By Christopher Guta, PhD:
I think that Malawi’s development requires more deliberate actions beyond those related to the measures announced through the budget statement presented in Parliament on September 9 2019 by the Minister of Finance that, to some extent, support the resurgence of manufacturing. One such measure, by way of example, is the increase of export allowance for non-traditional products. The need for ‘out of the box thinking’ on this matter cannot be overemphasised given the products I saw on display at the Malawi Consulate Office in Tete, Mozambique last week.
The Malawi Consulate facilitated a business visit I had to Tete related to a manufactured product I am involved with. While at the Consulate Office, I viewed the manufactured products on display. My observation was that the variety was limited. I saw vegetable oils produced by several manufacturers indicating a propensity for product copying and, to an extent, lack of depth in our manufacturing endeavours. Of course, there is no way the Consulate could display all types of products manufactured in Malawi. The sweeping conclusion regarding our affinity for product copying and lack of manufacturing depth is an inference from my personal knowledge of our manufacturing base.
Thus, as one thinks about Malawi’s development, the question regarding what Malawi is losing out as the manufacturing sector suffers becomes pertinent. From a learning and innovation perspective, a fundamental loss to the economy is the limited potential for structural change of the economy – often underpinned by a combination of both product and process innovation.
A study I undertook some time ago showed that a larger proportion of Malawian firms undertake at least one of the following five innovations: product innovation, process innovation, service innovation, market innovation and organisational innovation. This was true for 66 percent of the firms in the study. When I compared firms in the service sector with firms involved in processing agricultural or non-agricultural inputs into finished products, I found that the service sector firms are less innovative. Malawi’s manufacturing firms are more likely than service firms to undertake both product and process innovations. They are also more likely to undertake product and process innovations that are more complicated. In the case of product innovation, manufacturing firms are more likely than service firms to go beyond introducing a new product or improving an existing product. They are more apt at developing substantially new products. Regarding process innovation, manufacturing firms are more likely to develop or substantially modify, existing processes than service firms. When I disaggregated manufacturing firms into those involved in agro-processing and those that manufacture products away from agricultural raw materials, I found that it was the firms that produced non-agriculture-related products that were more innovative in terms of both product and process innovation.
You are entitled to ask me at least the following two questions. The first is: So what? A related second question is: How relevance is this to Malawi’s development? Product differentiation is a critical variable in creating and sustaining niche markets. The more innovative products and their related processes are the more a firm and an economy can gain and sustain a competitive advantage. It is the progressive ability of South Korean firms to move their country from an agrarian economy to one that now is out performing previously dominant countries such as Japan that accounts for South Korea’s rapid development. The market value of Samsung today is higher than that of three or more leading Japanese firms combined.
The second reason I think this is relevant for Malawi’s development is anchored in the finding by Professor Emeritus Chinyamata Chipeta and Mjedo Mkandawire that the manufacturing sector is the basis for structural change of Malawi’s economy. I also found the same from my study. Unless the structure of Malawi’s economy changes, we should not expect to move up the ladder regarding indicators of development used to classify countries on the United Nations Human Development Index. I said it before and offer no apology for repeating it today: It is the lack of structural change that underpins, as Professor Emeritus Metcalfe of Alliance Manchester Business School once wrote, ‘much of the pain and disappointed hope associated with economic development’, especially in sub-Saharan African developing countries such as Malawi.
So, in addition to giving tax incentives that appear to promote importation and local usage of high value-added products such as solar panels, solar batteries and solar inverters, I would be happier to also have read something in the budget statement that explicitly incentivises domestic and foreign investment in local manufacture of higher value-added non-agricultural products. The ongoing construction of the Grand Business Park in Lilongwe, where we will buy high value goods manufactured in China mainly, may not foster rapid development of Malawi.