The policy discussion in Malawi has been cautionary against rapid urbanization and its adverse effects such as the urbanization of poverty. Malawi being predominantly rural, national development policies have naturally focused on rural development as an end in itself but also as a means to reduce rural to urban migration by raising agricultural productivity and value-addition and creating markets and job opportunities in rural villages.

For instance, the Malawi Growth and Development Strategy (MGDS) states that “The long-term goal is to develop rural growth centers… and reduce rural-urban migration” (GOM 2006). Likewise, the current MGDS-II (soon to be replaced by MDGS-III) demonstrates a concern with urbanization by introducing the notion of a Green Belt with an aim to “reduce ruralurban migration” as well as population policies aimed at “addressing the vulnerabilities caused by… migration and rapid urbanization” (GOM 2011).

Some of these concerns appear to have been propelled by the projection of high urbanization rate – however, Malawi is at an early stage of urbanization and is urbanizing at a moderate rate. Unlike some alarmist projections of rapid urbanization, Malawi is urbanizing at a rate of 3.7-3.9 percent per year for the period of 1998-2008, more slowly than other African countries. Around 16 percent of Malawi’s population (2.8 million) lived in urban areas for the same period. Rural to urban migration has been the main driver of urbanization in Malawi but the net migration inflow, including both rural-to-urban and urban-to-rural migrants, stands only at 14,000 working-age migrants moving to cities and towns annually (2006-2010), which explains the moderate rate of urban population growth.

At the current rate and pace of urbanization, Malawi is indeed well-positioned to plan ahead to maximize the benefits of urban agglomeration, while addressing the congestion effects. The Malawi Urbanization Review examines this proposition by analyzing the past and future contribution of cities and towns to national development and by measuring this up against the current institutional and financial capacity of local governments to manage urbanization. Analyses presented in this report are particularly timely as Malawi is planning for the coming half decade through the Malawi Growth and Development Strategy (MGDS) III (2016-2020).

The Contribution of Urbanization to National Growth and Development

The GDP and employment patterns in the past 15 years (1998-2013) indicate that Malawi’s economy is undergoing a positive structural change. In the past decade and a half (1998-2013), Malawi experienced an annual GDP growth rate of 3.9 percent on average. Industry was the major driver of economic growth, mainly due to expansion in manufacturing and construction at an annual growth rate of 5.4 percent, as compared to three percent growth for agriculture. Sectoral patterns of employment demonstrates a clear indication of “positive structural change” – a gradual shift out of agriculture and the movement of labor from low to high productivity sectors. Employment in the service sectors grew rapidly at almost eight percent per year for 1998-2013, increasing by 17 percentage points. In comparison, employment in agriculture declined in absolute terms by 20 percentage points, despite rural population growth.

However, structural transformation in Malawi is not driven by urbanization, as conventionally known, since most of the expansion of Malawi’s non-farm sector occurred in rural areas. In Malawi, rural and urban economies do not neatly correspond to agriculture and non-agriculture. Almost a third of rural jobs are in non-farm activities, while one in every six urban jobs are in agriculture. The composition of non-agricultural sector differs between rural and urban areas, demonstrating production and consumption linkages between the two. Among services that dominate non-farm employment in Malawi, trade activities (retail and wholesale trade as well as restaurants) are important in rural areas, where they account for about half of all non-farm jobs. In contrast, a greater proportion of urban nonfarm jobs are in finance, business services and public administration. Accordingly, urban centers become net importers of agricultural and food products from rural areas, while exporting transport, finance and business services to rural areas.

At the same time, the urban economy demonstrated a potential of making a greater contribution to the national development, by growing faster than the overall economy. Although data constraints make it hard to gauge the precise contribution of cities and towns to national growth, Malawi’s four cities form the economic core of the national economy, with their contribution to national GDP (33%) far larger than their population share (13%). In comparison, rural areas contain 85 percent of Malawi’s population, but account for only 62 percent of national GDP. Secondary towns contain about three percent of the population, but contribute six percent to national GDP.

There also exist complex but strong linkages between rural and urban economies through production, consumption and migration channels, which can be further reinforced in support of national growth and development. Agriculture is heavily concentrated in rural areas, while industrial and service sectors that are most important in cities and towns. This production pattern defines rural-urban consumption linkages whereby urban centers import most of their agricultural and food products from rural areas, while exporting services to rural areas, such as transport, finance and business services. These strong rural-urban linkages need to be carefully factored in the analysis of future urbanization trends and their implication for public investment options.

The core issue for policy debate is not about rural versus urban but about the constraints and opportunities of urbanization for national development, including both rural and urban areas. The report presents four scenarios of urbanization with different impact on national growth for the period of 2010-2030, depending on modalities of public investments:

(i) Baseline “business-as-usual” scenario (with urbanization rate of 16.14% in 2030);

(ii) Faster urbanization scenario (over 21% urbanization rate by 2030) – with no change in the spatial allocation of public investments;

(iii) Urban investment scenario – faster urbanization with increased urban investment, but at the expense of rural investment; and

(iv) Win-win investment scenario – faster urbanization and increased urban investment paid for by raising taxes on urban households (therefore the baseline level of rural investment).

If urbanization continues at the current rate, it is anticipated that major cities will grow further, generating national growth gains (Baseline scenario). At an accelerated rate, both benefits and costs of urbanization would increase, with structural transformation taking place at the cost of urbanizing poverty, unless further capital investment is made to reduce congestion effects (Faster urbanization scenario). In order to address congestion effects associated with faster urbanization, investment needs to increase in line with the growing demands for infrastructure and services in urban areas. With a fixed amount of public resources, this means that more investment in urban areas would reduce the level of investment in rural areas, thereby lowering agricultural productivity and hurting the rural poor who are mostly smallholder farmers (Urban investment scenario). If the food price increases due to low agricultural output, the urban poor will also be negatively affected as net consumer of agricultural products. A win-win solution will be found when urbanization can be financed by increasing the urban tax base and the level of public investment in rural areas is maintained (Win-win Investment Scenario).

Unlike the prevailing concern with the prospect of rapid urbanization and its adverse effects, urbanization can play a positive role in Malawi’s national growth and development. Urbanization does pose significant challenges for housing, sanitation and other services – challenges that were well recognized in the previous MGDS. However, a careful analysis of past growth patterns demonstrates that even small increases in the pace of urbanization and level of urban investment could greatly enhance Malawi’s long-term economic prospects by accelerating growth and bringing more meaningful structural change. Increased investment in urban areas, which comes at the cost of rural agricultural investment, increased food prices and urban poverty, can be self-financing if urban households/firms are taxed to pay for urban development.