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Doing Business In Africa: Malawi

Doing Business In Africa: Malawi

In this AFKInsider series, series we explore the regulatory conditions that an entrepreneur is likely to face when setting up a business in sub-Saharan Africa. AFKI presents Doing Business in Africa: Malawi.

Malawi, a landlocked country in Southeastern Africa that borders Zambia, Tanzania, and Mozambique, is one of the poorest in Africa.

Colonized by the British in the late 19th century, the country was briefly united with other British possession in the area in the semi-independent Central African Federation until 1963 when it was dissolved as a prelude to independence in 1964.

Like many African countries, independence was followed by decades of authoritarian rule. In Malawi’s case its first president, Hastings Banda, consolidated power into a one-party state that was rigid and dictatorial even by African standards. In an African take on French King Louis XIV’s famous quip that “L’état, c’est moi,” Banda noted that when it came to Malawi, “Everything is my business. Everything. Anything I say is law…literally law.”

Luckily for Malawi, Banda’s stint as absolute monarch did not have absolutely terrible consequences. His line was generally pro-Western, some might say slavishly so, and he fiercely criticized anything smacking of African socialism. He even kept up relations with apartheid South Africa even as most of his neighbors were severing ties with Pretoria and assisting the African National Congress with money, weapons, sanctuary, and diplomatic support.

One downside of his reign, however, was the degree to which he inserted himself into nearly every business enterprise of consequence in the country. Combined with his close association with Malawi’s former colonial power he ironically demonstrated socialism’s main criticism of capitalist-led development in Africa – that the wealth and prosperity built by post-colonial African capitalism was merely just another form of colonialism, only this time more widely shared with local elites like Banda.

Still, under Banda, growth occurred and, rare in Africa, women’s rights and status were improved under his dictatorial rule. This, however, was not enough to save him from the general trend of democratization in Africa during the early 1990s. After enduring significant domestic and international pressure Banda allowed a full transition to multi-party democracy in 1993. This led to the election of Bakili Muluzi the following year — the country’s first democratically elected president.

Since then, Malawi has remained a multiparty democracy though not without problems. As is usually the case in newly democratic countries, political institutions are still weak and elections invariably see charges of fraud and vote-rigging levied against the winners. More disturbingly, ethnic politics seem to be growing stronger and continuing poverty and economic mismanagement led to riots in 2011 that were violently put down.

Currently, Malawi is governed by President Joyce Banda (no relation to Malawi’s first president), who assumed office after the death of the country’s third president, Bingu wa Mutharika, in 2012. While it is early days for Malawi’s first female president, Banda’s background as an educator, grassroots women’s rights activist, and her experience as minister of foreign affairs and then vice president of Malawi give hope for sound, stable, and wise democratic leadership going forward – a relative rarity in Africa.

Ease of Doing Business

So how does all this influence business conditions? According to World Bank, Malawi ranks 133rd out of 183 countries on its Ease of Doing Business Index. The index was created by the bank to gauge the degree to which businesses encounter regulatory hurdles, legal threats to property, and the time and money spent on things such as registering a business, ensuring right of title to property, and acquiring licenses. By way of comparison, the U.S. ranks fourth on ease of doing business, right after Singapore, Hong Kong, and New Zealand.

What does this ranking mean? Take, for instance, the bank’s measure of how easy it is to start a business. The bank defines business-creation costs as the time and money outlays involved in the series of legal steps an entrepreneur must take to legally establish an in-country firm. Using this framework, the bank then tasks researchers to go through this process in order to establish in-country averages.

When this metric is applied to Malawi, it ranks 132nd out of 183 in ease of starting a business, making Malawi one of the more difficult places on Earth to start a legal commercial enterprise. To start a business in Malawi one has to complete 10 bureaucratic procedures that take a total of 39 days at a cost of about $302, with no minimum capital requirement imposed by the government for the start-up. For Westerners this may be a miniscule amount, but for most Malawians this represents more than a year’s income.

Figure 1:

How the World Bank Measures Ease of Starting a Business

          Fig 1 Ease of Business Graphic WB

The bank ranked Malawi in a number of other areas. To obtain a construction permit, for instance, Malawi is ranked 174th out of 183 countries. An entrepreneur must complete 21 procedures which take on average 268 days at a cost of nearly $3,640 – around 13 times the national income. Clearly, obtaining construction permits in Malawi is a serious obstacle to overcome for most Malawians.

For ease of  obtaining and registering property, Malawi ranks 81st out of 183 countries measured. To register property in Malawi, one must complete six bureaucratic procedures that take, on average, 49 days and cost 3.2 percent of the property’s financial value in fees and other costs. This makes Malawi a moderately difficulty place to register property.

Malawi does worse when it comes to obtaining credit. It ranks 116th out of 183. The bank examines the legal rights of creditors and borrowers in secured transactions and bankruptcy law as well as the strength of credit information bureaus and exchanges. When lenders have both strong legal rights and easy access to a wide variety of information about the client’s creditworthiness, reasons the bank, the more available credit will be. When information on borrowers is significantly lacking – as is the case in most of Africa – legal protections for creditors must in turn be very strong. Unfortunately, while creditor rights are strong in Malawi there is very little information available on potential borrowers.

Figure 2:

How the World Banks Conceptualizes Credit Acquisition

 Fig 2 Ease of Business Graphic WB

When it comes to protecting investors and minority shareholders, Malawi’s ranking improves. Here, the country ranks 74th out of 183 countries. It received this score because Malawi requires a moderate level of conflict-of-interest disclosure and is a moderately difficult place to bring a shareholder lawsuit. Directors, too, are held liable in most instances.

Malawi does even better in the area of taxation. The World Bank estimates that pleasing the tax man in Malawi requires a total of 25 payments over the course of a year which take up to 157 hours to complete and can consume up to 25.1-percent of a company’s profits. Accordingly, Malawi’s tax burden is ranked 25th out of 183 nations, making it a country with one of the lowest tax burdens on Earth.

When it comes to engaging in cross-border trade, however, Malawi does very poorly. In Malawi, to import goods into the country requires 10 documents for customs officials to inspect. On average, it takes 51 days to import goods into Malawi at a cost of $2,570 (excluding tariffs) per container.

The cost to export goods is somewhat lower. Malawi requires 11 documents to be inspected by customs officials. The total cost (excluding tariffs) is $1,713 per container, with delivery taking up to 41 days from point of origin. Compared to global averages this nets Malawi a ranking of 173rd out of 183 on ease of engaging in cross-border trade.

Malawi improves when it comes to contract enforcement. It ranks 121st out of 183 countries. On average, it takes 42 legal procedures to take a contract from dispute to resolution, with 312 days spent in court or attending to legal issues. The financial cost of pursuing a contract claim typically accounts for 94.1-percent of the value of the claim – clearly a huge deterrent to the legal enforcement of contracts and why Malawi ranks so low, given its otherwise good scores in this area.

Finally, in terms of closing or liquidating a business Malawi ranks 126th out of 183 countries. It takes 2.6 years to close a business at a cost of 25 percent of the value of the estate for a recovery rate of 17.9 cents on the dollar.

Table 1 presents a summary of these rankings as well as Malawi’s overall ease-of-doing business rating. Malawi does best in the areas of tax, registering property, and protecting investors. It does poorly in the areas of permitting construction, trading across borders, starting a business, and enforcing contracts.

Table 1:

World Bank Ease of Doing Business

Assessment and Rankings: Malawi

Table 1 Malawi Ease of Business

 

Prospects

Malawi appears to have many of the components necessary for economic takeoff. It is primarily an agricultural economy with little diversification outside of its dependency on its single cash crop – tobacco. Nonetheless it is well positioned to take advantage of the region’s emergence from years of internal and external conflict. President Banda has, for instance, reintroduced policies promoting macroeconomic stability and made efforts to reassure donors and woo back international financial institutions and their external support.

What’s more, Malawi has significant natural resources — land, water, forestry and minerals — much of it, unexploited. Mineral exploitation, for instance, started only recently with the opening of the Kayelekera uranium mine in 2009. The potential for further development of these resources – and increased chances of export earnings – is clearly there.

 

Figure 3:

 Malawi Economic Growth,

Percent Increase, 2003 – 2013

Malawi GDP Growth

However, Malawi first needs to solve several problems. The most obvious is alleviating the country’s isolation by enhancing transport links with its neighbors. Until recently this has been all but impossible due to political instability in its most important neighbor – Mozambique. Political stability there and, more importantly, the possible development of sizable energy sectors in both Mozambique and Tanzania could lead to an eventual upgrade in regional transport links.

Second, the country’s poverty has two impacts. First, it robs citizens of the resources necessary to better themselves through education and entrepreneurship. Second, it puts intense pressure on the environment. Citizens are incentivized to engage in ecologically unsustainable practices in order to boost short-term income – leading to widespread forestland loss.

Government policy, therefore, needs to target its limited resources directly on poverty reduction. Fortunately Malawi has shown through its fertilizer subsidy program a penchant to spend on such measures even at the cost of bucking the opinion of IMF advisors who have warned against such largesse. President Banda’s background, too, gives hope that she will be channeling more resources into education and poverty reduction.

Finally, as in much of the rest of Southern Africa, the prevalence of HIV/AIDS in the population is very high – 11.9-percent. This puts a burden on the population that reduces economic growth and forces the diversion of resources away from education and children’s health towards public health spending on older, less productive portions of the population.

Still, Malawi holds tremendous potential. It has a sound, legitimate, democratic government that is relatively corruption-free by African standards. Its resource base is underdeveloped. Wages are low and investment possibilities, cheap. Its business conditions are relatively benign and its location in an up-and-coming region of economic growth positions it well for the future.