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Deals and DevelopmentThe Political Dynamics of Growth Episodes$

Lant Pritchett, Kunal Sen, and Eric Werker

Print publication date: 2017

Print ISBN-13: 9780198801641

Published to Oxford Scholarship Online: December 2017

DOI: 10.1093/oso/9780198801641.001.0001

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Powerbrokers and Patronage

Powerbrokers and Patronage

Why Malawi Has Failed to Structurally Transform and Deliver Inclusive Growth

Chapter:
(p.71) 3 Powerbrokers and Patronage
Source:
Deals and Development
Author(s):

Jonathan Said

Khwima Singini

Publisher:
Oxford University Press
DOI:10.1093/oso/9780198801641.003.0003

Abstract and Keywords

This chapter investigates the patterns of growth in Malawi from 1954 to 2013. Using the deals and development framework, it highlights four growth regimes during this period. First, a period of growth stagnation under colonial rule. Second, a period of growth acceleration post-independence as a clientelist structure emerged in key sectors of the economy under president Banda. Third, from 1978 onwards the lack of sustainability of these structures led to a period of growth decline. In 1994 Malawi transitioned to multiparty elections, however the country failed to modernize and the systems of patronage were further entrenched. Fourth, from 2003 the country has seen weak growth acceleration. However, the country has failed to transform how the economy is organized, meaning that many of the structures remain in place. An overreliance on powerbrokers and rentiers within the economy has meant that the structural changes needed to improve living standards within the country remain elusive.

Keywords:   economic growth, political settlements, deals environment, Malawi, rent space

3.1 Introduction

Between 1954 and 2012 Malawi experienced four growth regimes: stagnation prior to independence in 1964; then a long episode of growth acceleration; and then a longer episode of sharp deceleration; with a weak growth acceleration episode currently playing itself out since 2003. During this entire period, Malawi failed to structurally transform its economy and deliver broad-based inclusive growth. We explain the reasons for this through an analysis of the relationship between the political settlement, the deals space, and the rents space, and how these interplayed and evolved.

The literature so far has largely focused either on Malawi’s political settlement (Harrigan, 2001; Booth et al., 2006; Cammack et al., 2010) or on economic drivers of growth (Stambuli, 2002; Lea and Hanmer, 2009; Ngwira, 2012). This chapter adds the deals and rents spaces, thus allowing for a combined analysis of the political settlement, informal institutions, and the sources of economic rents. This is helpful to deepen our understanding of the underlying drivers at play and to provide more insight as to why the democratization of Malawi in 1994 has so far failed to deliver structural transformation and inclusive growth.

We conclude that Malawi’s lack of structural transformation is the result of two unfavourable combinations. First, between 1964 and 1994 Malawi had a dominant party political settlement with a flawed long-term developmental vision. This vision led to a growth acceleration up to the late 1970s, but then (p.72) unravelled itself due to the patronage system introduced by Hastings Banda that stood at its heart. This system focused on rentiers and powerbrokers in the rents space, while actively undermining workhorses and magicians. Second, from 1994 to date, the combination of a competitive clientelist political system—which took hold with the introduction of a multiparty democratic system—and a rents space in which rentiers and powerbrokers continued to entrench Malawi’s patronage system, prevented a new long-term developmental vision from taking hold and prevented the lessons from Banda’s time from being learnt. In turn, this has prevented the structural reforms necessary to allow both workhorses and magicians to achieve growth at scale and to drive structural transformation and inclusive growth.

These combinations of the political settlement and the rents space have prevented structural transformation in three ways. First, rentiers, though exporting, are low in economic complexity, with minimal economic incentive for innovation and diversification (tobacco and tea). Second, powerbrokers are largely importation or captive market businesses that combine with government services to provide rents for political elites (maize input supply, construction, transport, poultry, and finance). The combination of a rentier- and powerbroker-based patronage system has kept the deals space largely closed, despite varying phases of orderliness and disorderliness in deal-making between political and business elites. So, third, political elites have had limited incentives since the 1980s to develop state capacity, because rentiers and powerbrokers do not require it to accumulate rents. In asking for tax breaks and preferential licences rather than the removal of binding constraints for value addition or the improved quality of government services, the demands of the political elite require a closed orderly deals space that can be provided without much state capacity.

Malawi remains stuck with an unfavourable combination of a competitive clientelist system and a patronage system dependent on powerbrokers and rentiers. The near-constant politics of re-election, succession, and patronage-seeking continue to take the upper hand over a long-term developmental vision. More complex government services and programmes that are needed to address the structural challenges faced by workhorses, which includes the vast majority of Malawians, and by magicians, where higher economic complexity lies, remain largely unaddressed.

Nonetheless, while still in their infancy relative to the welfare needs of the country, state capability, workhorses, and magicians are gradually developing. This is driven by three factors: technology improvement (for example agricultural yield improvements or access to mobile phones); regional integration (new entrants into magician sectors); and predictable aid (better infrastructure). Positive, though short-lived, feedback loops in the deals space—for example Bingu wa Mutharika’s response to constant drought and crop failure (p.73) under Bakili Muluzi; and an increased emphasis on magicians since 2013 following the 2012 foreign exchange crisis—help to a certain degree, but are too short to have a large-scale impact on structural transformation.

3.2 Overview of Growth and Structural Transformation

Malawi’s economic growth since 1954 is characterized by four regimes: (a) stagnation between 1954 and 1964; (b) growth acceleration between 1965 and 1978; (c) GDP per capita decline between 1979 and 2002; and (d) growth acceleration between 2003 and 2012. The growth of real GDP per capita from 1954 to 2010 is shown in Figure 3.1. There were three structural breaks in Malawi’s growth path between 1954 and 2012 (Kar et al., 2013). These are indicated in Figure 3.1 and occurred in 1964, 1978, and 2002.

Powerbrokers and PatronageWhy Malawi Has Failed to Structurally Transform and Deliver Inclusive Growth

Figure 3.1. History of Malawi’s GDP per capita (1955–2010) with growth breaks filtered from four possible Bai–Perron breaks

Source: Penn World Tables 7.1—PPP converted GDP per capita (chain series), at 2005 constant prices.

In the period of economic stagnation prior to 1964, Malawi was adjoined to modern-day Zimbabwe and Zambia, forming the Federation of Rhodesia and Nyasaland. Its economy was largely dependent on limited external colonial support. The primary British focus was on modern-day Zimbabwe, followed by modern-day Zambia and its copper. Nyasaland was the backwater.

The British pound was used as currency during this period (Pauw et al., 2013). The pound was extensively overvalued, given Malawi’s trading position and its (p.74) limited capacity to export. Fiscal policy was also ill-suited, with most expenditure concentrated in modern-day Zimbabwe. Infrastructure investment had stalled by the 1950s—the main item of infrastructure was the railways built in the early 1900s for the extraction of raw crops, largely tobacco, tea, and coffee.

In 1964, Malawi entered a growth acceleration regime that lasted until 1978. Malawi attained independence that year under the leadership of Banda, who assumed a dualistic development policy that balanced active government interventions with targeted private-sector leaders in strategic sectors. He selectively identified strategic partners to enforce growth in rentier sectors to be sectoral pace-setters in technology, innovation, and quality control. These pace-setters also had the capacity to attract investment. Such companies included Lonhro (formerly owned by the Tiny Roland family) in sugar, the Conforzi family in tea, David Whitehead in textiles, and Limbe Leaf in tobacco. This came at a time when the production of commodities such as tobacco became more cost-effective in developing, rather than developed, countries. Investment in tobacco was well-coordinated, with constraints on land, extension services, market linkages, research, and transport all being addressed through public and private players in the sector.

The government promoted agricultural development through estate farming models. Its policies supported large-scale agriculture, awarding preferential access to land, investment, and credit. It established a monopoly state marketing board—the Agricultural Development and Marketing Corporation (ADMARC)—that channelled profits into the estate sector and subsidized investments in industry. During this period the production of estates grew at an average annual rate of 17 per cent, while smallholder production grew at 3 per cent (Ngwira, 2012). The government supported this development policy through a fixed exchange rate regime that undervalued the Malawi Kwacha. This supported higher rates of savings (Simwaka et al., 2012).

The government also created a major, dominant powerbroker firm. Press Corporation dominated a number of domestic sectors: retail, wholesale, oil distribution, property, banking, insurance, ranching, pharmaceuticals, and transport. It also invested in tobacco. At its peak it accounted for one-third of Malawi’s GDP and employed 10 per cent of the wage-earning workforce (Meredith, 2006). Banda’s plan included a symbiotic relationship between Press Corporation and ADMARC, the former in agriculture and production, and the latter in marketing. Smallholder farmers were largely excluded.

The government’s centralized approach to development policy allowed Malawi to exploit its existing support structures, such as its rail and road network. Malawi exported 95 per cent of its products through the Mozambican ports of Nacala and Beira (Lea and Hanmer, 2009). From 1964 to the late 1970s, the increase in rentier-based exports corresponded to the growth in GDP per capita (see Figure 3.2). During this period, annual average real growth (p.75) exceeded 5 per cent, and over the whole period GDP per capita more than doubled (Booth et al., 2006). Real GDP per capita peaked in 1977 at US$778.

Powerbrokers and PatronageWhy Malawi Has Failed to Structurally Transform and Deliver Inclusive Growth

Figure 3.2. Percentage of exports (left axis) and GDP per capita in Malawi in US dollar prices (right axis)

Source: Penn World Tables—PPP converted GDP per capita (chain series), at 2005 constant prices and World Bank, World Development Indicators.

Malawi’s third growth regime ran from 1978 to 2002, and is one of sharp deceleration that saw a decline in Malawi’s Economic Complexity Index to −1.72 in 1982 and to an all-time low of −1.88 in 2000.1 Real GDP per capita slumped to US$431 in 2001 after twenty-three years of decline.

Following the 1973 oil price shock, commodity prices fell in the late 1970s and Malawi’s terms of trade declined by 43 per cent from 1980 to 2002. As world demand declined, credit became more expensive internationally. This hit Malawi’s rentier sectors hard and estate bankruptcies followed, which induced a domestic banking liquidity crisis (Cammack et al., 2010). Similarly, South African demand for migrant labour declined, reducing Malawian remittance incomes. In 1977, civil war broke out in neighbouring Mozambique and lasted until 1992. Access to the ports of Beira and Nacala was blocked. Transport costs shot up as exports were diverted to Tanzania and South Africa, via Zambia and Zimbabwe. The Mozambican civil war resulted in an influx of over one million refugees into Malawi, equivalent to 10 per cent of Malawi’s population, placing a large strain on public expenditure.

The start of structural adjustment (e.g. through the partial decontrol of prices of some commodities in 1983), a severe drought in 1979–80, bad (p.76) weather conditions in 1981, food shortages, and the closure of the most cost-effective rail routes also contributed to this growth regime. The government maintained a fixed exchange rate regime, but resorted to constant devaluations and fiscal deficits on the back of its efforts to fund welfare expenditure. The cumulative effect of all these factors manifested themselves in an inflation rate of 83 per cent in 1995 after it had been maintained at around 10 per cent in the 1960s and 1970s (Naferankhande and Ndhlovu, 2006).

This growth regime is ultimately characterized by four underlying structural constraints that had developed gradually over time since the 1960s, but emerged on the back of these external shocks, on the gradual liberalization of the economy, and on ageing Banda’s loss of interest in economic policy in the 1980s (Cammack et al., 2010).2 These were: weak and deteriorating state capacity; the exclusion of the majority of the population from the productive economy due to the estate-based nature of agriculture; the dependency on rentiers for exports; and the closed nature of the deals space. These exposed the fundamental weakness in Banda’s development strategy in the 1960s and 1970s.

In the 1990s, the government continued the gradual liberalization of the agricultural sector. In 1996, the Special Crops Act was repealed, allowing smallholder farmers to export crops (Diagne and Zeller, 2001). This led to a large shift in smallholder production, from nearly nothing in 1990 to around 70 per cent of total production of export crops in 2009 (Lea and Hanmer, 2009), reflecting a surge in the workhorse share of GDP.

When multiparty democracy commenced and Muluzi became president in 1994, the already weak and demoralized civil service continued to weaken, due to less centralized corruption, political appointments, and poor wages (Cammack, 2010). This made it difficult for the state to implement development and poverty-alleviation policies. The spread of HIV/AIDS and fiscal ill-discipline reduced capacity even further. Debt undermined spending on services (Cammack, 2010). Public services and infrastructure deteriorated, the inability to deal with poor rains and drought increased, corruption with impunity increased, and anti-corruption institutions were handicapped by the regime. Private investment slowed in the late 1990s as the lending rate increased from 17 per cent in 1980 to 56 per cent in 2001 (see Figure 3.3). Donors recognized these weaknesses, but did not cut aid between 1994 and 2001 in their support of a new democracy in Africa, and in order to avoid a collapse of the economy3 (Cammack, 2010).

Powerbrokers and PatronageWhy Malawi Has Failed to Structurally Transform and Deliver Inclusive Growth

Figure 3.3. Investment as a share of GDP, Malawi

Source: World Bank, World Development Indicators, and Reserve Bank of Malawi. Measured as the ratio of gross fixed capital formation to GDP.

(p.77) Malawi entered a growth acceleration regime from 2003 to 2012. This period benefited from a move to more orderly deals with the election of Mutharika in 2004. He brought in a former IMF economist as the minister of finance, who set sound macroeconomic policies and opened up to the private sector by strengthening public–private dialogue.

The change in government served as an encouraging basis for a number of growth factors to kick in from 2004. First was the return of development partners, following aid being cut in 2002 until the ousting of Muluzi. If debt relief is added to official development assistance, total aid inflows equalled 93 per cent of GDP in 2006 and 50 per cent in 2007, according to the OECD’s aid database (OECD, 2013).

Second, the introduction of a large fertilizer and seed subsidy programme and the gains made in the health sector, particularly in HIV/AIDS, supported the acceleration. The introduction of the Farm Inputs Subsidy Programme proved successful in preventing droughts and famines that had plagued Malawi right up to 2005, and allowed Malawi to create a maize surplus for the first time in almost two decades (Chinsinga, 2012).

Third, good rains in Mutharika’s first term, something Muluzi did not enjoy in his two terms, and a boom in the tobacco sector and other cash crops, also contributed to the growth acceleration.

Fourth, a key factor behind the growth acceleration from 2006 onward was the fixing of the exchange rate above market equilibrium, resulting in a sharp decrease in inflation and a boom in consumption—mostly of imported (p.78) goods—as evidenced by the rapid increase in Malawi’s trade deficit, which rose from 7 per cent in 2001 to 21 per cent in 2010.

Things changed in Mutharika’s second term. The combination of an overvalued fixed exchange rate, a structural trade deficit, in which Malawi imported double what it exported in 2010, and the cutting of aid following a reversal of Mutharika’s development stance to one aimed at electing his brother in 2014, led to a foreign exchange crisis in 2011. This brought about a deceleration in growth to 1.8 per cent that year from 9 per cent in 2008. Growth recovered in 2013.

In summary, Malawi has failed to structurally transform its economy over the past fifty years. It remains highly dependent on the export of tobacco. In 1995, tobacco accounted for 68 per cent of all goods exports, rising from 41 per cent in 1965. Its share of goods exports remained at 58 per cent in 2010. The dependence on tobacco and tea contributed to Malawi’s lack of structural transformation over the past five decades, because companies invested in these rentier sectors had little incentive to innovate and expand into new sectors, due to the relatively high cost of developing new products compared with their existing business model (Government of Malawi, 2012).

3.3 Evolution of Malawi’s Deals Space, Rents Space, and Political Settlement

This section analyses the evolution of Malawi’s political settlement, its deals space, and its rents space, in order to bring out feedback loops between the three and the role they played in the growth story presented in Section 3.2. Figure 3.4 sets out Malawi’s growth regimes relative to its political leaders.

Powerbrokers and PatronageWhy Malawi Has Failed to Structurally Transform and Deliver Inclusive Growth

Figure 3.4. Malawi’s growth and political regimes

Source: Penn World Tables 7.1—PPP converted GDP per capita (chain series), at 2005 constant prices.

3.3.1 Economic Stagnation: 1954–64

The period of stagnation at this time came about because of a lack of infrastructure investment—which by the 1950s had all but dried up—a lack of fiscal expenditure, and ill-suited monetary policy. Despite a strong dominant party regime, with colonialism in its dying years, deals were closed and disorderly, and this led to stagnation of GDP per capita at a very low base.

3.3.2 Growth Acceleration: 1964–78

In 1964, Malawi achieved independence and assumed a strong dominant party system that lasted until 1978. Political elites rallied behind its new leader, Hastings Banda, in a newly independent African country.

(p.79) Banda promoted a long-term developmental vision based on attracting rentiers in each major export sector of the economy, while setting up a large dominating powerbroker. This entrenched Malawi’s economic structure that has lasted to the present day. Selected investors in tobacco, tea, sugar, textiles, and other rentier industries enjoyed privileged access to the president, who, guided by their expertise, used the public sector to deliver the factors necessary for investment and growth. His closest ally was apartheid South Africa, which invested in Malawi’s infrastructure, including the construction of the new capital, Lilongwe.

To survive as president, Banda also built a patronage system that promoted loyalty and made clients dependent on his largesse (Harrigan, 2001). His form of clientelism fitted with his conservative, capitalist, support-the-strong development policy, in that he provided benefits such as land, credit, and training to favourites, based on his unfulfilled expectation that this would create a middle class that would develop the nation (Cammack, 2010). The main thrust of Banda’s development policy was to generate capital for reinvestment through the agricultural and manufacturing sectors, such that access to these rent-earning opportunities provided Banda with a useful fund of political patronage (Frankenberger et al., 2003). At independence, agriculture was divided into a small ‘estate’ sector and a much larger smallholder sector. Banda converted customary land to leasehold farms for commercially oriented smallholders, which were subsequently classified as ‘estates’ and licensed to grow tobacco. In this way, a few privileged Malawians were granted customary (p.80) land and so joined the largely expatriate estate (tea, tobacco, and coffee) sector, then responsible for most of the country’s exports (Stambuli, 2002). According to Cammack et al. (2010: 10), ‘Building on colonial development thinking, Banda thus fostered the creation of an elite class of Malawians that he thought would spearhead agricultural development and national growth while excluding those individuals deemed to be less productive.’

Therefore this period is characterized by a strong dominant party that provided a closed but orderly deals space for rentiers and powerbrokers, but left the space disorderly for workhorses and magicians.

3.3.3 Sharp Deceleration: 1978–2003

1978–94

The lack of openness and the nature of Banda’s patronage system meant that growth in the first part of Banda’s rule prevented inclusive, broad-based growth, which in turn created a negative feedback loop on the rents space and on the political settlement. The majority of the population (80 per cent) was unable to participate in the productive economy and benefit from the wealth it generated, such that their demands for food security, healthcare, education, and public services could not be satisfied by the nature of the growth Banda provided. This strengthened the push for liberalization and structural adjustment by civil society and development partners, which in turn placed Banda’s patronage and rent-capturing structure under threat. The lack of sustainability in the nature of growth achieved before 1979—which failed to deliver a middle class—and the succession politics that it led to, contributed to deteriorating institutions that prevented Malawi from addressing a number of structural constraints, leading to a decline in GDP per capita in the 1980s (Cammack et al., 2010):

Economic restructuring under the tutelage of the IMF and World Bank disrupted in significant ways the system for channelling rents that had worked, with limitations, under Banda [in 1964 to 1978]. The policy of reforming the estate sector to reduce subsidies and make it more competitive, together with the shift against import-substitution industrialization, heralded a major change in the types of rent-creation and distribution that could be encouraged.

(Cammack et al., 2010: 20)

Therefore the lack of sustainability in Banda’s developmental vision, due to its marginalization of workhorses and magicians, provided a window for development partners to temporarily undo Banda’s rent system, turning the political settlement into a weak authoritarian dominant party system. This negative feedback loop came about because, as the economy and markets opened up, the position of elites came under threat, and succession politics emerged for the first time. Banda’s deputy, John Tembo, dominated through (p.81) the 1980s—but was later undone, first by the Church, who turned against the regime due to weak government services, famine, and drought, and then by Muluzi’s camp within Banda’s party—the Malawi Congress Party (MCP). Muluzi represented those who had been sidelined by Tembo in the 1980s.

Succession politics led to a deterioration of institutional capacity, a lack of development policy, and a return to disordered deals in the second half of Banda’s thirty-year term as president. Since the private productive sector lacked the capacity to compete in sectors beyond tobacco, tea, sugar, and coffee, fiscal revenues and public sector wages declined, while debt increased. The civil service lost its ability to address market and coordination failures and to supply welfare services to the burgeoning population. Disorder increased for rentiers as state capacity to support them dwindled, such that they failed to expand. While suffering on the back of weaker macroeconomic indicators, order largely remained for powerbrokers, epitomized by Press Corporation and its sustained control of various captive markets.

1994–2002

In 1994, Malawi transitioned to a competitive clientelist political settlement, following the launch of a multiparty democracy. Muluzi won the elections of 1994 and then again those of 1999. The deals space opened up, particularly for medium- and large-scale private traders, but also for smallholder farmers, who became eligible to trade in cash crops following the repealing of the Special Crops Act, though their rents were negligible.

However, the deals space also became more disorderly than prior to multiparty democracy, for two reasons. First was the combination of Muluzi’s economic and political approach. His economic approach was free-for-all trade without any effort to account for market failures. Muluzi was a trading businessman who emerged from the Malawi Confederation of Chambers of Commerce and Industry (MCCCI). The business elite who supported Muluzi were essentially traders who made their rents by importing consumables such as fertilizers, fuel, and various consumer goods previously not available in Malawi. Muluzi’s politics favoured his religion, ethnic background, and region, in order to build the patronage structure he deemed necessary to win multiparty elections in a competitive clientelist political settlement.

This combination led to a surge in corruption surrounding government contracts and an increase in the mismanagement of state resources. Politically connected business elites, such as Kalaria, benefited from insider knowledge and illegal deals. Although initially Muluzi followed donor advice and relied on advisors who prioritized development, within a few years he had surrounded himself with politicians who had an interest in short-term gains and aimed to use state resources, aid, and the development process to stay in power and get rich (Cammack, 2011). Many government contracts were given (p.82) to powerbroker companies, who did not fulfil the requirements to deliver on those deals. Similarly, Muluzi was accused of exporting Malawi’s maize reserves in 2001 for personal gain, shortly before the onset of a drought which resulted in a famine.

The second reason for the increase in disorderliness was the illegal dismantling of Press Corporation, which was divested for political reasons because it was the basis of support for John Tembo. Development partners liked this, as they saw Press Corporation as dominating sectors and preventing other firms from growing. However, in doing this they missed the fact that the indigenous class lacked the capacity to fill the Press Corporation gap, thus increasing the disorderly nature of deals. Powerbrokers therefore suffered in the mid-1990s, although Muluzi’s own band of powerbrokers—such as Kalaria—would soon emerge to take up captive markets lost by Press Corporation.

These two factors combined to further weaken macroeconomic management and to sustain a lack of government strategic direction and coordination, which in turn led to economic instability and continued indebtedness. The disorderly nature of the rents space meant that there was minimal new investment. In the later Muluzi years, order returned for powerbrokers, but these had little interest in investing, given the trade-based nature of their rents. Traditional rent-generating sectors (tobacco, tea, and sugar) were not complemented by new growth sectors, leading to stagnation in the export-oriented side of the rents space and thus for workhorses too.

However, this outcome led to a positive feedback loop. When Muluzi tried to alter the constitution in 2002, so that he could stand for a third term, donors cut aid, despite the risk of economic meltdown and persistent famine. Muluzi then relied on Muslim funding and his main business associates to support his election campaigns. But a block by the national assembly and public demonstrations against Muluzi—which epitomized Muluzi’s inability to keep the patronage system under control, due to disorderly deals—prevented constitutional change and forced Muluzi to appoint a successor as his party’s presidential candidate in the 2004 elections.

3.3.4 Weak Growth Acceleration: 2003 Onwards

2003–9

In 2004, Mutharika defeated John Tembo, although Mutharika did not win a majority of seats in parliament. The party undertook extensive political manoeuvring to form a government of national unity that included several opposition parties. In 2005, Mutharika left Muluzi’s party, citing his anti-corruption campaign, and formed a new party called the Democratic Progressive Party (DPP). A number of ministers and politicians transitioned to the new party, epitomizing the ongoing strength of clientelism in Malawi’s political system.

(p.83) This period of growth acceleration was kick-started by the birth of the uranium mining sector, which expanded by 23 per cent in 2003. The return of aid following Muluzi-free elections, debt relief, and good rains also helped.

Yet the acceleration phase was primarily driven by the more orderly, and to a certain extent more open, deals space under Mutharika. This allowed the economy to start benefiting from the structural adjustment policies that had commenced in the 1980s, but had so far yielded no returns. The lack of growth and the disorderly nature of deals during Muluzi’s time gave Mutharika a platform to distance himself from Muluzi. It gave him the capacity to strengthen his patronage base by delivering growth, while at the same time expanding his personal wealth, in a similar vein as Hastings Banda in the 1960s and 1970s.

Mutharika was able to consolidate corruption at the centre of government. He centralized rent-seeking activities at the top of government, such that contracts, though given out through corrupt practices, were better supervised and controlled. Rampant corruption and the creation of rents for patronage purposes were reduced (Cammack et al., 2010), thus benefiting powerbrokers and rentiers. Companies were expected to perform against a contract, unlike in Muluzi’s time, in return for a long-term relationship with the president, whom they would bankroll.

Mutharika also followed Banda’s lead in identifying strategic partners to support him for his re-election campaigns. These were primarily Chinese mining and infrastructure investors, Paladin Mining, Mully Brothers, and Mota-Engil—who won most road construction and rehabilitation projects, and who are also building a new railway line, funded by mining company Vale, joining Tete in Mozambique to the Nacala railway. Powerbrokers Mully Brothers benefited from the distribution of fertilizers under Mutharika’s national patronage system—the Farm Input Subsidy Programme for the country’s staple crop, maize. This programme also represented an improvement in the orderliness of the rents space for workhorses for the first time.

This equation allowed political elites at the top of government to be committed to economic growth and hence led to ordered deals, which spurred investment and growth. Growth peaked at 9 per cent in 2009.

2009–12

In time, the rents space started to close, entrenching itself more and more around Mutharika’s strategic business partners, as he tried to assume Hastings Banda’s developmental vision. Mutharika won the 2009 election by a landslide against a newly formed Muluzi–Tembo alliance, on the back of his Farm Input Subsidy Programme, which allowed him to capture both powerbrokers and workhorses. Mutharika’s objective shifted away from growth towards personal wealth and succession. He had no reason to fear parliament and (p.84) the opposition, as he had in his first term, and his own policies emerged more clearly (Cammack et al., 2010). He did not need to balance growth with the efforts to develop his patronage base. Autocratic tendencies that surfaced in a muted fashion between 2004 and 2009, controlled by a desire to outperform Muluzi, emerged more forcefully, having secured growth and a positive response by the electorate.

As in the first half of Banda’s presidency, growth secured in the first phase led to a negative feedback loop: economic growth and food security between 2004 and 2009 led to an easy election victory, which gave Mutharika the comfort he needed to be able to focus on succession—required by the competitive clientelist settlement—and on building his patronage and wealth. In 2013, it emerged that Mutharika’s private assets increased from approximately US$1 million on his election in 2004 to approximately US$150 million at his death in 2012 (Nyasa Times, 2013a).

Mutharika also maintained an overvalued fixed exchange rate to finance his Farm Input Subsidy Programme and to support import-based powerbrokers and workhorses. This, and the ongoing neglect of magicians, resulted in a foreign exchange crisis in 2010 and 2011, which led to a disorderly rents space. Together with Mutharika’s efforts to move to closed deals, this caused real annual economic growth to decline from a peak of 9 per cent in 2009 to 1.9 per cent in 2012. Malawi experienced chronic shortages of fuel, fertilizer, medicine, and other imported inputs and consumables. Mutharika also entered into conflict with the tobacco sector, still the country’s main foreign exchange earner, arriving at a point where he expelled two managing directors of major tobacco companies. Some tobacco companies left, deeming Malawi too risky and reflecting disorder in the rents space for certain rentiers (order remained in the mining and cotton rentier sectors). Increasingly autocratic tendencies in the management of governance and of development assistance led to the British high commissioner being expelled in 2011, which in turn prompted donors to cut aid that year.

2012 onward

While grooming his brother Peter to take over from him, Mutharika died in April 2012. His vice president, Joyce Banda, who had been forced out of the party after falling out with Mutharika, assumed the presidency on the back of positive feedback loops from the disorder of Mutharika’s second term. Economic strife drove the army and the minister of justice to intervene to put an end to an attempted coup d’état by Peter Mutharika. A large number of party members abandoned the DPP and joined Joyce Banda’s Peoples’ Party, reflecting the persistent strength of Malawi’s clientelist patronage system.

The initial days of Joyce Banda’s presidency, which started in 2012, saw a return to an orderly deals space for all categories of the rents space, with the (p.85) reversal of distortionary policies, such as the freeing up of the exchange rate, and the return of budget support aid, which was cut in 2011. This was driven by a reaction to the acute foreign exchange crisis Malawi had experienced in 2010 and 2011. Joyce Banda adopted an Economic Recovery Plan to give the perception of economic direction and reinstated an IMF-extended credit facility.

Yet, with elections looming in 2014, her focus soon switched to securing her patronage base, which was necessary for her to survive in a competitive clientelist political settlement. Once again, this led to disorderly deals. While she attempted to open up dialogue with the private sector and institute some reforms, her electoral strategy followed the patronage approach of her predecessors, but without sufficient control mechanisms. This consisted of handouts of maize, seed, fertilizer, goats, and cows to poor communities across the country, but also of state pilfering. By November 2013, the total value of the pilfering and false contracting was estimated at US$155 million, or 4 per cent of GDP (Telegraph, 2013). Aid was cut again and budget support, which accounted for 41 per cent of the national budget in 2013–14, was frozen indefinitely in November 2013.

Joyce Banda lost the 2014 elections to Mutharika’s brother, Peter, who became Malawi’s fifth president. Her electoral strategy failed largely because of a corruption scandal in 2013 that implicated her (Nyasa Times, 2013b) and went public (for which the Internet and media were critical), the rise in maize prices in 2013, the continued allegiance of workhorse smallholder farmers to Mutharika due to the Farm Input Subsidy Programme, and the fact that the bureaucracy and patronage system remained allied to Peter Mutharika, which gave him a strong handle on the electoral process. The Electoral Commission became convinced of the need for a recount of votes, following anomalies in the first official count. But, while the law allowed the commission to recount, it did not provide for a time extension for the publication of results. The court announced this with one hour and thirty minutes left before results had to be published, leaving no room for a recount and an official victory for Peter Mutharika. Mutharika won, with 36 per cent of the vote, ahead of the MCP candidate, with 27 per cent. Joyce Banda got 20 per cent. Mutharika won in the south, MCP in the central region, and Joyce Banda in the north, reflecting the regional nature of the patronage system.

3.4 The Nature of Deals in the Rents Space

We estimate Malawi’s rents space in 2013 to be distributed as follows: 41 per cent of GDP is captured by powerbroker sectors; 34 per cent by workhorses; 21 per cent by rentiers; and 4 per cent by magicians (see Figure 3.5). This has (p.86) deteriorated slightly when compared with 2002, when powerbrokers accounted for 37 per cent of GDP, workhorses 36 per cent, rentiers 22 per cent, and magicians 4 per cent. In 1978, powerbrokers accounted for 48 per cent of the economy and workhorses only 12 per cent. Rentiers accounted for 31 per cent and magicians 8 per cent. We estimate that in 1964 rentiers accounted for 52 per cent of the economy, reflecting the colonial legacy, while powerbrokers accounted for 38 per cent, with workhorses at 12 per cent, and magicians at 4 per cent. Magicians, who have relatively high economic complexity and are key for structural transformation, have remained weak throughout this period. (p.87) Following the advent of multiparty democracy, workhorses have come to occupy a larger share of the economy, largely at the expense of rentiers, who have limited scope for growth, while powerbrokers continue their domination on the back of Malawi’s entrenched patronage system. We now discuss evolution of the nature of the deals in the rents space.

Powerbrokers and PatronageWhy Malawi Has Failed to Structurally Transform and Deliver Inclusive Growth

Figure 3.5. Distribution of rents space in Malawi, as a share of GDP

Source: Author estimations.

Notes: Magicians have fluctuated between 4 per cent and 8 per cent, reflecting lack of importance in the patronage system, both under dominant party and competitive clientist political settlements. Workhorses started at 12 per cent of economy in 1964, despite including vast majority of population. Gradual increase as deals space has slowly opened and become more orderly, though orderliness has only started improving since 2004. Powerbrokers stable throughout all regimes, around 40 per cent of economy. They survived on back of patronage system, which guarantees a degree of orderly deals, with some turbulence in the 1990s. Rentiers started at 52 per cent at independence. Gradual decline to 20 percent of economy today, reflects limited scope for growth and closed deals space.

3.4.1 Magicians: Competitive and Export-Oriented

Magicians persist in small numbers in the agricultural, light manufacturing, and accommodation and travel sectors. Most of these players are small- and medium-sized businesses that have a more formal relationship with government and limited access to the deals space. Some deals are made on matters of business and export licensing, access to seeds, extension services, tax, electricity connection, water access, etc.

Agro-processing and other forms of manufacturing are generally dominated by the Malawian-Indian community who were evicted from rural areas in the 1970s—thus causing their deals space to become disorderly. It remained so through the 1990s. It has gradually become more orderly, but these firms largely try to keep government and politicians at arm’s length. Such companies have limited relations to the political elite and rely on the MCCCI to represent them on issues such as tax, energy, and water supply, though many feel they cannot rely on the MCCCI to represent their interests.

Many companies of this type are based in sectors that have relatively higher economic complexity in the product space, such as manufacturers of food and dairy products, beverages, plastics, packaging, and welding. Such companies are less reliant on government contracts or natural resources than they are on foreign exchange availability, an efficient tax system, the cost of transport to markets, the cost of finance, and access to energy. Although gradually improving, as epitomized by an increased focus on exports following the foreign exchange crisis of 2011, the government continues to struggle to enforce formal and informal agreements here, unless the implementation of the agreement is solely dependent on the actions of senior politicians. This suggests a gradual improvement in orderliness and openness of the deals space for magicians, while remaining, on balance, largely disorderly and closed, mainly because Malawi’s competitive clientelist political system is impeding the emergence of a long-term development vision.

While possibly being held back by democratization, the slow gradual growth of magicians is driven by external factors, such as technological, infrastructure, and human capital improvements and regional integration. However, many binding constraints and coordination failures remain. This is due to their exclusion from the patronage system and the generally disorderly and closed nature of their deals space.

(p.88) 3.4.2 Workhorses: Competitive and Domestic-Oriented

This category includes the vast majority of Malawians who participate in the economy as subsistence and smallholder farmers, retailers, and providers of small-scale services such as hairdressing, cooking, and tailoring. Deals are largely characterized by maize and legume fertilizer subsidies, the maize market itself, various domestic crop markets accessing transportation services and extension services, accessing seed, securing business permits, and evading tax.

Their deals space was largely closed and disorderly in the time of Hastings Banda. In his first fifteen years in power, he favoured estate-based agriculture and state-based trading. The Special Crops Act, which was repealed in 1996, marginalized workhorses, and in his last fifteen years in power structural reforms and the decline in economic growth meant that it became much harder to access basic government services and support programmes. Similarly, numerous droughts, crop failures, and famines set in. Most workhorses lacked access to deal makers, thus making the deals space both closed and disorderly.

With the advent of multiparty democracy, the deals space became much more open, following the liberalization of numerous markets, including the primary cash crop, tobacco, and agricultural trading. However, deals remain disorderly because of the continued limited state capability to provide government services, to provide land titling, and to deliver support programmes.

In 2003, the deals space continued to open up, with some 1.6 million farmers becoming eligible for support under the Farm Input Subsidy Programme. This programme suggested an improvement in the orderliness of the deals space for workhorses and was a key benefit of a competitive clientelist system. It complements gradually improving access to government services through slight improvements in state capability. Similarly, while formal land titling and property rights remain weak, there has been increased recognition and protection of smallholder land rights through the strengthening of civil society. The deals space for workhorses returned to disorderliness in 2011 on the back of the foreign exchange crisis that drove up the cost of essential imported items.

3.4.3 Rentiers: High Rent and Export-Oriented

The deals space for rentiers was closed but orderly under Hastings Banda as he favoured few strategic partners—one per major sector—in the form of agriculture and forestry estate concessions, and manufacturing companies. The deals space for rentiers became more disorderly in Hastings’ latter years as the state became incapacitated on the back of structural adjustment and political upheaval. This disorderliness continued in Muluzi’s first term, as corruption (p.89) became more rampant and the government’s capacity to follow up on deals weakened further.

However, mining concessions signed since 1999 suggest that a degree of orderliness returned in this particular sector. Deals have been informal since then, due to a weak institutional framework for the sector, which the government is gradually trying to fix. From 2003 onward, the orderliness of mining deals has increased, with better capacity of the government to follow through on its side of deals made. Similarly, the governments of Mutharika and Joyce Banda maintained a very close working relationship with mining concessions, including Chinese explorers, as a key source of rents.

Similarly, the cotton rentier sector has been able to increase the orderliness of its deals with government by securing ever-more government support in Mutharika and Joyce Banda’s presidencies, while keeping the sector fairly closed and oligopolistic. While mining scores low on economic complexity, cotton scores better, but Malawi lacks the cost competitiveness to be able to compete externally.

Yet, despite the opening up of mining and support for cotton, no new agricultural and forestry concessions have been signed, suggesting a continuously closed deals space and limited scope for growth. This has remained true to the present day, largely because multiparty democracy brought about an increased awareness and protection of subsistence and smallholder farmer rights to access land.

The tobacco and tea sectors have seen a gradual increase in disorderliness as other rentiers (mining) have become more central to the patronage system of the political elite in recent years. Yet companies in sectors such as tobacco and tea still remain large enough to have direct ministerial and presidential access on an informal basis when issues arise with government bureaucrats that threaten their business, such as fraudulent labour cases or delayed licences. Political interest in such sectors is generally not based on personal patronage, but on national priorities, such as foreign exchange generation, donor conditions, or minimum prices.

3.4.4 Powerbrokers: High Rent, Weak Competition, and Domestic-Oriented

Powerbroker sectors in Malawi are those that capture the largest rents. They mostly comprise construction, fertilizer imports, fuel imports, financial services, government services, telecommunications, transport services, and some agriculture (e.g. Illovo and Carlsberg) and manufacturing sectors. Deals are centred on securing government contracts (e.g. construction, fertilizer imports, and finance through government bonds), on limiting competition and new entrants (e.g. transport, dairy, and finance), securing preferential access to inputs (e.g. poultry), securing preferential licences (e.g. forestry), and extracting income (p.90) from government (e.g. civil service and politicians via allowances). Deals are much more informal than formal. Rents are gained primarily from taxpayers and aid (fertilizers, construction, financial services) and secondly from the domestic market (e.g. telecommunications, poultry, sugar).

While under Hastings Banda rents were largely extracted from rentier and powerbroker sectors, in Malawi’s multiparty democracy since 1994 most political rents have come to be extracted from powerbrokers. Powerbrokers have largely managed to maintain a closed and orderly deals space through most of Malawi’s independence period, with close, strategic relationships with the political elite throughout. This relationship has formed the cornerstone of the Malawian patronage system established by Hastings Banda, and was further entrenched by multiparty democracy in 1994. While orderliness suffered in times of economic crisis, such as in the 1980s and the 1990s, proximity to the political elite has meant a degree of continuity in orderliness. Players changed, such as Group 5 (construction) and Kalaria (retail, fertilizers, etc.) in Muluzi’s time being replaced by Mota-Engil and Mully Brothers, respectively, in Mutharika’s time, but the space has generally remained orderly and closed.

An example of how the political elite benefit from powerbrokers in maize production is through using their access to government-donor information to support their business interests. A company interviewed for this research cited an example in 2013, where a donor published a large tender to buy maize the next day, which drove up the price. Politicians and bureaucrats with access to this information prior to publication informed their business interests and friends to buy maize the day before the tender, knowing that the next day the price of maize was to rise. The interviewee claims that many business decisions in agricultural commodity trading are based on such information.

Personal interactions with politicians are more important for companies reliant on natural resources, such as land, water, or minerals, or on government contracts, such as farm input suppliers, medicine suppliers, and construction companies. Typically such companies are located in the lower-complexity sections of the product space, because they are either in enabling sectors with captured markets or they produce final goods but enjoy monopolistic or oligopolistic market power with an ability to limit external competition.

In conclusion, the political elite’s rents space is mostly linked to sectors within the product space that are generally less conducive to long-term growth. This is because they have a lower level of economic complexity and source their rents from government expenditure, which depends on taxes, aid, and natural resource extraction, which in turn has limited scope for growth and import trading, and which is ultimately constrained by lack of exports and a cap on aid.

(p.91) Magician sectors, which are key for the development of the product space and long-term growth, have largely been disconnected from the political elite since independence, because they have never formed part of the political patronage and clientelist system, and because competitive clientelism has prevented a long-term developmental vision from taking hold. As such, the bottlenecks faced by these sectors are typically not political priorities. This may explain why, as emerged from the interviews for this research, the structural constraints faced in the 1990s have largely gone unaddressed since multiparty democracy.

3.5 Conclusion and Policy Insights

Following a pre-independence period of economic stagnation, Malawi has experienced three growth episodes: a strong acceleration between 1964 and 1978; a strong deceleration between 1978 and 2003; and a period of weak acceleration since 2003. During these growth regimes, Malawi has failed to structurally transform its economy, remaining largely dependent on the same export and domestic sectors as in 1964.

This chapter has analysed the evolution in the dynamics of Malawi’s political settlement, its deals space, and its rents space to try to explain the failure to achieve structural transformation, adding depth to the conventional narrative that is based either solely on a political settlement analysis or on a purely economic analysis. It has also brought out dynamics and feedback loops between these three elements.

At independence, Malawi inherited an economy largely dependent on rentier sectors in the form of tobacco, tea, and coffee. Malawi’s first president, Banda, declared a one-party state, which set Malawi on a strong dominant party political settlement until 1978. This enabled him to build on the rentier system he inherited. Through a closed, orderly deals space he selected strategic partners, one per major sector, and supported their investment. In turn, he used this and a network of powerbroker businesses that fed off the rentier model to develop a patronage system necessary to guarantee his survival.

The lack of openness and the nature of Banda’s patronage system meant that growth in the first fifteen years of Banda’s rule created a negative feedback loop on the rents space, and hence on the political settlement in the last fifteen years of his rule. Succession politics also contributed to deteriorating state capacity that, in turn, prevented Malawi from addressing a number of structural constraints, leading to a decline in GDP per capita in the 1980s. As the deals space for workhorses, rentiers, and magicians became more disorderly and the political settlement turned into a weak authoritarian regime, (p.92) a positive feedback loop set in, that allowed development partners, the Church, and civil society to secure multiparty democracy in 1994.

Despite being partly eroded in the 1980s on the back of structural adjustment, the patronage system that Banda had built ultimately survived, leading to an unhelpful combination of unaddressed market failures and competitive clientelism in a multiparty democracy. This is delivering two types of feedback loop between growth and the deals space. On the one hand are negative feedback loops, in which positive growth leads to a worsening of the rents space through more disorderly deals—such as Mutharika’s second term relative to his first term and Joyce Banda’s second year relative to her first year. On the other hand, periods of negative growth (or significant slowdowns in growth) register positive feedback loops on the deals space. Negative growth leads to a reaction in the electorate, because it manifests itself in drought or shortages of key supplies, and similarly the powerbroker patronage base. This has driven new governments to deliver growth—such as Mutharika in 2004, following the failures of Muluzi, and Joyce Banda in 2012, following the foreign exchange crisis and decline in growth in Mutharika’s second term.

Yet positive feedback loops from negative or weak growth are too small and short-lived to deliver permanent gains in the orderliness and openness of the rents space, particularly for magicians. Positive feedback loops are focused on restoring patronage and hence are too short-lived to bring about the reform needed for magicians to grow at scale. As a result, the only underlying change was an increased share of the rents space by workhorses. The near-constant re-election and succession politics brought about by competitive clientelism, and the dependency of the patronage system on import and captive market powerbrokers, have kept magicians disconnected, thus preventing structural transformation and capping the potential growth of workhorses. This is epitomized by the foreign exchange crisis, the trade deficit, and the aid crisis of the 2010s, which is undermining the sustainability of the Farm Input Subsidy Programme.

As a result, while minimal economic transformation took place in the 1960s—such as through new investments in sugar and brewing—on the back of Hastings Banda’s strategic partner policy and his strong dominant party political system, this unravelled in the 1980s, as it failed to empower workhorses and magicians. From 1994 the combination of a competitive clientelist political system and a rents space dependent on powerbrokers and rentiers—which are both low in economic complexity—have combined to further prevent the structural transformation of Malawi. Although there is a slight positive trend in the product space, with more complex sectors and markets developing on the back of technological improvements, regional integration, and infrastructure gains, such as plastics, packaging, dairy, food (p.93) processing, and oil seeds, these sectors remain in their infancy compared with mining, tobacco, tea, and raw sugar. The structural transformation required to support burgeoning welfare requirements needed by a rapidly growing population with expectations of improved living standards remains elusive.

3.5.1 Policy Insights

Dominant party systems and longer-term limits in competitive clientelist settlements deserve increased consideration. The strong dominant party political system of 1964 to 1978 was the only period in which a long-term developmental vision took hold. Multiparty democracy has further entrenched the patronage system set up by Hastings Banda, in which powerbrokers and rentiers provide political elites with rents. Election time frames and succession politics have continually superseded long-term planning.

At the same time, multiparty democracy efforts to empower workhorses need to be complemented with explicit efforts to develop magicians, for example through export-oriented industrial policy. Multiparty democracy facilitated an improved deals space for workhorses in 2004, though mainly as a system for re-enforcing the powerbroker patronage system, rather than building up magicians and exports. As a result, the deals space worsened in 2011 on the back of the foreign exchange crisis that benefited import-based powerbrokers. A permanent increase in orderliness and openness for workhorses thus probably requires a permanent increase in orderliness and openness for magicians.

In Malawi’s competitive clientelist political settlement, there is merit in progressives in government and development partners exploring a more explicit partnership with the political elite that can find and demonstrate a way to deliver a long-term developmental approach based on state and magician capability, while at the same time helping elites maintain to a degree a client and patronage base. This could allow Malawi to grab on more rapidly to the tailwinds being created by regional integration and by technological, human capacity, and infrastructure improvements.

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Notes:

(1) The decline in the index in the late 1970s and 1980s was also a result of a decline in the global score for a number of products which Malawi exported, such as tobacco and legumes, as the rise in commodity prices shifted the production of such crops from developed economies to less-developed economies. The Atlas of Economic Complexity, MIT media lab, Country Profile Malawi. <http://atlas.media.mit.edu/en/profile/country/mwi/>.

(2) Some observers and visitors claimed in the 1980s that he did not appear astute enough to his government all of the time and that he seemed uninterested in the details of development policy (Pryor, 1990).

(3) When asked why donors gave money to Muluzi, the head of the IMF in 2005 said that this was because there was going to be economic meltdown and the government was doing nothing about it.