Malawi Economic Justice Network (MEJN)

Impact of the Global Economic Crisis on Vulnerable Households in Malawi

A consultancy report submitted to:

Malawi Economic Justice Network (MEJN),

P.O. Box 20 135

Lilongwe2

by

Charles B.L. Jumbe, PhD

Frederick B.M. Msiska

Centre for Agricultural Research and Development,

P.O. Box 219,

Lilongwe.

;

January 2010

Table of Contents

List of Tables

List of Figures

List of boxes

List of Annexes

Acronyms

Acknowledgements

Executive Summary

1.0 INTRODUCTION

1.1Background

1.2Objectives and Scope of the Study

1.3Study Limitations

1.4Organization of the Report

2.0 METHOLOGY OF THE STUDY

2.1 Literature Review

2.2Study Approach Design

2.2.1Study Tools Development

2.2.2Recruitment of Research Assistants

2.2.3Review of Study Tools and Training of Research Assistants

2.3Sampling and Data Collection Process

2.3.1Sampling Processes

2.3.2Field Data Collection

2.4Data Entry, Analysis and Report Writing

2.4.1Field Reports by Research Assistants

2.4.2Data Entry

2.4.3Data Analysis and report writing

3.0FINDINGS, RESULTS AND ANALYSIS

3.1Household Demographic Characteristics

3.1.1Household size

3.1.2 Age of household head

3.1.3Household Literacy Levels

3.1.4Marital Status of Household Heads

3.1.5 Main Occupation of Household Heads

3.2Household Access and Demand for Social Services

3.2.1Access to Social Services

3.2.2Demand for Social Services

4.0 IMPACT OF GLOBAL FINANCIAL CRISIS ON INPUT AND OUTPUT PRICES

4.1 Impact on Agricultural Input prices

4.2Impact on commodity prices

5.0 IMPACT OF FINANCIAL CRISIS ON INCOMES, WAGES, REMITANNCES & GIFTS

5.1 Impact on Household Incomes

5.1.1Changes in household economic activities and incomes

5.1.2Changes in Household Income Levels

5.2 Recovery from Income Shocks

5.3 Impact on unskilled wage rates

5.3.1Inter-temporal dynamics in the wage rates for unskilled labour

5.4Impact on Remittances

5.4.1External Remittances

5.4.2Internal remittances

5.4.3Contribution of remittances to household income

5.4.3Impact on Gifts

6.0IMPACT OF GLOBAL FINANCIAL CRISIS ON LIVELIHOOD ASSETS

6.1Household Disposal of Assets

6.2Impact on livestock assets

7.0HOUSEHOLD EXPENDITURE AND CONSUMPTION

8.0CONCLUSIONS AND IMPLICATIONS FOR POLICY

References

List of Annexes

List of Tables

Table 1: Household Size

Table 2: Age of household head

Table 3: Age Groups of Household Members at National level

Table 4: Main occupation of Household Head

Table 5: Access to educational facilities

Table 6: Distance and time taken to reach education facility

Table 7: Quality of education facilities

Table 8: Access to health facilities

Table 9: Distance and time taken to the health facility

Table 10: Access to safe water

Table 11: Distance and time to access water points

Table 12: Services or programs provided to the communities

Table 13: Activities to improve livelihood

Table 14: Demand for services by communities

Table 15: Comparison of observed changes in farm input prices between 2008 and 2009

Table 16: Comparison of fertilizer supply on local markets between 2008 and 2009

Table 17: Changes in price of maize between 2008 and 2009

Table 18: Comparison of household income between 2007, 2008 and 2009

Table 19: Household perceptions on changes in incomes, 2008 and 2009

Table 20: Perception of recovery from income decline

Table 21: Whether the Household has a Member living outside the Country

Table 22: Amount and frequency of external remittances

Table 23: Changes in Flow of External Remittances

Table 24: Household response to the decreased external remittances

Table 25: Internal remittances

Table 26: Share of remittances in total incomes in 2008

Table 27: Types of gifts given in years 2008 and 2009

Table 28: Disposed of household assets over 2008

Table 29: Reasons for Disposal of Household Assets

Table 30: Changes in Livelihood Assets over 2008

Table 31: Annual expenditure among rural households

List of Figures

Figure 1: Marital status

Figure 2: Average Maize Price Trends 2007-09.

Figure 3: Ranking of important source of livelihood from 2007 to 2009.

Figure 4: Channels for sending remittances

Figure 5: Description of change in the flow of internal remittances

Figure 6: Reasons for decline in internal remittances

Figure 7: Reasons for maintaining the assets

Figure 8: Reasons for disposing livestock

Figure 9: Description of change in consumption/eating habits

List of boxes

Box 1: Commodity Prices and Livelihood: The case of Nabwenje Village, Mchinji district.

Box 2: Tobacco prices and household income: Case of Chimenya village, Phalombe district.

Box 3: Case Study on Remittances in Lufita, Chitipa District

List of Annexes

Annex 1: List of Sampled Villages

Annex 2: Household Age Groups

Annex 3: Quality of health services

Annex 4: Water quality

Annex 5: Reasons for the observed changed in farm input prices

Annex 6: General perception about commodity prices

Annex 7: Comparison of months with highest price for maize, 2008 and 2009

Annex 8: District Level Paired Statistical Tests for Income Difference

Annex 9: Regression Results for Determinants of Changes in Household Incomes

Annex 10: Changes in unskilled wage rates

Annex 11: Reasons for Increase in unskilled wage rate

Annex 12: Amount and frequency of receiving internal remittances

Annex 13: Types and sources of gifts

Annex 13: Trends in livestock holding for 2007, 2008 and 2009

Annex 15 Household expenditure shares 2008 and 2009

Annex 16: Coping mechanisms in the face of crisis

Acronyms

ADMARC: Agricultural Development and Marketing Cooperation

APIP: Agricultural Productivity Investment Programme

GDP: Gross Domestic Product

FGD: Focus Group Discussions

MEJN: Malawi Economic Justice Network

MSCE: Malawi School Certificate of Education

ODI: Overseas Development Institute

RA: Research Assistant

SAP: Structural Adjustment Programme

SSA: Sub Saharan Africa

SPSS: Statistical Package for Social Scientists

TA: Traditional Authority

TOR: Terms of Reference

UNICEF: United Nations Children’s Fund

Acknowledgements

We would like to take this opportunity to express deep appreciation to various institutions and individuals who have made invaluable contributions towards this study. Our special thanks go to the Malawi Economic Justice Network for the technical assistance provided to the study team and also for working tirelessly in mobilizing the financial resources without which this study would not have been possible. In same vein, we are indebted to UNICEF Malawi office for timely provision of the requisite financial support which made this study a reality.

All the research assistants who participated in the study by collecting data from scores of rural households and small scale businesses deserve our heartfelt recognition for the job well done. These are Misheck Mtaya, Ms Grace Banda, Ms Brenda Mwagomba, Stater Magombo, Martin Likongwe and Austin Chimbiya. It was not easy to endure through the hot days of work across the five districtscovered by the study.

To the nearly five hundred respondents in the rural Malawi who spared their precious time and effort to provide us with the valuable dataupon which this study is based, we say, thank you a million times. Surely, the study would not have accomplished if you had decided to ignore us or refuse to grant us the interviews, and for that we shall always remain deeply indebted. In spite of the valuable contributions to this report from various stakeholders, the consultants, however, remain responsible for all the errors, omissions and mistakes therein.

Executive Summary

This study was commissioned by the Malawi Economic Justice Network to establish the impact of the current global economic crisis on the Malawi economy with particular focus on its implications on the poor and vulnerable groups and propose ways of mitigating the impacts. The study recognizes that the financial crisis which is the focus of this analysis was preceded by the food crisis characterized by high food prices which were beneficial to net producers while impoverishing consumers. It comes against the background of the fact that while several international analyses of the causes, impact and policy responses have been undertaken that shed light on such issues, there is little or no system research information on the Malawi economy particularly relating to the rural households.

The study was conducted in fifteen villages from five districts of Chitipa in the North, Salima and Mchinji in the Centre and Phalombe and Mangochi in the South. In each village, thirty households were sampled for household interviews thus totaling four hundred and fifty households. In order to triangulate the results of the household interviews, interviews were held with the small scale traders in the nearby trading centre of each village and focused groups of men and women separately.

The 2008 global economic crisis, with its serious negative implications on the Malawi economy especially the vulnerable households, follows the footsteps of other previous shocks that have hit the country such as the declines in the international prices of tobacco in the 1990s, upsurge in petroleum products in the late 1970s, and slippages in the exchange rates in the 1990s.

The results show that the Malawi economy, just like other Sub- Saharan Africa economies, benefited from global food price increases in 2007-08 seasons. Analysis of household income patterns for the past three years shows that rural households experienced an average income earnings increasedby MK15,230.50, representing a 33 percentincrease,between 2007 and 2008 owing to global commodity prices increases. These positive gains have been quickly negated by global financial meltdown leading to a decline in average income earnings of MK 9,000.00, representing a decline of 15 percent between 2008 and 2009 for the same rural households. In any case, this means that the 2008 economic crisis would have had much more serious negative implications had it been that it were not preceded by increases in household incomes in the year before.

A spatial view of the impact of global economic crisis shows significant variations in impact of the crisis on the different districts of the country. This analysis shows that Chitipa district is the least affected by the global economic crisis as evidenced by the fact that it registered significant income increases not only within the 2007-08 period but also when we compare the 2007 and 2009 income levels. On the other hand, Mangochi district is the most negatively affected by the crisis with double income decreases for 2008-09 period and even when comparing 2007 and 2009 household income levels.

Lack of proper produce markets and inadequate access to farm inputs such as fertilizer have been established as the major causes of household income declines. This calls for speedy government action in terms of ensuring stable and accessible input and output markets.

With respect to remittances, the study shows that 25 percent of the households have a member working outside the country (external migrants) while 38 percent of the households have members working and living outside the district of origin (internal migrants). For those households that receive external remittances, they receive on average an amount of MK 16,500 per year which represents 1.2 percent of total household income. This clearly indicates that Malawi’s rural economy is not strongly linked to the flow of external remittances. However, internal remittances are relatively more important than external remittances as they account for more than 2.5 percent of the total household income. Overall, internal and external remittances account for only 3.5 percent of total household income with female headed households have a higher share of remittances (6.2%) to total household income.

Both forms of remittances have substantially declined in 2009 and thiscalls for introduction and/or scaling up of safety net programmes for households who have been negatively affected by declines in remittancesespecially in the districts that have high proportions of rural households who do rely on remittances such as Mangochi district.

In terms of household assets, the study has established that about 70 percent of the rural households had their asset stocks either remaining constant or reduced between 2008 and 2009. Lack of money to purchase additional households assets was given as the major reason. In addition, cases of theft, natural depreciation of assets and some few sales of assets to raise incomes for food were also reported. In this regard, it can be argued that since global economic crisis has not yet really resulted into forcing most rural households to sell their assets, there is need to come up with social and economic support measures such as public work programmes that would prevent this from happening at a large scale.

In the face of financial crisis, people devise different coping measures such as reducing the amount of food (14%) and shifted to cheaper foods (7%). However, our results indicate that the global financial crisis had little impact on the livelihoods of the local communities. Although the poor and vulnerable households devote more than 25 percent of budget on food, the food prices in 2009 were not that high despite the financial crisis. The effect of the economic crisis could have worsened if the government had not intervened in the agricultural production through the agricultural inputs subsidy programme. In other words, the global financial crisis was internally mitigated by the good harvest obtained in 2008 and 2009 following good rains and the increased maize productivity through the use of hybrid seeds and application of fertilizers under the government subsidy program.

The study has established that the provision of formal credit opportunities and reduction in agricultural input prices are essential services in boosting incomes of rural communities through improved crop productivity and participation in business opportunities. Essentially, such interventions would be instrumental in cushioningrural communities against the effect of economic shocks other than the provision of short-term safety nets such as food assistance. The study findingscall for more long term development-oriented than reliefinterventions in order to effectively empower Malawi’s vulnerable households against any economic shocks.

The study has shown that rural incomes in Malawi are to a larger extent integrated with the dynamics in the global economy, such that price changes in the world economy which are likely to affect the welfare of rural communities in Malawi. In particular, analytical results indicate that a 1 percent increase in selling prices faced by the households leads to acorrespondingincrease in household income by 0.24 percent. Essentially, what this means is that market oriented public policies are critical for sustainable socio-economic empowerment of the rural populace. These results call for shift in policy focus away from supply side policy interventions in favor of interventions that effectivelylink farmers to reliable markets.

1

1.0 INTRODUCTION

The world economy has over the past few years undergone a few economic crises that have had significant implications for the developing countries including Malawi. The major crises include: the fuel, food and financial crises from 2007 to mid 2008. Of these, the financial crisis is the most recent and with the most negative implications in terms of slowing down the global economic growth and investments.

The food and financial crises have different underlying causes. The high food prices largely emanated from a surge in consumption of agriculture products due to the income and population growth, rising energy prices and subsidized biofuelsproduction, all of which took place against a background of stagnating agricultural productivity and output growth (von Braun, 2008). Further, von Braun (2008) observes that the financial crisis which emerged from the subprime lending and flawed regulatory regimes in the developed world, resulted in the collapse of financial markets and hence economic slowdown and downward pressure on prices of agricultural products. Admittedly, the sequencing of these two crises has placed complex challenges on policy makersworldwide. While policy makers started developing policy measures to contain the inflationary and macroeconomic effects of high food prices, they had to deal with the emergent challenge of dampening food and agriculture prices due to the financial crisis.

The financial crisis has had several implications for the developing countries. These range from declines in foreign direct investments, declines in export revenues due to shrinking demand in the developed world, downturns in remittances, rise in unemployment due to job losses (e.g. 30 000 in Zambia), declines in foreign aid, increase in food insecurity and malnutrition, increase in poverty, amongst others (Overseas Development Institute (ODI), 2009; von Braun, 2008).

Analyses of the policy responses to the two major crises reveal wide variations in the approaches to deal with the crises even in the developing world. According to the ODI(2009), policy responses range from continuing business as usual to using proactive approaches. In some countries, steps were made to implement growth accelerating policies or even implementing fiscal stimuli, yet in others, there have only been minor adjustments to the monetary policies. In terms of social policy responses, ODI (2009) further observes that some countries such as Nigeria and Zambia significantly reduced their budgetary allocations to the social sector, whereas as Cambodia and Indonesia have extended their social protection provisions. In general, a country’s capacity to respond to the crises depends upon extent of revenue contraction, the ability of the government to access resources to finance the fiscal deficit, and the preexistence of social protection systems (ODI, 2009).

The foregoing synopsis shows that a wealth of information exists on the causes, impact and policy responses of the global economic crisis on world economies including Sub -Saharan Africa (SSA). However, little is known about the implications of the phenomenon on the Malawi economy particularly the vulnerable rural households. Itis for this reason that this study was commissioned to unravel the extent to which vulnerable households in Malawi have been impacted by the global economic crisis and the responses to various aspects of the crisis.

1.1Background

The Malawi economy has since independence in 1964 relied on the agricultural sector for economic development and the well-being of Malawians. The sector contributes about 36-39 percent of the gross domestic product (GDP), accounts for over 90 percent of national export earning and 85 of employment opportunities. To confirm the importance of the agricultural sector to the national economy, household studies have shown that about 70 percent of the rural households earn their incomes from sale of agriculture products. The agricultural sector itself is dualistic, comprising the estate and smallholder sub-sectors. Besides agriculture, the other important sectors of the national economy are: wholesale and retail trade (14%), manufacturing (8%), financial and insurance activities (7%), and construction (5%) (MDPC, 2009).