Malawi's tobacco sector : standing on one strong leg is better than on none

Abstract

Tobacco plays a central role in Malawi's economy, accounting for 60% of its exports, 13% of its GDP, and 23% of its total tax base. One in five Malawian households rely substantially upon income from tobacco production or employment. Malawi, a small, land-locked country, is the world's leading exporter of burley tobacco leaf, having recently overtaken the exports of the United States. Despite international efforts to reduce cigarette use because of its adverse health effects, world demand for Malawi's tobacco should remain robust for many years as a result of the expected continued growth in consumption in many low and middle income countries and as a result of the favorable characteristics and competitive cost of Malawi's tobacco. Still, Malawi faces substantial challenges in drawing sustained benefits from its relatively strong international market position. The liberalization of the sector during the early to mid-1990s resulted in a massive entry of smallholder farmers into tobacco production. While the income from production was formerly concentrated among a limited number of commercial estate owners, such income was now spread among some 350,000 households, with powerful multiplier effects in rural areas. There was an expectation that these developments would create an institutional and financial platform for the diversification of the rural and broader Malawian economy. Initial signs of this were evident in the late 1990s. Yet, this engine for growth and diversification has since stalled. The earlier flow of cash income into rural areas has slowed to a trickle in recent years as a result of sharp tobacco price declines (related to short-term international supply and demand conditions), reduced farm productivity and high and rising transaction and logistics costs in the tobacco marketing chain. Institutional limitations and conflicting interest within the industry have inhibited the development of an appropriate policy and operational response to the productivity problems and loss of profitability experienced by many Malawian growers. This paper highlights the challenges facing the industry and Malawian policy-makers and outlines options for moving forward in addressing those challenges. Malawi's capacity to achieve its ambitions for economic diversification depend, in part, on its ability to overcome the current challenges facing its dominant industry. It is a more profitable tobacco industry- rather than wishful thinking-which can serve as an effective spring board for move diversified patterns of investment, employment and trade in Malawi.

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