Smooth Transitioning Growth in Malawi: The Role of Economic Policy

Abstract

Malawi adopted orthodox neoliberal economic policies in 1981 to replace Keynesian-based demand management, developmental state,  and protectionist policies. However, the sub-period from 2004 to 2012 witnessed some reversion to elements of the pre-liberalisation  period. This paper analyses the response of the Malawian economy to the critical economic policy shifts experienced since 1960. A  smooth transition regression (STR) model is estimated to explain the country’s real output, setting its trend as the threshold variable.  Augmenting the model with proxies for labour and capital is found to be unrewarding, but the heuristically determined logistic STR  model fits the data well. The transition process is subsequently used to explain the response of economic growth to policy changes. We  find that Malawi’s growth did not transition until after 2004, and the change was practically fully accomplished by 2011. Real output growth was significantly faster during this transition period. The findings of this study imply that the appropriateness of orthodox  neoliberal economic policies is questionable in Malawi. This should motivate astute policy-makers seeking to adopt post-neoliberal  economic management policies, mutatis mutandis.