Dynamics of Malawi’s Trade Flows: A Gravity Model Approach

The paper attempts to examine Malawi’s trade with her major trading partners using an econometric gravity model. In the model, the bilateral trade is a linear function of economic size of the country, geographical distance, and exchange rate volatility, among other factors. Preliminary results show that the fixed effects model is favourable over the random effects gravity model. Specifically, Malawi’s bilateral trade is positively determined by the size of the economies (GDP of the importing country) and similar membership to regional integration agreement. On the other hand, transportation cost, proxied by distance, is found to have a negative influence on Malawi’s trade. Likewise, exchange rate volatility depresses Malawi’s bilateral trade whereas regional economic groupings have had insignificant effect on the flow of bilateral trade. The implications of these results are many. First, all kinds of barriers to trade must be liberalized to a greater extent to enhance Malawi’s trade. One of the main problems of bilateral trade in Africa is transport infrastructure network. Improvement in infrastructure may be a necessary step for successful trade flows within Africa. Second, Malawi can do better if the country trades more with its neighbours. Third, greater stability in the international exchange system would help increase prospects for trade and investments for Southern African countries. Finally, the flow of trade in regional blocks is constrained by problems of compensation issues, overlapping membership, policy harmonization and poor private sector participation