regulated and directed markets and these have no reason to provide credit for industrialisation. They are interested in quick profits and, due to privatisation, these banks are owned by shareholders (mostly foreign) who are driven by the maximisation of their investment and not national development. The NDB can make good use of Public Private Partnerships to transfer risks and encourage large scale financing operations in Malawi. In addition, they can act as facilitators, promoters or even investors.

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