Impact of Agricultural Exports on Economic Growth of Malawi: an Econometric Analysis of Tobacco, Tea, and Sugar
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Date
2024-10
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Kenyatta University
Abstract
Malawi's economy has historically relied exclusively on agricultural export earnings, which account for more than 80% of foreign earnings, with tobacco accounting for almost 50% of total exports. Agriculture employs over 65 percent` of people in official employment and contributes at least one-third of Malawi's Gross Domestic Product (GDP). Tobacco, Tea, and Sugar are Malawi's primary export commodities. Over the past five decades, the country has been implementing export expansion strategies to broaden and increase the foreign sector's contribution to GDP. Despite these reforms, Malawi's economic growth has been slow and volatile by regional standards, and poverty levels have risen over time. As a result, this study aimed at evaluating the dynamic impact of disaggregated agricultural crops (Tobacco, Tea, and Sugar) exports on the economic growth of Malawi, as measured by Real GDP; assessing the cyclical correlations in the trends of Tobacco, Tea, and Sugar export value series linked to Real GDP series; and determining the presence of causality between the export commodities and the Real GDP. The short and long-run impact of the export commodities on real GDP was evaluated by estimating Autoregressive Distributed Lag (ARDL) model on time series data spanning 1969-2019; and the validity of causality was determined by the Toda Yamamoto granger causality test; whereas determination of trends and cyclical correlations was done by using The Hodrick-Prescott (HP) filter. The ADF and PP Unit root tests and the ARDL co-integration tests were performed before estimating the Error Correction Model for short-term dynamics and Toda Yamamoto Granger causality. The ARDL Co-integration tests revealed a long-run relationship between agricultural exports and economic growth. The study findings also revealed that only sugar export has a positive and significant impact on economic growth both in the short and long-run, with a 1% increase in sugar exports resulting in a 0.19% increase in Malawi's GDP on average, ceteris paribus. Tobacco exports revealed a significant short-run effect on real GDP, whereas Tea export was not significant both in the long and short run. In terms of cyclicality, Tobacco and Tea exports were procyclical with real GDP, which exacerbated economic vulnerabilities. Sugar exports were discovered to be acyclical, with an absence of correlations with economic cycles, boosting economic resilience and stability by assisting in mitigating risk spanning economic cycles. However, the study established a bi-directional causal association between sugar exports and economic growth but no causal relationship between economic growth and tea or tobacco exports. To mitigate the risks of commodity procyclicality, export diversification initiatives aimed at enhancing sugar and tea productivity, such as exporting highly valued goods, should be recommended. By divesting from tobacco and expanding sugar production, the government could additionally mitigate the structural risks of over-reliance on a crop that has no short- or long-term impact on the real GDP. Promoting value-added activities in the tea industry must be recommended as it can lead to more stable revenue streams.
Description
A Thesis Submitted in Fulfilment of the Requirement for the Award of the Degree of Masters of Science in Agricultural Economics, in the School of Agriculture and Environmental Sciences of Kenyatta University, October 2024
Supervisors:
1.Lucy Ngare