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Economic

Research

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Number 77

July 2009

Trade and Development When 

Exports Lack Diversification

A Case Study from Malawi

Suresh Chand Persaud

Birgit Gisela Saager Meade
www.ers.usda.gov

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Persaud, Suresh Chand, 1969-

 Trade and development when exports lack diversification.

 (Economic research report (United States. Dept. of Agriculture.

 Economic Research Service) ; no. 77)

 1. Tobacco industry—Malawi. 2. Economic development—

 Malawi—Case studies.

 3. Malawi—Economic conditions. I. Meade, Birgit Gisela Saager

 II. United States. Dept. of Agriculture. Economic Research Service.

 III. Title.

HD9146.M32

www.ers.usda.gov

Photo credits: Howard F. Schwartz, Colorado State University, 

Bugwood.org (tobacco field); Claudio Angelini (truck and bales); 

and Jupiterimages (tobacco leaf).
United States

Department

of Agriculture

www.ers.usda.gov

A Report from the Economic Research Service

Abstract

Developing countries, particularly those that depend heavily on a small number of agricultural exports, are vulnerable to domestic and international shocks. These countries 

often have difficulty achieving sustained economic growth. This analysis uses Malawi, 

a country that earns most of its foreign exchange from tobacco, as a case study of export 

concentration and heavy exposure to volatility. The econometric results suggest that the 

decline in Malawi’s gross domestic product (GDP) when tobacco exports are falling 

is almost three times greater than the increase in GDP when exports are rising. Modelbased simulations indicate that variability in tobacco exports leads to slower economic 

growth because GDP falls by a relatively large amount in response to a given decrease 

in exports, while recovering little during an upswing in exports. Gains in tobacco yield 

and improvements in marketing efficiency, however, can help buffer Malawi’s GDP from 

variability in export revenues.

Keywords: Malawi, tobacco, export-led growth, asymmetry, volatility, productivity, 

trade, development, marketing efficiency, price transmission

Acknowledgments: The authors extend their appreciation to staff members of the ERS 

Market and Trade Economics Division Suchada Langley, Chief of the Agricultural Policy 

and Models branch, Mary Anne Normile, Chief of the International Demand & Trade 

branch, and economists Steven Zahniser, John Dyck, and Matt Shane for their thorough reviews and helpful comments on earlier drafts. We would also like to thank our 

three anonymous reviewers for their valuable suggestions. Special thanks are extended 

to Courtney Knauth, Cynthia Ray, and Thomas McDonald for editorial and design 

assistance.

Suresh Chand Persaud

Birgit Gisela Saager Meade

Trade and Development When 

Exports Lack Diversification

A Case Study from Malawi

Economic

Research

Report

Number 77

July 2009
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Trade and Development When Exports Lack Diversification: A Case Study from Malawi / ERR-77

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Recommended citation format for this publication: 

Persaud, Suresh Chand, and Birgit Gisela Saager Meade. Trade and 

Development When Exports Lack Diversification: A Case Study from 

Malawi. ERR-77. U.S. Dept. of Agriculture, Econ. Res. Serv. July 2009.
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Contents

Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iii

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Export Concentration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Asymmetric Impacts of Exports on GDP . . . . . . . . . . . . . . . . . . . . . . . . . 5

Productivity Gains Potentially Offset Export Variability . . . . . . . . . . . . 9

Marketing Efficiency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Agricultural Productivity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Exports and Economic Growth in Malawi . . . . . . . . . . . . . . . . . . . . . . . 12

Symmetry: Reference Case . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

Asymmetry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

Simulation Model Characteristics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

Overview of Scenarios . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

Implications for Other Countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

Futures Markets and Developing Countries . . . . . . . . . . . . . . . . . . . . . . 18

Price Transmission and Marketing Inefficiency . . . . . . . . . . . . . . . . . . 19

Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

Appendix. Data Sources, Model Parameters, 

and Simulation Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
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Summary

In developing countries, export concentration is a critical obstacle to 

sustained economic growth. A number of countries in Africa, Latin America, 

and the Caribbean depend heavily on a limited number of cash crop exports 

and are vulnerable to domestic and international shocks. Malawi stands out 

among these countries. Malawi’s agricultural exports averaged 20 percent of 

gross domestic product (GDP) between 2000 and 2004, and one commodity, 

tobacco, provided over half of Malawi’s export earnings. 

What Is the Issue?

The contribution of agricultural exports to economic growth in developing 

countries has been neglected in the literature on export-led growth. In addition, past studies have effectively assumed that an increase in exports would 

affect GDP to the same extent as an equivalent decrease. This assumption 

may not be correct. For example, if export revenues are inefficiently utilized 

(for instance, diverted toward low-return enterprises that are not consistent 

with a country’s comparative advantage), rising exports will do little to 

increase GDP, and the growth-enhancing effects of export expansion may be 

largely lost. Moreover, inefficient utilization of export revenues may leave 

the country’s economy unprepared for unfavorable shifts in market conditions that lead to falling exports. The economic benefits of export expansion 

may then be muted, and the economic losses of export contraction may be 

accordingly larger. 

This analysis uses Malawi as a case study of export concentration and heavy 

exposure to volatility, a topic with broad relevance for other developing 

countries that have difficulty in drawing sustained economic growth from a 

narrow portfolio of cash crop exports. The study investigates the relationship 

between Malawi’s tobacco and nontobacco exports and its GDP, particularly 

the impact of rising compared with falling exports. If the economic impacts 

of falling exports exceed those of rising exports, how does variability in 

foreign sales influence the pace of Malawi’s GDP growth, compared with a 

scenario in which Malawi’s economy is affected equally by increasing and 

decreasing exports? 

In the absence of offsetting improvements in productivity, a country that 

depends heavily on commodity exports is less likely to experience persistent economic growth because its economic fortunes would be closely tied 

to booms and busts in world commodity markets. In developing countries 

such as Malawi, considerable potential exists to enhance the productivity of 

the agricultural export sectors by raising farm productivity and marketing 

efficiency. If tobacco exports are indeed an engine of Malawi’s GDP growth, 

might efficiency gains in the tobacco sector reduce the potentially adverse 

effects of export volatility on Malawi’s economy? 

What Did the Study Find?

The statistical findings of the study bear out anecdotal evidence that 

Malawi’s tobacco exports are positively related to its GDP. The analysis, 

which disaggregated Malawi’s total exports, showed no evidence that nontobacco exports drive the country’s economic growth. 
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Variability in Malawi’s tobacco exports leads to slower economic growth, 

because GDP falls by a relatively large amount in response to a given 

decrease in exports, while recovering little during an upswing in exports; the 

analysis showed that the impact of tobacco exports on GDP is almost three 

times greater when exports are falling than when they are rising (asymmetry). 

This result for Malawi provides a cautionary tale for other countries with 

similar economic structures: Ineffective management of export revenues, 

along with production and marketing inefficiencies, may diminish the positive GDP effects of rising exports without tempering the negative effects of 

falling exports. Such inherent weaknesses may, in fact, exacerbate the negative impacts of export variability on a country’s GDP. 

Model results show that Malawi’s GDP would be least vulnerable to volatility 

in tobacco export earnings if gains in yield and marketing efficiency were 

combined with an export-GDP relationship that was symmetric, that is, with 

rising and falling exports having GDP impacts of equal magnitude. Growth in 

farm productivity would require improvements in the availability and quality of 

resources and inputs, as well as in human capital. Greater marketing efficiency 

could be achieved by reducing internal costs of transportation and distribution, 

which could partially insulate Malawi’s GDP from falling export prices. Lower 

export prices would not be fully transmitted to the farm price if increased 

efficiency along the marketing chain led to increases in the farmers’ share of 

the export price. Consequently, as marketing margins contracted, Malawi’s 

economy would be shielded to a degree from lower international prices: the 

model results indicate that a decrease in the export price would only slightly 

reduce farm prices, domestic tobacco production, exports, and hence GDP.

 On the other hand, if export prices rose, increased efficiency along the 

marketing chain could amplify the benefits accruing to growers—an increase 

in the farmers’ share would mean that farmers received a greater portion of 

a higher export price. The analysis shows that this would lead to relatively 

large increases in farm prices, production, and exports, and therefore in GDP. 

As export variability inevitably occurs, the combination of margin compression—which reduces the gap between farm prices and export prices—and 

rising tobacco yields can partially offset the negative impact of falling export 

prices on Malawi’s GDP, while amplifying the benefits of rising export 

prices, generating an upward ratcheting effect.

How Was the Study Conducted?

The framework for empirically investigating the relationship between exports 

and economic growth is based on an extension of an aggregate production 

function model. The value of exports is partitioned into rising and falling 

components, leading to a more flexible model specification that allows 

for differential impacts of increasing vs. decreasing exports. Although the 

econometric results clearly suggest an asymmetric relationship between real 

tobacco exports and real GDP, this study does not predict or forecast the 

continuation of relationships found in historical data. Rather, it compares 

different scenarios involving asymmetric vs. symmetric export-GDP linkages. Econometric estimates of the export-GDP relationship for Malawi are 

embedded in a simulation model that also incorporates relationships for the 

farm supply response of tobacco and the transmission (to varying degrees) of 

export prices to producer prices.
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Introduction

In large parts of Africa, Latin America, and the Caribbean, economic growth 

and stability depend heavily on a limited number of cash crop exports. 

However, these export commodities are prone to periods of volatility. Trade 

shocks influencing exports of commodities such as tobacco, coffee, tea, 

cocoa, sugar, and cotton often lead to macroeconomic instability and poor 

economic performance in developing countries, reducing U.S. agricultural 

export potential to these regions. 

Among countries with a narrow range of exports, Malawi stands out. Malawi 

ranks among the poorest countries, with per capita gross domestic product 

(GDP) in purchasing power parity terms of $760 in 2007 (World Bank, 

2009). The country also has one of the most highly concentrated export portfolios — one cash crop, tobacco, accounts for approximately 60 percent of 

its total merchandise export earnings. Malawi is a small landlocked country 

in Africa with a population of approximately 12.9 million. Tobacco accounts 

for 13 percent of Malawi’s GDP and 23 percent of its total tax base (Jaffee, 

Figure 1

Coffee exports as share of total merchandise 

exports, 1994-2004 average

Burundi Ethiopia Guatemala Honduras Rwanda Uganda

0

10

20

30

40

50

60

70

80

Source: FAOSTAT database.

Percent

Figure 2

Sugar exports as share of total merchandise 

exports, 1994-2004 average

Percent

0

5

10

15

20

25

30

35

40

Source: FAOSTAT database.

Belize Cuba Fiji

Islands

Guyana Mauritius Swaziland

Figure 3

Banana exports as share of total merchandise 

exports, 1994-2004 average

Source: FAOSTAT database.

Percent

Costa

Rica

Dominica Ecuador Panama Saint

Lucia

Saint

Vincent/

Grenadines

0

10

20

30

40

50

60

Figure 4

Key agricultural exports as share of total 

merchandise exports, 1994-2004 average

Source: FAOSTAT database.

Percent

Cote d’Ivoire Ghana Madagascar Malawi

0

10

20

30

40

50

60

70

Cocoa Cocoa Vanilla Tobacco
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2003). This study uses Malawi as a case study of export concentration and 

heavy exposure to volatility, an issue with broad relevance for other developing countries that experience difficulties in drawing sustained economic 

growth from a narrow portfolio of cash crop exports. 

The study investigates the relationship between Malawi’s exports and its 

GDP. Although the export-led growth hypothesis has gained wide acceptance 

(Krueger, 1990; World Bank, 1991, 1993), the contribution of agricultural 

exports to economic growth in developing countries has been neglected in the 

literature (Dawson, 2005). In addition, past studies have effectively assumed 

that a given increase in exports has the same magnitude of impact on GDP 

as an equivalent decrease in exports. This assumption may not be correct. If 

export revenues are diverted to subsidize low-return enterprises that are not 

consistent with a country’s comparative advantage, the positive GDP effects 

of export expansion could be largely lost. Moreover, inefficient utilization 

of export revenues would leave the country’s economy unprepared for unfavorable shifts in market conditions that lead to falling exports. A distinctive 

feature of this study is that it recognizes that GDP may fall by a relatively 

large amount in response to a given decrease in exports, while recovering 

little during an upswing in exports, a phenomenon called asymmetry. 
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Export Concentration

Many countries in Sub-Saharan Africa, Latin America, and the Caribbean 

earn a large share of their export revenues from a small number of agricultural commodities (FAO, 2004). Commodity concentration is particularly 

extreme in Burundi and Malawi, countries that earn approximately 70 

and 60 percent of their total merchandise exports from sales of coffee and 

tobacco, respectively (figs. 1 and 4). Among sugar exporters, Cuba and 

Guyana stand out with the highest levels of export concentration (fig. 2), 

and banana exports account for between 30 and 60 percent of merchandise 

exports in several Caribbean countries (fig. 3). A common characteristic of 

heavily indebted poor countries is that they obtain more than half of their 

merchandise export earnings from primary (i.e., unprocessed) commodities 

(World Bank, 1999). Relative to industrial economies, developing countries 

(excluding those in East Asia) tend to experience larger shocks in terms of 

trade growth (Loayza et al., 2007), implying that price instability in international markets is a major concern for developing economies.

When supply and demand are highly inelastic, even small changes in demand 

or supply can be a source of considerable price variability. In response to 

tight market conditions, characterized by low stocks and high prices, farmers 

can increase their planting, but they cannot reduce the time it takes for crops 

to ripen to harvest, a period that can extend to years in the case of perennial crops such as coffee or cocoa. When higher crop production occurs, 

prices fall as supplies quickly outgrow demand in importing countries, 

given that demand does not grow significantly in response to lower prices. 

Consequently, price fluctuations are prolonged and deepened, potentially 

leading to a pattern of short-lived booms followed by lingering slumps 

(FAO, 2004). Nevertheless, the demand for market-based risk management 

services tends to be unmet in developing countries (World Bank, 1999). Price 

variability may induce countries to forgo the benefits of specialization in 

accordance with comparative advantage, or to enact costly price stabilization 

schemes, while also contributing to unwillingness to liberalize markets.

Although variability is a concern in developing countries, empirical studies 

are not unanimous in their support for the hypothesis that volatility adversely 

affects economic growth. Indeed, a positive relationship between export 

instability and economic growth is possible. For example, under the assumption of risk-averse behavior, instability in export earnings may lead to 

decreased consumption, higher savings, increased investment, and hence 

higher economic growth (MacBean, 1966; Knudsen and Parnes, 1975; 

Yotopoulos and Nugent, 1976). In addition, if higher risk enterprises are 

associated with higher returns, countries that on average experience faster 

GDP growth will also experience greater volatility. In contrast, it can be 

argued that export instability restrains economic growth, if risk-averse investors reduce their investment or if export instability induces countries to hold 

large foreign exchange reserves that may incur substantial opportunity costs. 

Empirical studies, such as those of Glezakos (1973), Voivodas (1974), Ozler 

and Harrigan (1988), and Gyimah-Brempong (1991), find a negative relationship between export instability and economic growth.

1A number of studies attempt to 

separate volatility into predictable vs. 

unpredictable components (Dehn, 2000; 

Dehn et al., 2005; Ramey and Ramey, 

1995), which is also problematic. If 

theory provides little guidance or support regarding measures of volatility, 

then attempts to separate volatility into 

predictable vs. unpredictable components will also lack firm foundations.
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Collier and Gunning (1996) and Schuknecht (1998) find that when countries 

experience positive shocks from windfall gains in export revenues, slower 

growth results from reduced efficiency of public investment projects during 

the boom phase, followed by higher fiscal deficits at the end of the boom. 

Similarly, Dehn’s (2000) empirical results show no evidence that extreme 

positive commodity price shocks have an impact on economic growth, 

while extreme negative shocks do adversely affect growth. Note that Dehn’s 

results rely on various decompositions of price volatility into predictable vs. 

unpredictable components, where the latter was not significantly associated 

with economic growth. Dehn et al. (2005) maintain that the literature has not 

established either a quantitatively important or statistically significant link 

between the variability of commodity export prices and economic growth. 

On the other hand, FAO (2004) maintains that declines and fluctuations in 

export earnings have adversely affected income, investment, and employment in developing countries where exports are not diversified.
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The lack of consensus in the literature cited here may partly reflect uncertainty as to how to measure volatility. A key challenge of estimating the 

impacts of volatility, whether in exports, exchange rates, or prices, is the 

choice of a particular variable to measure volatility. Theory provides little 

guidance1 for selecting an appropriate measure, and the empirical results may 

be sensitive to the measure chosen (Goodwin, 2002). To avoid the uncertainties associated with attempts to measure variability, we focus this study on 

a more fundamental issue: an increase in export revenues (as distinct from 

positive commodity price shocks) may not have the same impact on GDP as 

an equivalent decrease in export revenues. In other words, the export-GDP 

relationship may be asymmetric.

Figure 5

Negative supply-side shocks and asymmetry

Exports S2 S1 

GDP response to an increase

in exports

E2

E3 GDP response with a subsequent

decrease in exports

E1

 Q3 Q1 Q2 GDP
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Asymmetric Impacts of Exports on GDP

Even when developing countries rely on a narrow range of exports, their 

economic difficulties are not entirely a consequence of commodity concentration. Other factors also tend to reduce the positive GDP effects of rising 

exports. For example, ineffective management of export revenues, combined 

with policies that do not sterilize large inflows of foreign currency (i.e., 

that do not limit exchange rate appreciation by reducing domestic currency 

liquidity), can allow destabilizing side effects (Lee, 1997) and misalignments 

of relative prices (Varangis et al., 1995). Consequently, asymmetry may 

arise, i.e., the economic benefits of export expansion may be muted, while 

the economic losses of decreasing exports would be relatively larger.

When a country experiences a period of rapidly rising exports, correlated 

changes in policies and macroeconomic conditions are possible, such as 

increased government spending and indebtedness and currency appreciation, 

which partially offset the positive GDP effects of export expansion (Varangis 

et al., 1995). The exchange rate can be slow to adjust as a country enters a 

phase of deteriorating export performance, which is exemplified by Malawi 

(Pryor, 1990). Although Malawi’s exchange rate regime has been relatively 

flexible since 1994 (FAO, 2003) and is characterized as a managed float, policymakers have alternated between periods of liberal and restrictive exchange 

rate management (IMF, 2007). Factors eroding the profitability of tobacco in 

Malawi include deteriorating price, quality, and productivity, in addition to the 

movement (or management) of the exchange rate (Jaffee, 2003). The exchange 

rate issue has broad relevance to other developing countries. Currency appreciation reduces the positive GDP effects of export booms, and, since the currency 

tends to be slow to depreciate during periods of falling international prices 

and/or export revenues, the result is to amplify the adverse GDP effects during 

periods of deteriorating export markets (Varangis et al., 1995). 

A number of other factors may truncate a country’s upward economic growth 

potential during favorable periods of rising exports, while not ameliorating 

the downside during periods of falling exports. For example, windfall gains 

are often channeled into low-return projects (Collier and Gunning, 1996). 

Governments may utilize revenues from cash crop exports to finance investFigure 6

Asymmetric export-GDP relationship

 E3 E5 Y1 Y3

 E1 Y5

 Y2

Y4

 E2 E4

 Period Period

1 2 3 4 5 1 2 3 4 5

 Exports GDP
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ments or subsidies for low-return enterprises that are not consistent with the 

country’s comparative advantage, tending to blunt the positive GDP effects 

of rising exports. Note that tobacco is Malawi’s primary source of political 

patronage (Jaffee, 2003). Less-than-optimal use of export earnings may also 

be due to weak institutions (Rodrik, 1998) and rent-seeking behavior (i.e., the 

investment of resources in efforts such as lobbying to create monopolies or 

to restrict competition). All these factors would reduce the benefits of rising 

exports, but there is no reason to conclude that they would shield an economy 

from falling exports. 
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We illustrate a possible form of asymmetry based on the notion of an exportGDP schedule, shown in figure 5 as S1. Exports are initially at E1 and GDP 

is at Q1. In this hypothetical example, windfall gains in export revenues are 

not invested in productivity improvements, and in this instance, GDP only 

rises along a static export-GDP curve from Q1 to Q2 when export revenues 

rise from E1 to E2. Note that fluctuations in a country’s agricultural export 

revenues may result from factors such as variability in weather, leading to 

changes in the quantities of farm output and exports, or from international 

price movements. Although the example presented here focuses on price 

movements as a source of instability in export revenues, similar reasoning 

applies when fluctuations in export quantity cause variability in foreign 

exchange earnings. 

When a boom in export revenues ends, due, for instance, to weather-induced 

contractions in farm output or falling international prices, a country may be 

in a heightened state of susceptibility to losses in export earnings. Windfall 

gains in export revenues leading to currency appreciation would tend to 

sharply reduce the competitiveness of export industries that have not experienced the boom. As a result, a country’s export portfolio will become even 

more skewed toward the main commodity with its rapidly rising international 

prices, implying larger economic losses when either the price or farm output 

of that commodity enters a falling phase. Indeed, when the boom ends, the 

country’s economy may be worse off than before the onset of the boom 

(Yabuki and Akiyama, 1996). The currency can be slow to adjust, remaining 

overvalued even after the boom ends and prices enter a declining phase. 

Consequently, the profitability of the once-booming export sector suffers due 

to the combined effects of deteriorating international commodity prices and 

an overvalued currency (Varangis et al., 1995).

Moreover, asymmetries may be induced by limited integration with global 

capital markets in combination with thin domestic capital markets (Aizenman 

and Pinto, 2005). Malawi’s financial sector is underdeveloped, characterized by measures of financial depth that are low even by the weak regional 

standards of Sub-Saharan Africa (IMF, 2007). Large negative fluctuations 

and the tightening of binding investment constraints adversely affect output 

growth, particularly in countries that are poor, financially and institutionally underdeveloped, or unable to conduct countercyclical fiscal policies. 

Empirical studies suggest that large adverse shocks contract investment, 

make liquidity constraints binding, and eventually lead to asset destruction 

(Loayza et al., 2007). 

The preceding discussion suggests that deteriorating commodity prices may 

lead to a negative supply-side shock. Accordingly, a decrease in exports may 

have two effects. First, GDP may decrease along the static curve S1 in figure 

5, and second, there may be a shift to a new export-GDP curve from S1 to 

S2. Consequently, as exports decrease from E2 to E3, GDP contracts along 

the diagonal line between S1 and S2, ultimately reaching Q3, implying a 

large decrease in GDP relative to its previous level of Q2. Forecasts based on 

a static concept of an export-GDP curve would tend to understate the adverse 

economic impacts of a negative shock. In summary, figure 5 illustrates a case 

where the GDP response to a decrease in exports exceeds the response to an 

increase in exports. A scenario in which the GDP response elasticity is higher 
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for a decrease in exports than for an increase would, all else being equal, 

reflect greater vulnerability to instability in export markets.

If the export-GDP relationship is asymmetric in the manner just described, 

fluctuations in exports would tend to generate a downward trend in GDP. 

Figure 6 clarifies this point. In the left panel, exports are on the y-axis. In the 

right panel, GDP is on the y-axis. In both panels, the x-axis indicates the time 

period. Exports are initially at E1 in period 1 (left panel) and GDP is at Y1 

(right panel). Exports fall to E2 in period 2, leading to a contraction in GDP 

to Y2. When exports recover in the subsequent period to E3, GDP does not 

fully recover and only reaches a level of Y3—falling exports have greater 

impacts than rising exports. The process continues to repeat itself: a drop 

in exports to E4 leads to a relatively large drop in the size of the economy 

to Y4. In period 5, note that exports are at their initial level since E5 = E1, 

while, in contrast, GDP is below its starting point, since Y5 < Y1. Although 

exports are fluctuating without any trend, GDP is experiencing a downward 

trend as a consequence of a form of asymmetry in which the impact of falling 

exports exceeds the impact of rising exports. 

The downward ratcheting effect illustrated in figure 6 is not an inevitable 

outcome. Booms can be economically beneficial when windfalls are well 

managed, but damaging when poorly managed. Moreover, falling world 

prices do not inevitably reduce the gains from primary commodity exports. 

Productivity gains in the export sector may allow countries to improve their 

returns from commodity exports, even in the face of deteriorating prices.
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Productivity Gains Potentially Offset 

Export Variability

In the absence of offsetting improvements in productivity, a country that 

depends heavily on commodity exports is less likely to experience persistent 

economic growth because its economic fortunes would be closely tied to price 

booms and busts in world commodity markets. Developing country exports 

contribute directly to the growth of their economies because exports are a 

component of GDP. An increase in the value of exports tends to increase 

GDP, while a decrease in exports has the opposite effect, all else being equal. 

The economic well-being of a society will vary with international commodity 

cycles, unless export revenues are used to finance investment and productivity 

growth in the export sector and other segments of the economy. 

Furthermore, exports may accelerate GDP growth if trade leads to scale 

economies and increased capacity utilization, as well as to externalities 

or spillovers that positively affect growth in the nonexport sectors (Feder, 

1983; Bhagwati and Srinivasan, 1978; Krueger, 1980). Trade can influence 

growth through investment (factor accumulation) (Levine and Renelt, 1992; 

Wacziarg, 2001), as well as through human capital accumulation (Frankel 

and Romer, 1999). Open economies may experience faster productivity 

growth, and exports may be a source of productivity gains (Bernard and 

Jensen, 1999). In cases where a country has a comparative advantage in agriculture, export-led growth from agriculture allows for better use of limited 

resources based on their true opportunity costs, while also providing foreign 

exchange (Johnston and Mellor, 1961) to upgrade technology.2 These indirect contributions of exports to GDP growth (involving productivity gains) 

are distinct from the direct effects of exports on GDP noted earlier, and it is 

precisely these indirect contributions that may protect an economy from the 

vicissitudes of primary-commodity markets.

Marketing Efficiency

2The literature on the nexus between 

trade and growth has grown to vast proportions over the past four decades. For 

an excellent review of empirical studies, 

see Lewer and Van den Berg (2003).

Figure 7

Tobacco yields

Source: FAOSTAT database.

1990 92 94 96 98 2000 02 04 06

0

500

1,000

1,500

2,000

2,500

3,000

Malawi

United States of America

Africa

Latin America & Caribbean

World developing countries

kg per ha
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Steady improvements in marketing efficiency may shield exporters of cash 

crops from volatility that involves deteriorating international prices. Trade 

costs, including internal costs of transportation and distribution, are important barriers to exports,3 and these costs can be much larger than trade policy 

barriers (Anderson and van Wincoop, 2004). Greater efficiency in marketing 

and reduced trade cost barriers may offset the impacts of falling export 

prices, allowing a country to continue to benefit from cash crop exports 

even during unfavorable market conditions. On the other hand, inefficiency, 

bottlenecks, corruption, and excess profits due to market power along the 

marketing chain help to divert the proceeds from tobacco sales/exports away 

from productivity-enhancing investments. 

3In addition, empirical evidence from 

Dennis and Shepherd (2007) indicates 

that reductions in trade costs are associated with gains in export diversification.

Figure 8 

Real value of Malawi’s tobacco exports, 1970-2003

Source: FAOSTAT database.

Exports (1,000 dollars, real)

1970 74 78 82 86 90 94 98 02

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

450,000

Figure 9 

Tobacco exports and GDP in Malawi1, 1970-2003 (R2 = 0.71)

1Logarithmic scale on the Y and X axes, i.e., natural logs of tobacco exports (1,000 U.S. dollars)

and GDP (1,000 U.S. dollars).

Sources: World Bank; FAOSTAT database.

Real GDP

B

BB B

B B B B

BBB B

B B

B B B B BB

B

B B

B

B

B B

B

B

BBB B

13.0

13.2

13.4

13.6

13.8

14.0

14.2

14.4

14.6

11.2 11.7 12.2 12.7 13.2
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The Government of Malawi has traditionally regulated tobacco farming. 

Prior to 1990, legal restrictions prevented smallholders from growing 

tobacco, while estate farms were allocated production quotas with the right to 

market their quota on the auction floors. Beginning in the 1990/91 cropping 

season, smallholders were granted quotas, allowing them to legally grow 

tobacco. However, smallholders were obligated by law to sell their output to 

Malawi’s state marketing board (ADMARC), which paid lower prices than 

the auction floors. The Government of Malawi rapidly increased the smallholders’ quota until 1995/96, and it abolished the quota system in 1996/97 

(Zeller et al., 1998). 

As alternatives to ADMARC, Malawi’s reforms permitted smallholders to 

organize themselves into “farmer clubs” that had the right to directly market 

tobacco to auction floors. In addition, under the reforms intermediate buyers 

were licensed to buy tobacco from smallholder or estate farms to be sold 

on the auction floor (Zeller et al., 1998). Intermediate buyers function as an 

important logistical link between tobacco farmers and the distant auction 

floors, allowing farmers to market their crop even if they are unable to bring 

their tobacco to the auctions. Intermediate buyers also pay farmers immediately in cash, although the amount is typically half of the auction floor price 

(Jaffee, 2003). 

Malawi’s production and marketing reforms were successful at achieving 

greater smallholder participation—smallholders account for 70 percent of 

Malawi’s tobacco output. However, the mass entry into production of smallholder farmers is associated with high and rising marketing and transaction 

costs (Jaffee, 2003). Transportation is the most important cost along the 

marketing chain. These costs are increased by regulations that restrict exports 

to a single auction house, thereby creating bottlenecks and transport congestion in front of the auction floors—transport costs for moving tobacco to the 

floor are inflated by as much as 300 percent, resulting in reduced farm prices. 

Moreover, these bottlenecks provide incentives for corruption and bribes 

(Koester et al., 2004). Auction Holdings Ltd. (AHL) is the sole operator 

of Malawi’s three auction floors, a monopoly in which the Government of 

Malawi has a controlling stake through ADMARC. Given the legal requirement that tobacco must be sold through auction floors, AHL passes through 

to farmers the expenses arising from corruption, extravagant corporate office 

costs, and excessive staff numbers at senior levels (Maleta, 2004).

In summary, inefficiencies and corruption along the marketing chain, as 

well as monopoly or monopsony rents accruing to intermediaries, result 

in reduced payments for Malawi’s tobacco farmers (Koester et al., 2004). 

Indeed, high local marketing costs may depress farm incomes by discouraging growers from cultivating export crops (Balat et al., 2007). In contrast, 

steady improvements in marketing efficiency that lead to higher farm prices 

and, in the intermediate to long term, to expanding agricultural production 

and exports, may contribute to faster, more sustained economic growth. 

Factors that reduce unit costs in the marketing sector would allow firms to 

operate profitably at smaller margins, involving lower and more competitive export prices. That is to say, marketing efficiency can be a key factor 

in coping with volatile periods in international markets when falling export 

prices lead to margin compression. Advances in farm productivity also 
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enhance a country’s ability to cope with volatility by allowing farmers to 

cover their costs of production at lower prices.

Agricultural Productivity

With increases in total factor productivity (TFP)—defined as the output 

per unit of all inputs combined—the agricultural sector can continue to 

profit, despite declining real prices, if productivity effects compensate for 

price decreases. Considerable potential exists for raising productivity in 

Sub-Saharan Africa (Wiebe et al., 1998), as well as in other developing 

regions. Continued growth in agricultural production hinges on producing 

more output per unit of land, a partial measure of productivity known as 

yield, rather than on bringing more land under cultivation. 

Malawi’s tobacco farmers have experienced a decreasing trend in productivity, with yields dropping at an annual rate of approximately 6 percent 

from 1990 through 2006. In 2006, Malawi tobacco yields were 25 percent 

lower than the African average, while yields in the United States were six 

times higher (fig. 7). Possible explanations include decreasing fertilizer 

use as well as a more general decline in soil fertility. Additional factors 

adversely affecting productivity include decreases in larger estate farms and 

the growing preponderance of relatively unskilled smallholder farmers, widespread use of low-quality, own-saved seed, and high and rising marketing 

and transaction costs (Jaffee, 2003). Moreover, despite potentially abundant 

supplies of water from Lake Malawi and several other large lakes (Tobin and 

Knausenberger, 1998), almost all of Malawi’s tobacco is grown under rainfed conditions (USDA, 2000) and hence is vulnerable to weather-induced 

shocks. Future yield trends will be influenced by the degree to which Malawi 

and other developing countries address deficits in the availability and quality 

of resources and inputs, as well as deficits in human capital.

Growth in farm productivity and improved marketing performance are likely 

to be largely concurrent. In countries where infrastructure is underdeveloped, 

Figure 10 

Simplified depiction of simulation model

Export price

Export revenues

GDP

Tobacco

production

Farm price
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large increases in agricultural productivity may be possible from investments 

in rural roads and utilities (Wiebe et al., 1998). Improvements in the quantity 

and/or quality of transportation and distribution systems would give farmers 

better access to productivity-enhancing agricultural inputs at lower costs. 

Difficulties in marketing larger quantities of production outputs would tend 

to discourage the adoption of output-increasing technology, while improved 

distribution systems would have the opposite effect. Growth in agricultural 

productivity, combined with parallel improvements in marketing, imply that 

outward supply shifts may be accompanied by falling margins.

Exports and Economic Growth in Malawi

Tobacco export earnings are a key driver of Malawi’s economy (Koester et 

al., 2004; USDA, 2000), and those earnings have experienced substantial 

fluctuations (fig. 8), particularly since 1989. Figure 9 illustrates the positive 

relationship between real GDP and the real value of tobacco exports.

On a more formal level, we quantify the linkage between these two variables 

via an aggregate production function model (see appendix for a description 

of the model). The econometric estimates of the export-GDP relationship are 

developed in two steps: (1) to provide a reference scenario, we estimate the 

model assuming that a given increase in exports has an impact on GDP identical to an equivalent decrease in exports, an assumption known as symmetry, 

and (2) we relax the preceding assumption to allow differential impacts on 

GDP of rising and falling exports, in a phenomenon known as asymmetry. 

Comparisons of symmetry and asymmetry yield useful insights.4

Symmetry: Reference Case

The model results indicate that a 10-percent increase in the real value of 

tobacco exports is associated with a 1.8-percent increase in real GDP. 

Similarly, because the assumption of symmetry is imposed, a 10-percent 

decrease in the real value of tobacco exports is also associated with a 

1.8-percent decrease in real GDP. These results, despite their usefulness in 

4Also of interest is the impact of 

nontobacco exports. Accordingly, when 

estimating the model, total exports 

are split into tobacco vs. nontobacco 

exports, to obtain the separate impacts 

on GDP of these export variables. The 

findings indicate no evidence that nontobacco exports, whether rising or falling, 

influence Malawi’s economic growth in 

any of the model specifications.

Figure 11 

Assumed growth in export price of tobacco

Source: Model assumption.

2003 2005 2007 2009 2011 2013 2015 2017

2,000

2,500

3,000

3,500

4,000

4,500

Export price ($ per metric ton)
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providing a benchmark for model-based simulations later in this report, do 

not account for the possibility that the impact of a change in exports may 

depend on the direction of the change. 

Asymmetry

Statistical evidence suggests that both increases and decreases in tobacco 

exports affect Malawi’s economy, although not to the same degree (app. table 

1). The results indicate a rejection of the null hypothesis of symmetry, and 

according to the point estimates, the impacts on GDP of decreasing tobacco 

exports far exceed those of rising exports. Specifically, a 10-percent increase 

in the value of tobacco exports is associated with an increase in GDP of 0.90 

percent, while a 10-percent decrease reduces GDP by 2.51 percent. This 

difference is significant, both statistically and economically. The latter is 

brought into sharp relief in the next section, where we build multiyear GDP 

projections under alternate scenarios.

Simulation Model Characteristics

Given empirical evidence that foreign exchange earnings from agriculture have macroeconomic effects, variables that affect a country’s export 

revenues—such as domestic farm production, export prices, and behindthe-border inefficiencies—likely influence its national income. We illustrate 

these relationships with a simple economic model for Malawi. In addition, 

the model framework is used to evaluate the likely role of asymmetry in the 

export-GDP relationship in constraining economic growth. 

As depicted in figure 10, the export price and the predetermined quantity 

of tobacco production influence the level of export revenues, which in turn 

contribute to GDP. A change in the export price has contemporaneous 

impacts on export revenues and GDP, as well as on the producer price of 

tobacco.

Figure 12 

Malawi’s real GDP under alternative scenarios

Source: Model results.

GDP (U.S. $1,000, real)

2005 2007 2009 2011 2013 2015 2017

1,500,000

1,700,000

1,900,000

2,100,000

2,300,000

2,500,000

2,700,000

2,900,000

Scenario I

Scenario III

Scenario II
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Changes in the producer price (due to export price movements) alter 

Malawi’s farm production of tobacco in subsequent time periods, implying 

lagged effects on GDP, in addition to the contemporaneous impacts that were 

previously mentioned. As indicated by figure 10, the framework incorporates 

relationships for the farm production of tobacco and the transmission (to 

varying degrees) of export prices to producer prices. The full model structure 

also captures the previously mentioned GDP-export linkages (symmetric and 

asymmetric).

Price Transmission

Export prices of tobacco, which are considered to be determined outside of 

the model,5 fluctuate around an increasing trend (fig. 11), and grow at an 

annual rate of 2.5 percent, by assumption in all the various scenarios.6 The 

experiments involving partial price transmission are based on statistical 

evidence suggesting an estimated elasticity of 0.55 (see appendix). 

Tobacco Production and Exports

Tobacco acreage responses are computed using area elasticities of 0.329 

and 0.951 in the short run and the long run, respectively, and are based on 

Chembezi (1991). Farm production of tobacco is the product of cropped 

area and yield. For simplicity, domestic consumption, imports, and stocks of 

tobacco are assumed to be negligible, implying that the quantity of tobacco 

exported equals farm production.

Overview of Scenarios

Every scenario considered in the model is similar in that (1) the export 

price follows the same pattern of fluctuating around an upward trend, and 

(2) we hold constant factors such as nontobacco exports, labor, and capital 

throughout the multiyear model projections. 

However, there are also key differences across scenarios. In the Reference 

scenario (Scenario I), the export-GDP relationship is symmetric. In addition, 

tobacco yield is held constant. Changes in the export price have (1) immediate impacts on export revenues, GDP, and farm prices via partial price 

transmission effects, and (2) lagged impacts on farm production of tobacco 

(via changes in cropped area), with implications for export revenues, and 

hence GDP. 

Scenario II differs from the Reference case in that the export-GDP relationship is asymmetric, but again, yield is held constant throughout the projection 

period, and export prices are partially transmitted to farmers. Scenario III 

returns to the symmetric export-GDP relationship used in the Reference case, 

while also adding insight by evaluating the impacts of rising yield. Scenario 

III also incorporates steady improvements in marketing efficiency that effectively overturn the price transmission relationship used in the Reference 

scenario and Scenario II.

In evaluating the projections, it is not the base-year levels themselves that are 

critical, but rather changes relative to the base year—as well as the relative 

differences between the various scenarios—that are relevant. The scenarios, 

5Empirical results from Koester et al. 

(2004) indicating price-taking behavior 

suggest that Malawi acts as a small 

country.

6The assumed price growth, along 

with the other components of the 

simulation model, leads to a 3.4-percent growth rate in the value of tobacco 

exports, which matches the 1970-2005 

growth rate.
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which are neither forecasts nor predictions, are meant to instruct, with the 

starting point and slope not crucial to the argument. 

Scenario I: Symmetry, With No Improvements in Yield 

and Marketing Efficiency

The export unit value fluctuates around an increasing trend (fig. 11), growing 

at 2.5 percent per annum (app. table 2) throughout the projection period (by 

assumption). With a passthrough elasticity of 0.55, rising export prices are 

not completely passed through to farmers as increasing margins dampen 

the price transmission effects—producer prices rise relatively slowly, at an 

annual rate of 1.6 percent in this experiment (app. table 2). Margins expand 

at an annual rate of 2.9 percent. 

Although tobacco yields remain constant at 0.73 metric tons (mt) per hectare 

(ha) throughout the projection period (by assumption), area planted to 

tobacco expands at 0.9 percent per year, in response to growth in farm prices. 

At 3.4 percent per year, export revenues grow faster than the unit value, due 

to increases in the quantity of production/exports and rising export prices. 

Given that the GDP-export relationship is symmetric in this experiment, 

economic growth tracks export revenues. Despite exhibiting year-to-year 

fluctuations, GDP grows at an average annual rate of 0.6 percent (fig. 12, 

app. table 2). 

Scenario II: Asymmetry, With No Improvements in Yield and Marketing 

Efficiency 

The export price continues to fluctuate around an upward trend and grows 

at an average annual rate of 2.5 percent, as before. Yield remains fixed at 

0.73 mt/ha, and price transmission is incomplete as before. An important 

difference now is that the relationship between exports and national income 

is asymmetric—the impacts on GDP are almost three times greater when 

foreign sales are falling than when they are rising. The implication is that 

upward and downward fluctuations in exports, or variability, tend to reduce 

the pace of economic expansion. Other things equal, GDP falls during a 

period of decreasing export revenues. However, suppose, for example, that 

during a period of rising exports that is assumed to follow, GDP grows relatively little. In that case, GDP does not experience a recovery when exports 

Futures Contracts

A futures contract, which is an agreement priced and entered on an 

exchange to trade a commodity (with standardized characteristics) at a 

specified future time, allows growers to reduce risks. For example, a farm 

producer may use short hedging as protection against decreases in output 

price, a practice that entails selling futures contracts at the beginning of 

or during the growing period. The grower holds the short futures position until the product is ready to be sold, and during this holding period, 

losses (gains) in the value of the output due to unexpected price changes 

tend to be offset by gains (losses) in the value of the futures position 

(Harwood et al., 1999). 
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return to (or exceed) their previous level, implying that a sustained period of 

export variability reduces economic growth. Scenario II illustrates just such a 

case—GDP now contracts at an annual rate of 0.4 percent.7

Scenario III: Symmetry, With Improvements in Yield

and Farmers’ Share

As in Scenario I, the GDP-export relationship is symmetric and the export 

price fluctuates around an increasing trend, growing at an annualized rate of 

2.5 percent. An important difference is that we now relax the previously held 

assumptions regarding marketing efficiency and yield. 

In the scenarios thus far, tobacco yields were fixed throughout the projection 

period, implying that any growth in farm output originated from area expansion rather than productivity improvements. However, at 0.73 mt/ha in 2005, 

tobacco yields in Malawi are below those of most other major producers. 

In addition, the farmers’ share of the export price in Malawi is relatively 

low (34 percent). The analysis now assumes that the farmers’ share of the 

export price rises to the 2003-2005 average level in Zimbabwe (57 percent). 

Reductions in the internal costs of transportation and distribution, as well 

as greater competition in the marketing sector, narrow the gap or margin 

between farm and export prices. Malawi’s tobacco yield also grows to the 

2003-2005 average level in Zimbabwe, i.e., 1.67 mt/ha.

In the scenario, farmers steadily increase their share of the export price 

throughout the projection period, and margins decrease by 0.8 percent 

per year. Consequently, the farm price grows at 6.5 percent, substantially 

faster than in the previous two scenarios. Moreover, the nature of the price 

transmission differs markedly from the previous scenarios: it is no longer 

an econometrically estimated parameter imposed on the model; rather, it is 

determined within the model. The simulated transmission elasticity of export 

prices to farm prices is now 82.6 percent larger during years of rising vs. 

falling export prices (1.26 vs. 0.69). 

Lower export prices are not fully transmitted to the farm price if increased 

efficiency along the marketing chain leads to increases in the farmers’ share 

of the export price. Consequently, as marketing margins contract, Malawi’s 

economy is to a degree shielded from lower international prices: A decrease 

in the export price only slightly reduces farm prices, domestic tobacco 

production, exports, and hence GDP. On the other hand, when export prices 

rise, increased efficiency along the marketing chain amplifies the benefits 

accruing to growers—meaning that farmers receive a greater portion of a 

higher export price. This leads to relatively large increases in farm prices, 

production, and exports, and therefore in GDP. As export variability inevitably occurs, the combination of margin compression—which reduces 

the gap between farm prices and export prices—and rising tobacco yields 

partially offsets the negative impact of falling export prices on Malawi’s 

GDP, while amplifying the benefits of rising export prices, generating an 

upward-ratcheting effect.

Propelled by rising farm yields and stronger price incentives to expand the 

area under tobacco cultivation, under Scenario III tobacco production and 

export revenues grow at average rates of 12.1 and 14.8 percent per year, 

7These projections are not predictions 

or forecasts, but rather scenarios that underscore the opposing economic effects 

of trend growth in export prices vs. fluctuations around the trend. Experiments 

using varying magnitudes of the growth 

trend reveal that faster growth in export 

prices relative to the degree of price 

variability has a positive effect on GDP 

growth. In addition, sensitivity analysis 

reveals that the opposing effect of price 

growth and variability is reduced when 

the differential between the elasticities 

of rising and falling export revenues is 

narrowed in the GDP model.
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respectively, leading to the fastest rate of economic growth (2.5 percent per 

year) among the three scenarios.
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Implications for Other Countries

Trade shocks influencing developing country exports of commodities such as 

tobacco, coffee, tea, cocoa, sugar, and cotton often lead to macroeconomic 

instability and poor economic performance, which reduce U.S. agricultural 

export potential to these regions. The state of the U.S. agricultural economy 

is closely tied to international trade, and developing countries, spurred by 

changing demographics and, particularly, by growing purchasing power, 

are becoming increasingly important outlets for U.S. agricultural exports. 

Continued expansion of developing country imports depends on the ability 

of those countries to achieve sustained increases in incomes and foreign 

exchange earnings to pay for imports.

This study presents its findings conditionally: If the GDP impacts of falling 

exports exceed those of rising exports in a given country, the adverse 

consequences of export volatility are exacerbated, all else equal. We do not 

attempt to generalize the statistical evidence for Malawi that suggests asymmetry. However, the issue may have relevance for other developing countries 

where economic growth and stability depend heavily on a narrow range of 

agricultural exports, particularly those with limited means to cope with risk 

exposure. 

Futures Markets and Developing Countries

Although developing countries are heavily exposed to volatility associated 

with commodity markets, the demand for risk management services tends to 

be unmet. The five largest producers among developing countries account 

for more than 75 percent of global production of cocoa, tea, rice, palm oil, 

coconut oil, groundnut meal, groundnut oil, rubber, and tin. Yet, developing 

countries in total account for less than 2 percent of the volume of futures and 

options instruments (see box, “Futures Contracts”), a remarkably small fraction given that these countries produce a large share of the physical output of 

commodities. 

Developing country participation in commodity futures markets is lacking, 

partly because, for certain commodities that are important to developing 

countries (such as rice and tea), no liquid exchanges exist. In addition, 

the available instruments in risk management markets are not necessarily 

consistent with developing country risk management needs, which often 

tend to be for smaller contract sizes, longer maturities, or a different quality 

of commodities, or for contracts that are not actively traded in international 

markets (World Bank, 1999). 

Despite the fact that futures markets offer substantial leveraging potential, 

traders require extremely liquid financial reserves in order to maintain futures 

positions. This obstacle is compounded by the fact that traders in the developing country cannot use domestic currency to meet margin calls, and instead 

must—for instance—utilize dollars or interest-bearing U.S. Government 

securities. A further complication stems from risks associated with exchange 

rate fluctuations—when traders in a developing country hold U.S. futures 

contracts, they are, in effect, speculating on the value of their domestic 

currency relative to dollars (Thompson, 1985). 
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The trader may attempt to manage exchange rate risk by concurrently 

hedging in foreign exchange markets,8 at the cost of requiring added liquidity 

on the part of the developing country trader (Thompson, 1985). The need to 

hold liquid financial reserves may exacerbate problems of foreign exchange 

scarcity. Moreover, there is also an opportunity cost of tying up foreign 

exchange for hedging purposes, in that it likely precludes its use in acquiring 

productivity-enhancing technology, which, as discussed earlier, may in itself 

help a country cope with volatility.

Price Transmission and Marketing Inefficiency

The empirical findings for Malawi that illustrate the role of productivity in 

buffering the impacts of export variability have broad application, given 

widespread inefficiencies in developing country marketing sectors. Useful 

information on the market environment in developing countries may be 

obtained from proxy indicators (Townsend, 1999)—for example, the transmission of changes in exchange rates to producer prices. The use of proxy 

indicators is a pragmatic approach, since attempts to characterize the market 

environment in developing countries are plagued by measurement problems.

Cross-country differences in transmission elasticities indicate differences 

in market structure, product characteristics, competition, and trade barriers 

(Menon, 1995). Empirical evidence from a wide cross-section of countries 

indicates that the transmission to producer prices of changes in international 

prices and exchange rates, while not altogether absent, tends to be slow and 

incomplete in developing countries (Liefert and Persaud, 2009). 

Barriers to Price Transmission

Historically, policy interventions were considered key barriers to price transmission. However, economic reforms, along with shifts toward substantially 

reduced government intervention in developing country agricultural markets, 

have enhanced the relative importance of other possible causes of incomplete 

transmission. These causes include, in particular, poor infrastructure and 

other market imperfections (Liefert and Persaud, 2009).

Although there are differences across countries, marketing of most major 

export and food commodities tended to be highly regulated by developing 

country governments throughout the 1960s, 1970s, and part of the 1980s 

(Barrett and Mutambatsere, 2008). In response to price variability, governments in developing countries created institutional arrangements that 

attempted to insulate producers and consumers from market price fluctuations through price controls or subsidies, or to replace the price discovery by 

markets with a planned and regulated system of prices (World Bank, 1999).

In the long run, price stabilization schemes are expensive to maintain: sharp 

fluctuations in currency values or other economic events may require large 

transfers of resources in consecutive years of low prices in order to meet 

administratively set benchmarks. Consequently, programs that attempted to 

separate domestic commodity prices from international prices were often 

unsustainable in the face of depleted stabilization reserves, limited borrowing 

capacity, and generally unhedged exposure to price risks. Lack of sustainability was a key factor in the unilateral abandonment of food marketing 

8This assumes that there is an active 

forward market for the particular developing country’s currency. If no forward 

market exists, the trader will have to 

resort to a (possibly imperfect) crosshedge in a different currency, which may 

be of limited value in reducing exchange 

rate risk.
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agencies and the once-ubiquitous marketing boards for export crops, such as 

coffee and cocoa (World Bank, 1999). Economic reforms and shifts toward 

substantially reduced government intervention in developing country agricultural markets in the 1980s and 1990s led to reduced rates of indirect and 

direct agricultural taxation. Nevertheless, a disaggregated view of net taxation by exportable and import-competing products shows that exportables are 

still heavily taxed in many developing countries (World Bank, 2007). 

Reform efforts were complicated by the creation of voids resulting from the 

withdrawal of government from agricultural markets. Farmers experienced 

reduced access to input financing and increased input prices, as the private 

sector often failed to replace parastatals in core input marketing activities 

due to underdeveloped communications, power, and transport infrastructure, along with credit constraints. Dismantling state-run monopolies and 

monopsonies did not automatically lead to efficient, workably competitive marketing industries. Even after removing legal and policy barriers, 

the private sector has played only a limited role in meeting the demand for 

motorized transportation in rural markets as a consequence of high sunk 

costs, as well as economies of scale (Barrett and Mutambatsere, 2008). In 

addition, most forms of infrastructure have characteristics of a public good. 

For example, given the likelihood of nonpaying traffic on roads, it is difficult 

to recoup investments in road building. If left solely to market forces, there 

would be suboptimal provision of infrastructure, implying a role for government in encouraging and funding investments in infrastructure (Coyle, 2005).

Price Instability and Incomplete Price Transmission

Slow or incomplete transmission of international prices to domestic 

markets, whether a consequence of government intervention or deficiencies 

in marketing sectors, may worsen price instability. For example, if lower 

international prices are not fully transmitted to domestic prices, decreases 

in world supply and increases in world demand—which would otherwise 

occur—will not take place, making international price reductions more acute 

and prolonged (Quiroz and Soto, 1995). Incomplete or slow price transmission in a small country would not affect world prices, but a group of 

exporting countries with a similar characteristic of low transmission could 

have global impacts. Inefficient marketing sectors may also amplify international price volatility, in much the same way as government interventions 

aimed at separating domestic commodity prices from international prices.

Industry Consolidation and Infrastructure

Vertical integration of supply chain activities, a hallmark of efficient food 

supply chains in developed economies, may improve marketing efficiency 

in low-income countries by reducing the number of middlemen along the 

marketing chain and collapsing margins (Landes et al., 2004). By operating 

on a higher scale of production, a smaller number of larger marketing firms 

could spread out lumpy, indivisible fixed costs and overhead over a larger 

volume of output, leading to lower unit costs. These changes in market structure would tend to place greater demands on developing country infrastructure, since it may be necessary to move final products and inputs over greater 

distances. Thus, improved infrastructure plays a role in the emergence of 

more efficient market structures.
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Sharp reductions in marketing margins potentially generate a combination of higher prices for farmers and lower prices for end users, even when 

a relatively small number of firms play a large role in setting prices due to 

shifts toward greater industry concentration (Landes et al., 2004). Moreover, 

in the event of industry consolidation, agribusiness firms may be willing to 

pay higher farm prices if those higher prices enable them to acquire larger 

supplies of raw agricultural materials, achieve higher rates of capacity utilization, and lower costs overall (Persaud and Landes, 2006; Persaud and 

Tweeten, 2002). Improved transportation infrastructure within a country 

facilitates competition and improves resource allocation (Coyle, 2005), 

encouraging the movement of food products and services from regions with 

lower prices to more remote, higher-priced areas.

Improvements in marketing efficiency, leading to a decreasing trend in 

marketing margins, markedly alters the nature of the price transmission 

effects from incomplete passthrough to a favorable form of asymmetric 

transmission. As demonstrated in the case of Malawi, a decreasing trend in 

the margin that separates farm and export prices allows farmers to steadily 

increase their share of the export price, thus buffering Malawi from falling 

export prices while amplifying the benefits of rising export prices. Countries 

that experience productivity gains are more likely to preserve the profitability 

of their export industries in the face of adverse price shocks, while those that 

do not achieve productivity growth tend to experience losses in market share 

and greater difficulty in coping with volatility.
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Conclusions

Developing countries often depend on a limited number of cash crop exports. 

Trade shocks and associated macroeconomic fluctuations may constrain 

income growth in such countries. Adverse effects of price volatility are, in 

some respects, a consequence of underdevelopment and low productivity. 

In the absence of offsetting improvements in productivity, a country that 

depends heavily on commodity exports is unlikely to experience persistent 

economic growth because its economy would be closely tied to booms and 

busts in world commodity markets. Future trends in economic growth are 

likely to be influenced by the ability to cope with volatility through productivity gains and improved management of export revenues. Malawi, an archetypal country with a highly concentrated export portfolio, illustrates these 

issues surrounding trade and economic growth. 

Statistical evidence suggests that both increases and decreases in tobacco 

exports affect Malawi’s economy, though not to the same degree. 

Specifically, the negative impacts on GDP of decreasing tobacco exports far 

exceed the positive effects of rising exports. Model-based simulations reveal 

the role of this asymmetry in reducing Malawi’s economic growth. There is 

an inverse relationship between export variability and GDP because Malawi 

bears the full brunt of contractions in its exports, while recovering little 

during a subsequent period of rising exports. In other words, fluctuations in 

exports have a downward ratcheting effect on Malawi’s GDP. 

Although statistical evidence for Malawi clearly indicates asymmetry, it is 

instructive to model and compare different scenarios involving asymmetric 

vs. symmetric GDP-export linkages, rather than predicting or forecasting 

the continuation of relationships found in historical data. Alternate scenarios 

demonstrate that improvements in farm yields and marketing efficiency can 

mitigate the adverse effects of export variability. Growth in yields would 

require improvements in the availability and quality of resources and inputs, 

as well as in human capital. Greater marketing efficiency may be achieved by 

reducing internal costs of transportation and distribution. The results show 

that as export variability occurs, the combination of margin compression—

which reduces the gap between farm prices and export prices—and rising 

yields partially offsets the negative impact of falling export prices on the 

country’s GDP, while amplifying the benefits of rising export prices, generating an upward-ratcheting effect.
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Appendix

Data Sources, Model Parameters, and 

Simulation Results

The underlying conceptual framework for empirically investigating the relationship between exports and economic growth is based upon an aggregate 

production function (APF) model. The APF model posits that, along with 

conventional inputs (capital and labor), unconventional inputs (exports and 

other variables) may be included in the model to capture their contributions to economic growth. This approach has been used by Dawson (2005), 

Al-Yousif (1997), Feder (1983), Fosu (1990), and Ukpolo (1994). 

The APF can be expressed as follows:

(A1) Yt = AtKa

t

Lb

t

 ,

where Yt is real aggregate output, Kt and Lt are capital and labor inputs, 

respectively, and At is the level of total factor productivity. Exports can 

increase total factor productivity by expanding knowledge transfers, by 

improving access to better technologies, inputs, and intermediate goods, 

by permitting a country to borrow external capital at more favorable terms, 

and by allowing an economy to realize economies of scale and scope. 

Accordingly, At can be expressed as a function of exports, Xt, and other 

exogenous factors, C:

(A2) At = g(Xt, C) = Xr

t

C .

Next, equation A2 is combined with equation A1 to obtain

(A3) Yt = CKa

t

Lb

t

Xr

t

 ,

where a, b, and r are the elasticities of output with respect to capital, labor, 

and exports, respectively.

Taking natural logs, ln, of both sides of equation A3 results in the following 

function, which is linear in the parameters:

(A4) lnYt = c + alnKt + blnLt + rlnXt + vt ,

in which all coefficients are constant elasticities, c is a constant parameter, 

and vt is the usual error term, which reflects the influence of all other factors. 

We take the analysis a step further by disaggregating the export value variable. Specifically, we decompose exports into tobacco (TX) vs. nontobacco 

(NTX) components, yielding, 

(A5) lnYt = c + alnKt + blnLt + dlnTXt + flnNTXt + vt ,

where d and f are elasticities of output with respect to tobacco and nontobacco exports, respectively. Although tobacco comprises the majority of 

Malawi’s exports, we test the hypothesis that nontobacco exports also positively impact GDP growth. Note that it is not necessarily the case that nontobacco exports contribute to economic growth to the same degree as tobacco 

exports. 
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Moreover, it is not necessarily the case that a given increase in exports has 

the same magnitude of impact as an equal decrease in exports. Thus, we 

partition the value of exports into rising and falling components and estimate 

a more flexible model specification that allows for differential impacts of 

increasing vs. decreasing exports:

(A6) lnYt = c + alnKt + blnLt + dRlnTXR

t

 + dFlnTXF

t

 + fRlnNTXR

t

 + 

fFlnNTXF

t

 + vt ,

where dR is the elasticity of rising tobacco exports (TXR

t

), dF is the elasticity 

of decreasing tobacco exports (TXF

t

), fR is the elasticity of rising nontobacco 

exports (NTXR

t

), and fF is the elasticity of decreasing nontobacco exports 

Appendix figure 1 

Plot of cumulative sum of recursive residuals

Source: Model results.

Percent

1979 81 83 85 87 89 91 93 95 97 99 01 03

-20

-15

-10

-5

0

5

10

15

20

Note: The straight lines represent critical bounds at 5-percent significance levels.

Appendix figure 2 

Plot of cumulative sum of squares of recursive residuals

Source: Model results.

Percent

Note: The straight lines represent critical bounds at 5-percent significance levels.

1979 81 83 85 87 89 91 93 95 97 99 01 03

-0.4

-0.2

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6
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(NTXF

t

). For tobacco exports, the null hypothesis of symmetry is dR = dF vs. 

the alternative of asymmetry, dR ≠ dF. Similarly, for nontobacco exports, the 

null hypothesis of symmetry is fR = fF vs. the alternative of asymmetry, fR ≠

f F. 

Data and Econometric Results

Using annual data, real national output (Yt) is approximated by real GDP, 

and the inflation index is the GDP deflator, both of which are from the World 

Bank World Development Indicators (World Bank, 2009). Researchers 

usually use the ratio of investment to output in place of Kt, since reliable estimates of actual capital stocks are not available (see for example, Al-Yousif, 

1997, and Roy and Van den Berg, 2000). We follow a similar approach by 

using gross capital formation as a share (percent) of GDP, obtained from 

WDI, to proxy capital inputs (Kt). The value of Malawi’s tobacco and nontobacco exports (computed as the value of total merchandise exports minus 

tobacco) is based on data from FAOSTAT (FAO, 2007). Labor force data 

obtained from WDI are only available beginning in 1980, rather than for the 

entire sample (1970-2003). We instead use a trend because it may provide 

a reasonable representation of variations in the labor force series, as these 

two variables are highly correlated (0.99) over the period beginning in 1980. 

Accordingly, we modify equation A6 by replacing Lt with TREND:

(A7) lnYt = c + aKt + bTREND + dRlnTXR

t

 + dFlnTXF

t

 + fRlnNTXR

t

 + 

fFlnNTXF

t

 + vt .

This approach allows us to estimate the model over a longer period (1970-

2003). 

Before proceeding to the estimation of the aggregate production function, we 

examine the time series properties of the data. Based on the Phillips-Perron 

test, all variables are either stationary or trend stationary at a 5-percent significance level or lower. For example, for the logs of tobacco and nontobacco 

exports, the null hypothesis of a unit root is rejected based on P-values of 

0.0477 and 0.0015, respectively (intercept, no trend). For capital and the log 

of real GDP, we reject the null hypothesis of a unit root (intercept, trend), as 

the P-values are 0.0064 and 0.0197, respectively. The explicit introduction of 

the trend variable in equation A7, used to capture variations in labor, has the 

effect of detrending, i.e., removing the influence of the trend. This approach 

is acceptable since the unit root tests imply stationarity about a deterministic 

trend, in which case variables can be made stationary by including a time 

trend in the regression (Gujarati, 1995). 

Empirical models used to investigate asymmetries based on the Houck 

(1977) method (a modification of Wolffram, 1971) have been criticized by 

von Cramon-Taubadel and Loy (1996) because these models have been used 

without adequately analyzing the time series property of the data. However, 

this criticism does not apply in our case, since the variables in question are 

either stationary or trend stationary, rather than being I(1) and co-integrated. 

Hence, we utilize the Wolffram specification as an appropriate method of 

segmenting variables into rising and falling components, so that we may test 

for asymmetry.
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Variables (ln Yt is the dependent variable) Coefficient P-value

ln TXR

t 0.090477 [0.0368]

ln TXF

t -0.251152 [0.0000]

ln NTXt 0.033819 [0.1772]

TREND 0.0407 [0.0000]

Kt -0.000602 [0.7650]

Constant -65.4482 [0.0000]

Goodness of fit and diagnostics Statistic P-value

R2 0.986459

R2

 adj 0.984041

σ 0.040354

χ2 AUTO (1) 0.057870 [0.810]

χ2 RESET (1) 0.092804 [0.761]

χ2 NORM (2) 0.011088 [0.994]

χ2 HETERO (1) 0.467780 [0.494]

Appendix table 1

Estimation results for GDP model

σ is the standard error of the regression; χ2Auto(1) is the Lagrange Multiplier test 

for autocorrelation; χ2RESET(1) is Ramsey's RESET test using the square of the fitted values; 

χ2NORM(2) is based on a test of skewness and kurtosis of residuals; χ2HETERO(1) based on 

the regression of squared residuals on squared fitted values. 

Source: Authors’ estimates. 

Appendix table 2

Model results

 Scenario III

Scenario I Scenario II Symmetry, growth 

Reference Asymmetry in yield & farmers 

Base Terminal Growth Terminal Growth Terminal Growth

Percent Percent Percent

Area (ha) 150,000 169,448 0.9 169,448 0.9 290,310 5.2

Yield (mt/ha) 0.73 0.73 0 0.73 0 1.67 6.5

Production (mt) 109,995 124,256 0.9 124,256 0.9 484,820 12.1

Domestic use (mt) 0 0 0 0

Export quantity (mt) 109,995 124,256 0.9 124,256 0.9 484,820 12.1

Export price, real ($/mt) 2,448 3,353 2.5 3,353 2.5 3,353 2.5

Export value, real ($1,000) 269,241 416,641 3.4 416,641 3.4 1,625,643 14.8

Producer price, real ($/mt) 842 1,032 1.6 1,032 1.6 1,911 6.5

Farmers’ share of export price (%) 34 31 -0.9 31 -0.9 57 4.0

Margin, real ($/mt) 1,606 2,321 2.9 2,321 2.9 1,442 -0.8

GDP, real ($1,000) 1,985,755 2,146,812 0.6 1,886,111 -0.4 2,737,790 2.5

Notes: Variables expressed in real terms are in constant 2000 dollars.

 Growth refers to the annual rate of growth from the base year to the terminal year.

Source: Model results.
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Asymmetric GDP-Export Linkage 

The regression results for equation A7 (not shown, to conserve space) 

indicate that the elasticities of nontobacco exports, whether increasing or 

decreasing, are statistically insignificant at the 5-percent level, based on 

P-values of 0.1890 and 0.3343, respectively. In addition, the Wald test of 

coefficient restrictions does not indicate a rejection of the null hypothesis of 

symmetry (F-statistic(1,27) = 0.137, P-value = 0.714) in the case of nontobacco exports. In contrast, the results for increasing and decreasing tobacco 

exports are both significantly different from zero, with P-values of 0.0498 

and 0.0001, respectively. Moreover, for tobacco exports we reject the null 

hypothesis of symmetry (F-statistic(1,27) = 9.100, P-value = 0.0055). Rather 

than retaining the specification that utilizes the rising and falling phases of 

both tobacco and nontobacco exports, we select a more parsimonious model:

(A8) lnYt = c + aKt + bTREND + dRlnTXR

t

 + dFlnTXF

t

 + flnNTXt + vt ,

in which only tobacco exports are partitioned into increasing and decreasing 

components. In other words, the final specification given by equation A8 

does not omit nontobacco exports—we in fact include this variable, but 

without segmenting it into rising and falling components. 

Appendix table 3

 Elasticities and parameters used in Malawi simulation model

GDP-Tobacco export relationship

Symmetric Elasticity

 Tobacco 0.18

Asymmetric Elasticity

 Tobacco (rising) 0.09

 Tobacco (falling) -0.25

Price transmission (export to farm price) Elasticity

Export price (Scenarios I, II) 0.55

Export price (Scenarios III) endogenous

Tobacco supply relationship

Area Elasticity

 Lagged dependent variable 0.654

 Farm price 0.329

 Growth 

Yield Parameter (per year)

 Trend (Scenarios I, II) 0%

 Trend (Scenarios III) 6.5%

Note: The simulation model holds constant other variables such as labor, capital, and 

nontobacco exports. 

Sources: Elasticities for GDP-tobacco export relationship are authors’ estimates and are statistically significant at the 5-percent level. The price transmission elasticities used in Scenarios I and 

II are authors’ estimates and are statistically significant at the 5-percent level. For Scenario III, 

price transmission effects are determined within the model. Area elasticities are from Chembezi 

(1991) and are statistically significant at the 5-percent level. In Scenarios I and II, yield is held 

constant throughout the multiyear projections, by assumption. In Scenario III, yield grows 6.5 

percent per year throughout the multiyear projections, by assumption.