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Thinking Development

By Christopher Guta, PhD:

In this week’s entry, I will attend to the last of the four national capabilities that Malawi needs to work on to foster development – openness of the economy. It is a difficult subject for me because I have seen many businesses in Malawi fold due to the effects of openness of the economy, yet I believe that it is an important aspect to consider on this column.

Let me create common understanding of what openness of the economy is. Economists define openness as the ratio, expressed in percentage terms, of the total value of a country’s imports and exports traded in a particular year divided by that year’s gross domestic product (GDP). The higher the percentage, the more open the economy is. Thus, openness deals with the extent to which free trade is embedded in a country’s governance structures and the extent to which the economy can be considered non-protectionist regarding international trade.

The reason I have difficulty with this important capability is that in some ways this perspective of how Malawi and countries like Malawi benefit from the global economy is not consistent with how countries such as the USA, in the past, and China, in the recent times, have gone up the development ladder. While China, which has become the second largest economy of the world much faster than predicted by others, finally acceded to the treaty that established the World Trade Organisation, the United Nations body that regulates global trade, it did so after protracted negotiations that lasted just over 15 years. During this period, it consolidated its productive capacity in many sectors of its economy that were attractive to foreign investors due, among other factors, to its high population. The US, by contrast, had its own conditions before embracing free trade. These were that the principles embodied in free trade would only be embraced when the time was ripe. The ripe time was when the US had a hundred million people and the seas were covered by its ships; when American industry attained the greatest perfection, and New York was the greatest commercial emporium and Philadelphia the greatest manufacturing city in the world; when no earthly power could no longer resist the American Stars. In other words, free trade is desirable when a country can compete in terms of its productive capacity in relation to those countries it trades with. I do not believe that Malawi has attained the perfection in manufacturing so as to be competitive in its international trade endeavours.

Having lamented thus, let me return to hard facts. The rationale for openness of the economy lies in the understanding and hope that when a country is open, it will benefit from technology flows which will, in turn, stimulate innovation. In addition to foreign trade, openness is often measured by considering three other factors, namely foreign direct investment, migration and licensing. Fagerberg and Srholec, my mentors on the subject of national capabilities and development, measured the performance of Malawi regarding foreign trade and foreign direct investment at two-time periods: before multiparty democracy (1992- 1994) and after (2000-2004). The results were that Malawi’s score improved substantially between the time periods from a score of minus 0.03 before multiparty to 0.92 after multiparty. So there is evidence that Malawi became a more open economy after embracing multiparty democracy in 1994. That said, what really needs to be understood is how has this openness impacted on development through the medium of economic growth? For me, the answer lies partly with what happened to the other three national capabilities, namely innovation systems, governance and political systems, in the same time periods. The evidence is that Malawi’s performance regarding innovation systems improved from a score of minus 2.42 to minus 1.47. This largely reflects improvements regarding investment in education which was prioritised after Malawi re-embraced multiparty democracy in 1994. There was also improvement in the political score from minus 1.4 to positive 0.32. However, Malawi’s score on governance deteriorated from 0.03 to minus 0.19. If my interpretation of the evidence is right, what specific factors regarding governance then limited or still limit the translation of Malawi’s openness into economic development and growth? I would like to suggest that corruption has something to do with it. One dimension through which corruption may have played a role relates to how Malawi implemented its privatisation of public enterprises in the period following the return to multiparty. To what extent did the process lead to effectiveness and efficiency in Malawi’s productive capacity? Remember that, in the case of USA, attainment of perfection in that country’s productive capacity was a condition for greater openness of its economy. Malawi can benefit more from its openness by creating opportunities for foreign direct investments into production sectors that will contribute to the country’s competitiveness in international trade. What are these sectors you may ask? Well that’s for all of us to identify and I believe that action to this end is underway through the creation of a revised national export strategy.

Now that the presidential televised debates are over and the manifestos of the major political parties are in the public domain, I will take time to read what they say about improving Malawi’s productive capacity as a basis for attaining competitiveness in international trade which is critical for economic growth and development. Do the same to inform your voting position on May 21 2019.

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