Malawi Compact II - Constraints Analysis

MCC’s evidence-based approach to its investments begins with a mutual understanding of a country’s main growth challenges. During the first phase of the compact or threshold program development process, MCC and the selected partner country, jointly conduct a constraints-to-growth analysis (CA). This analysis identifies the constraints to private investment and entrepreneurship that are most binding to economic growth in the country. The results of this analysis enable the country, together with MCC, to select activities most likely to contribute to sustainable, poverty-reducing growth.

The Constraints Analysis Report for the second Malawi Compact highlights the following binding constraints to economic growth: 

1. An unstable macroeconomic environment as reflected in high and volatile inflation: For much of the last decade, Malawi has had one of the most unstable macroeconomic environments in the world, dominated by high interest rates, an overvalued currency, followed by high inflation and an unstable outlook. Very high interest rates and short loan tenor combine to make investing for the long-term nearly impossible in Malawi, trapping the country in a low-growth and low-investment equilibrium.
2. A high cost of road freight transport services and barriers to linking farms to markets in rural areas: The extent and quality of rural road networks, cost of rural freight transport, and other market distortions may result in extremely high prices of farm-to-market transport and market power distortions. These prices inhibit the development of Malawi’s rural economy and stymie structural transformation by preventing the rural-to-urban movement of labor and diversified production of cash crops.
3. Difficulties with access to land for investment due to mismanagement of the estate sector and unclear/uncertain land rights, particularly for women smallholders. De facto land markets in Malawi operate under systems of informal land rights, blocking outside investors from investing in land. Lack of land for investors creates substantial distortions in production and investment, discouraging new entrants into Malawi’s markets. Uncertain or unclear land rights can slow growth by discouraging investment in land productivity improvements and limiting land transactions that could consolidate plots, potentially leading to greater urban migration.