Trade Policies, Market Structure, and Manufacturing Sector Performance in Malawi over the period Hopestone Kayiska Chavula Macroeconomic Policy Division Economic Commission for Africa Addis Ababa, Ethiopia. African Economic Conference, 28th-30th October 2013, Johannesburg, RSA.

Contents Introduction. Economic policy regimes and manufacturing performance. Price mark-ups, trade and market structure hypotheses. Methodology and data. Empirical results. Conclusions.

Introduction Like many African countries Mw has gone through episodes of economic performance over the years; However, it is observed to have performed relatively better in the first fifteen years after independence than the other periods; Malawi’s manufacturing sector has remained relatively small and underdeveloped, and its performance remains dismal; The paper tries to evaluate the impact of changes in economic policies and market structure on the performance of the manufacturing sector in Malawi.

Economic policy regimes and mnfng. performance PeriodTrade Policy ActionsManufacturing Average Growth rates Import Substitution Industrialisation  Overvalued exchange rate system – fixed peg  Limited tariff protection  Non-tariff barriers to trade e.g. import licensing and implicit foreign exchange rationing.  Malawi-Botswana reciprocal trade agreement in  Active government involvement in manufacturing industries.  Low and stable inflation and interest rates % a SAPs Period  Periodic devaluation of the local currency and liberalisation of interest rates  Liberalisation of output prices and limited entry  Liberalisation into the manufacturing sector. 2.87%  Introduction of duty drawback system in  Introduction of surtax credit system in 1989  Bilateral trade agreements  Reduction in tariffs leading to a maximum of 75 percent in  Elimination of quantitative trade restrictions and foreign exchange rationing.  Abolition of exclusive monopoly rights  Privatisation of state-owned enterprises  Liberalisation of the financial sector and interest rates Complete Open Economy Regime and export promotion  Floatation of the local currency  Introduction of Export Processing Zones (EPZ)  Reciprocal bilateral trade agreement  Base surtax rate reduced to 20%  Malawi joined the COMESA free trade area  Privatisation of state-owned enterprises.  Liberalisation of industry and output/input prices % b

Price-cost margins and manufacturing output growth rate trends –

Price mark-ups, trade and market structure hypotheses Debate on competition and market structure in firm/industry performance; Inputs availability (Mw) play a significant ro in the performance of industry/firm; Increase in demand has a positive impact on performance; Imports lead to low p-cost margins due to increased competition; Export market tends to compel monopolists (oligopolists) to be more competitive in pricing;

MethodologyandData Methodology and Data Y=price-cost margin (performance) MC=market concentration X=vector of factors determining conjectures B= vector of barriers to entry e=elasticity of demand p=policy variables

Methodologycont…. Methodology cont…. ; ;, DU = dummy variables for structural breaks Fink= finance working capital

Data Firm level panel data from NSO through NES, ; 141 firms under 14 four digit ISIC industries; Exports and imports are at industry level.

Empirical Results 1 st carried out the Clemente-Montanes-Reyes unit root test to establish structural breaks; Results showed significant structural breaks in –1982 : LR effect of economic instability before adopting SAPs –1991: could be due to accumulation and continued effects of SAPs. Dummy variables were constructed based on these structural breaks to capture the policy effects on performance.

Panel Data Regression Estimates Variables Model FGLS Model FE(Robust) Model FGLS Model RE (Robust) Hhi 0.128*** (0.000)0.175*** (0.000)0.091*** (0.000)0.157*** (0.000) Imp-0.044*** (0.000)-0.330*** (0.000)0.014 (0.425)-0.086** (0.021) Exp (0.528)-0.064*** (0.006)0.025 (0.174)-0.055** (0.019) Rmtrs *** (0.000)-0.488*** (0.000)-0.186*** (0.000)-0.241*** (0.000) Skill-0.031* (0.065)0.038 (0.565)0.019 (0.644)-0.081** (0.015) fink *** (0.001)-0.096* (0.106)-0.165*** (0.001) (0.226) Mes (0.748)0.090 (0.525)0.090 (0.362)0.274** (0.017) Klr 0.129*** (0.000)0.081* (0.100)0.255*** (0.000)0.084** (0.029) Dem (0.566) (0.750) (0.650) (0.997) Tariff0.008 (0.835)0.058 (0.314) (0.401) (0.144) Dummy (0.927) Dummy ** (0.031) Intercept 1.727*** (0.000)2.958*** (0.000)0.924 (0.183)2.234** (0.047) Hausman test 47.09*** (0.0000)27.19*** (0.0000)50.19*** (0.0000)15.34 (0.1202) Wooldridge test (AR1) 6.729** ( (0.4223)3.423* (0.0693)17.230*** (0.0001) Wald test1.3e+05*** (0.000)1.6e+05*** (0.000)1.5e+05*** (0.0000)- Breusch & Pagan LM *** (0.0000) Observations Groups

Empirical results cont….. Policy changes and strategies led to two significant structural breaks (in 1982 and 1991) Mainly attributed to the country’s economic crisis in the late 1970s and early 1980s, and the accumulation and continued effects of the SAPs; Price-cost margin increased with the degree of market concentration in an industry; Imports and exports are found to have a negative and significant impact on the firms’ performance in line with economic theory especially during the import substitution/protectionist and post-liberalisation periods.

Conclusions International trade has considerable impact on domestic profitability looking at the effects of import and export intensity; Calling for export performance enhancing policies and import discipline; Emphasis on technological transfer of emerging technologies, the associated knowledge and expertise; Deliberate efforts to enhance the availability of factor inputs (raw materials, skilled labour & financing capital & access to loanable funds).