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Thinking Development

By Christopher Guta, PhD:

I have in an earlier episode of this column introduced the issue of trust and its impact on development. My assertion was that trust needs to flow like a river in our households, our business firms and in our government if Malawi is to rapidly transform economically and socially. In today’s episode, I discuss the extent to which trust influences investment decisions.

In his budget statement for the 2019/2020 financial year, Minister of Finance Joseph Mwanamvekha argued that Malawi is making strides regarding development. However, he also made some lamentations. A key lamentation for me was that economic growth has, over the years, been volatile. By allocating significant amounts of investment funds (K18.9 billion) for the Shire Valley Transformation Programme (SVTP), the Minister appeared to confirm what Mbane Ngwira, the publicist for Reserve Bank of Malawi, had said prior to the Budget Statement that growth volatility had something to do with Malawi’s reliance on rain-fed agriculture.

To be sure, the SVTP aims at investing in irrigation infrastructure as a basis for promoting commercialisation of agricultural production. Households in Chikwawa and Nsanje districts, which collectively have title to the 43,370 hectares that are expected to be developed in this 14-year World Bank loan financed programme, are at the centre of the SVTP development initiative. Also at the centre are investors who will partner with the households in developing commercial farms and/or establish new agro-processing business firms or procure the farm outputs for their intended uses including exporting them as commodities.

While weather variability has a role regarding economic growth in Malawi, I have argued, and continue to do so, that economic growth in Malawi is also impacted by low diversity of our production capacity.

In this episode, I shed some light on the role of trust on investment. I want you to trust me that the assertions made to support the argument that trust is important for investment emerge from robust knowledge and shared understanding. The first assertion is that all factors remaining constant, the lower the per capita income of a country, such as is the case in Malawi, the higher the rate of economic growth should be. Take Government debt as a factor: when Malawi was forgiven its debt under the Highly Indebted Poor Countries Programme – a period that coincided with the first term of the Bingu Administration, only Qatar grew faster than Malawi, we were told. The visible public investment initiatives then raised trust of individuals and businesses in the administration hence the ‘landslide’ victory by DPP in the 2009 elections.

The second assertion is that in low income countries such as Malawi, trust can replace the role played by strong institutions. Institutions are those artifacts that relate to the values, attitudes and social norms that condition emergence of trust and in many ways reflect observance of the rule of law. A good example here is the extent to which individuals in households, business firms and government respect property rights. It was not a surprise, therefore, that the Forfeiture Act, which enabled Government in the past to snatch private property, was one of the first pieces of legislation to be repealed after Malawi re-established democracy in 1994.

The third, and perhaps the most important assertion is that trust causes economic growth. This means that a shared understanding exists that at the core, it is trust that explains economic growth and not the other way round.

The last assertion with added value to readers of this episode is that trust does not really matter for the total investment made in an economy. Trust impacts on the role of investment in spurring economic growth by influencing the efficiency of investment decisions. To the extent that the K18.9 billion to be invested in commercialisation of agriculture in the Shire Valley is part of the total investment in to the Malawi economy in the 14 years will trigger private investment in expanding production diversity of Malawi, it will be the efficiency of the investment decisions measured in terms of the long-term, as opposed to the short-term, nature of the production technology choices that will influence long term economic growth of the country. This is so because trust influences the attitude of individuals towards risk. The investors that will augment the Shire Valley Transformation Programme and, indeed, invest in other sectors of the economy elsewhere, will seek the security of production technologies that represent low risk. This will most likely underpin expansion of production capacity of products whose competitive advantage can easily be eroded because of low level innovation.

As I sign off, I would like to comfort you regarding the ‘so what’ question I will have raised in your mind by undertaking to address what needs to be done to raise the trust levels in Malawi from where they are at the moment in the next episode.

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