Climate Change Impact on Business Activity in Malawi

Introduction

Climate change is currently the world’s most prominent problem that affects almost every sector of the economy (Palmer 1965). It highly affects sustainability of business activities today (Colander 2008). Balancing economic growth and environmental sustainability has been a great challenged for all governments, businesses and all the stakeholders across the globe (Palmer 1965). Climatic changes have adverse impacts on operational costs as well as the cost efficiencies and effectiveness in the long term (Harris, McGuigan and Moyer 2001).

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Impact of Climate Change on Business Activity in Malawi

According to the Network of International Development Organizations in Scotland (2009) Malawi has experienced adverse climatic effects over the last several decades which have included intense rainfall which have caused riverine floods and flash floods as well as seasonal droughts. These have impacted negatively on the sustainable livelihoods of its rural community as well as the country’s economy (Network of International Development Organizations in Scotland 2009).

The most affected sectors of the economy include the agricultural, health, energy, fisheries and wildlife, water and forestry sectors (Pauw, Van Seventer and Thurlow 2010). Drought and floods have disrupted food production in many districts in the country as well as other agricultural export crops (Network of International Development Organisations in Scotland 2009). Livestock keeping has also been affected (Pauw, Van Seventer and Thurlow 2010). According to African Economic Outlook which is a network of research centers in Africa the country’s citizens have suffered from hunger and malnutrition occasionally (African Economic Outlook 2010).

Such climatic changes also come with other diseases such as malaria, cholera and many others It has also led to the unreliable water levels experienced in the rivers like River Shire which is the primary source of hydro-electric power in the country (African Economic Outlook 2010). These impacts negatively on energy production, water for industrial use as well as for irrigation (Network of International Development Organisations in Scotland 2009).

Decrease in biodiversity has negative reverse implications on other sectors of the economy such as animal reproduction, tourism, agriculture among other sectors of the economy (Van der Wal 2008, p 9). Floods affect crop and livestock production and in such areas, farmers are normally forced to plant twice due to the destruction caused by floods (African Economic Outlook 2010).

The agricultural sector is one of the key economic sectors in Malawi’s economy (African Economic Outlook, 2010). This is because it plays a very important role in Malawi’s economy by influencing the significant macroeconomic factors such as growth in economy, employment rates, and economic inflation as well as microeconomic factors such as changes in economic policies like changes in taxation rates and market mechanisms (Colander 2008 and; Eaton and Douglas 2002)

Contribution of agriculture to the economy of Malawi

Malawi is still a developing country in Africa. According to the US Department of State (2010) Malawi realised a GDP of $2.92 billion in 2008 and experiences an annual GDP growth of about 9.7% and an average inflation rate of about 8.6%. In 2008, the country earned about $995.6 million from its exports but spent about $1.654 billion on imports mainly on food, consumer goods, semi-manufactures and petroleum (US Department of State 2010). Its agricultural export mainly includes tea, tobacco, coffee, wood products and sugar. Smallholder farmers who are the majority farmers of about 90% of the population also practice subsistence farming which includes maize, beans, cassava, rice, peanuts among many others (US Department of State 2010).

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For the rural population in Malawi, they derive nearly 63.7% of their entire income from the agriculture sector (US Department of State 2010). It also contributes greatly to the employment sector of the country since it provides about 87% of direct or indirect employment to the country’s population (US Department of State 2010). Declining poverty levels from 52.4% to 40% between 2005 and 2009 are strong indicators of the country’s growth and development (National Statistical Office 2009).

Revenue collection has also improved tremendously (National Statistical Office 2009). This has been made possible by the tax reforms and the expansion of Tax Payers Unit (African Economic Outlook 2010). However, foreign reserves fell to about 0.6% in 2009 due to the serious forex shortages and import demand backlogs (African Economic Outlook 2010).

Agricultural vulnerability

Malawi has experienced severe climatic events lately, ranging from droughts to floods and this has caused variations in planting dates in each year (State of Environmental Report for Malawi 1998). These climatic variations have caused more of negative impacts than positive impacts on the agricultural, wildlife and fisheries, forestry, water and other sectors of the economy (State of Environmental Report for Malawi 1998).

Other sectors which directly depend on agricultural raw materials like food manufacturing industries and agro-industries have been drastically affected (State of Environmental Report for Malawi 1998). This in turn leads to low income to smallholders which in turn affects the demand for agricultural goods and inputs (United Nations Conference Centre 2010).

Considering that manufacturing industries that rely on agricultural raw materials now have only one alternative, which is to import most of their raw materials; it implies that the country earns less foreign exchange from its trade than it spends on its imports from the international community and therefore less gross domestic product is realized (United Nations Conference Centre 2010).

Impacts of Climatic Changes on the Agricultural Sector

According to the State of Environmental Report for Malawi (1998) Malawi’s economy depends on rain-fed agricultural production. Therefore adverse climatic-rainfall variability such as floods or serious droughts in the country has serious impacts on the economy of the country (State of Environmental Report for Malawi 1998).

According to this report, the variations in the weather patterns experienced in this country cause significant impacts on agricultural production and development since the country has limited capacity to invest in modern technologies and innovations that could help increase productivity and profit. Since most rural people in Malawi depend on subsistence farming, such rainfall unreliability affects leads to losses in incomes and thus increased vulnerability to food insecurity and poverty (State of Environmental Report for Malawi 1998)

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Malawi’s agricultural sector accounts for a about 80% of the country’s total exports (US Department of State 2010). However, the foreign exchange earnings are highly vulnerable to adverse climatic changes such as drought and floods (US Department of State 2010). Such impacts strains the government’s budget since such climatic changes causes reductions in tax revenue collections due to lower corporate and personal earnings (Pellinga, Özerdemb and Barakatb 2002). Droughts and floods also increase vulnerability of its citizens to environmental hazards which in turn increases the poverty levels (Ministry of Agriculture and Food Security 2007).

Thus it increases the government’s expenditure in relief and emergency programs (Ministry of Agriculture and Food Security 2007). It also has cost-push effects on inflation since it leads to increased food prices (Thurlow, Diao and. McCool 2008). Inflation has great implications on food security of the country (Ministry of Agriculture and Food Security 2007). For example, the food prices in Malawi increased significantly after the 1991/92 drought (State of Environmental Report for Malawi 1998).

The changes in the global climatic conditions have limited the production possibilities in various sectors of the economy; with the most affected being the agricultural sector (Pellinga, Özerdemb and Barakatb 2002). According to Carretera International Maize and Wheat Improvement Center which is a non-profit organization responsible for research and training on improvements on maize and wheat productivity, rainfall unreliability and droughts today dictates the crop varieties that farmers grow and the crop varieties that seed companies produce (Carretera International Maize and Wheat Improvement Center 2010).

Farmers and seed companies have been forced to shift to drought resistant crop varieties (Ngozo 2010). Seed companies have changed their business models so as to keep up with the changing climatic conditions (Neondo 2009). According to Carretera International Maize and Wheat Improvement Center (2010) and: Carretera International Maize and Wheat Improvement Center (1995) some of the drought resistant maize varieties include ZM 309 and ZM 523 which are drought resistant species and have the advantage of maturing fast.

Floods and droughts also dictate the location of industries within the country (Ngozo 2010). Areas adversely affected by floods such as Chikhwawa District in the Southern Malawi, discourage location of industries due to the risks involved during the floods (Ngozo 2010). Most industries therefore tend to locate in towns particularly in the capital, Lilongwe (Ngozo 2010).

This means that manufacturing companies which depend on agricultural raw materials produced in far away regions of the country have to incur greater expenses in transport cost (Colander 2008). Smallholder farmers who sell their produce to these companies also incur a lot of expenses especially when they have to transport their produce to factories using their own means (Eaton, Eaton and Douglas 2002). This increases the cost of production on both the farmers and the manufacturers (Eaton, Eaton and Douglas 2002).

Infrastructural constraint is another major problem posed by floods (State of Environmental Report for Malawi 2010). This makes the existing trade uneconomical (Pellinga, Özerdemb and Barakatb 2002). Poor transport and infrastructure causes serious strains in the market, industry as well as trade; and it also increases production cost (United Nations Conference Centre 2010). Droughts reduce water availability by reducing the water levels in the lakes and rivers within the country, thus industries which consume large volumes of water during processing such as agro-processing industries are at greater risks (United Nations Environmental Programmes 2008, p 12).

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Climatic changes have also led to increase in prices on important industrial and agricultural inputs due to increase in demand for such commodities economies (African Economic Outlook 2010). This has in turn increased the cost of input of agricultural products and agricultural related products (Bade and Parkin, 2001). This is a major factor that causes the inflation being experienced in this country (Pellinga, Özerdemb and Barakatb 2002).

According to African Economic Outlook (2010) inflation levels in the country increased by about 0.3% between the years 2009 and 2010. Such levels of inflation have weakened the Malawian kwacha against the US dollar and currencies of other strong economies (African Economic Outlook 2010). This means that Malawi can not compete favorably in the world trade (African Economic Outlook 2010).

Environmental hazards such as floods and droughts cause vulnerabilities to hunger, health care problems and poverty as well as destruction of property (Jones and Olken 2010). This has made the Malawian government to focus its budget on mitigating the impacts of these hazards and hazard related problems (Ministry of Agriculture and Food Security 2007). The government and other stakeholders such as Non-Governmental Organizations and the business community have to develop the infrastructure that is destroyed by the floods (Jones and Olken 2010).

This burdens the government’s budget and shifts the government’s efforts away from investing in modern technologies and innovations meant to improve its key sectors of the economy (Ministry of Agriculture and Food Security 2007). This is a major reason as to why the country’s capacity to invest in modern technologies of agriculture and other sector of production are limited (Pauw, Van Seventer and Thurlow 2010).

Climatic change has also affected the forestry industries (Network of International Development Organisations in Scotland 2009). Droughts and floods destroy plant trees meant to replace the cut trees. This implies that wood industry is estimated to decline in the near future by a great percentage (Network of International Development Organisations in Scotland 2009). Increasing diminishing forest quantity and quality destroys the country’s water catchment areas leading to the lower water levels in rivers and lakes that have occasionally been experienced (Palmer 1965).

Lipton Tea Company (Unilever)

Tea Farming in Malawi

Considering that agriculture is the most affected by the global climatic change, in Malawi, the major agricultural export is tea (Ministry of Agriculture and Food Security 2007). According to Fairtrade Foundation, a non-profit organization which is responsible for licensing the use of fairtrade mark for the UK products, global climatic change has led to increased global prices for tea especially between 2008 and 2009 due to the shortage in production caused by droughts and increasing demand (Fairtrade Foundation 2010).

According to Technical Centre for Agriculture and Rural Corporation which is a non-profit institute working towards sustainable agricultural production, this was good news for tea farmers in Malawi although their production was also affected by the drought (Technical Centre for Agricultural and Rural cooperation 2009). The prices increased by a record 30% in 2009 (Technical Centre for Agricultural and Rural cooperation 2009). This has mainly been caused by inflation rising from the increasing cost of production of tea which has been triggered by the global climatic change (Fairtrade Foundation 2010).

Records also indicate that the demand for tea for consumption has also outpaced the supply of tea by about 0.8% between 2005 and 2009 (Technical Centre for Agricultural and Rural cooperation 2009). Despite Malawi having a large arable land of for agriculture, it produces slightly above an eighth of Kenya which is the world’s leading tea exporter and has approximately 20% of arable land (Technical Centre for Agriculture and Rural Corporation 2009). According to the Technical Centre for Agriculture and Rural Corporation (2009) Malawi produced 46 000 tones of tea in 2008.

Impact of Climate Change on Lipton Tea Company

Lipton Tea Company is a major investor in tea farming and production in the country (Technical Centre for Agricultural and Rural cooperation 2009). It is also the largest in tea growing company in the world and produces about 35 000 tones of tea in its worldwide companies and buys and sells about 290 000 tones from other sources (Technical Centre for Agricultural and Rural cooperation 2009).

It has its processing factories located within the tea farms due to its perish-ability and also to minimize the cost of transport for the company (Technical Centre for Agricultural and Rural cooperation 2009). One advantage that the company has in tea production in the country is the low cost of labor due to the large population in the country (Fairtrade Foundation 2010). However climatic changes have dictated the regions capacity for maximum tea output (Fairtrade Foundation 2010).

Climatic change has occasionally affected tea growing since hailstones sometimes destroy tea leaves in the plantations and has also caused tea diseases and pests related to global warming (Fairtrade Foundation 2010). Thus climatic changes have affected the quality and quantity of tea output (Technical Centre for Agricultural and Rural cooperation 2009). This means that it has generally increased the risks involved in tea production than before (Van der Wal 2008).

Droughts coupled with unreliable rainfalls have seriously affected tea output in Lipton Company (Fairtrade Foundation 2010). Due to climatic changes, this has led to the encroachment of arid conditions into areas suitable for tea production (Technical Centre for Agricultural and Rural cooperation 2009). This has greatly limited the company’s tea production areas as well as its future expansion programs (Van der Wal 2008). The company’s ability to expand its investment in Malawi’s southern regions like Machinga, Shire Valley or Blantyre districts is limited by the seasonal floods in those regions (State of Environmental Report for Malawi 1998).

Macroeconomic factors that have caused serious constraints on the company’s trading abilities include the destruction of infrastructure that is caused by floods on road networks port facilities, and bridges within the country and in its neighbouring countries (United Nations Environmental Programmes 2008).

Malawi is a landlocked country and therefore Lipton Tea Company has to rely on road networks of the country and its neighbours to transport its tea to the tea Auctioning markets in Mombasa and Limbe (Fairtrade Foundation 2010). Destruction of the road networks poses serious problems to the company and forces the company to use other means of transport such as air transport which might not be cost-effective (Van der Wal 2008).

Uniliver Tea Company also buys tea from smallholder tea farmers (Technical Centre for Agricultural and Rural cooperation 2009). These tea farmers lack adequate technical inputs such as fertilisers or improvement methods which can enable them produce high quality tea which can fetch better prices in the market (Fairtrade Foundation 2010). This means that most of tea that the company buys and sells in market has very low economic returns to the company (Fairtrade Foundation 2010). According to Fairtrade Foundation (2010, p. 5) such tea is likely to fetch only 3% of the retail value of tea and Malawi only accounts for about 4% of such tea exported to the world market.

The global climatic change has led to the increase in inflation in country and the risks involved in tea farming (Fairtrade Foundation 2010). These in turn, have impacted on the cost of tea production especially on smallholder farmers in Malawi (Fairtrade Foundation 2010). As such most tea farmers have lost faith in tea production and instead have shifted their focus on other crops (Van der Wal 2008). This has lowered the amount of tea available for Lipton Tea Company for trade and has reduced the company’s revenue generating opportunities in the country (Van der Wal 2008).

In general, changes in climatic conditions in Malawi have had serious impacts on the cost of production, disrupted logistics and have affected the business continuity of Lipton tea Company (Dunne, Bradford.and Roberts 2009). This has made the company to shift its tea production focus on other countries such as Kenya, Sri Lanka, India and China (Van der Wal 2008).The cost of the business management has risen since new business skills and business process are needed to ensure continuity in tea production in Malawi (Van der Wal 2008).

This also includes the high cost of conserving and managing the environment (Van der Wal 2008). This implies an increase in the cost of production (Van der Wal 2008). Malawi, being a third world country, is vulnerable to risks to consumer markets since it lacks proper adaptive capacity to the impacts of climatic change (World Business Council for Sustainable Development 2010, p 13 and Dunne, Jensen, and Mark 2009). Thus such environmental impacts lead to increased poverty levels which in turn affect the population’s purchasing capabilities (Dunne, Jensen, and Mark 2009).

Conclusion

Global climatic changes are increasing and its impacts are unavoidable. This means that solutions for mitigating its impacts on the economies of the world as well as solutions for adapting to climate change need to be developed. Businesses need to reflect on adaptation planning and measures. Such adaptation measures should include acquiring financial services such as index insurance.

Sustainable communities are environmentally sensitive and would focus much effort in promoting sustainable living. This would in turn create positive impacts on long term operational effectiveness on businesses as well as cost efficiencies. It is also important to ensure effective resource management in business operations. Sustainable exploitation of natural resources which includes sustainable energy use and conservation should be on the forefront of sustainable use of both renewable and non-renewable resources. It is important to find alternative energy sources which do not pollute the environment so as to reduce the number of trees cut for fuel. This would in turn conserve the watersheds.

Every country should work towards implementing measures which are aimed at enabling it cut down emission of greenhouse gases into the atmosphere. Malawi needs to take advantage of the carbon trade. It should invest on planting more trees in the country’s regions which are vulnerable to encroachment by arid conditions and demand for payment from the world’s greatest economies who contribute more carbon emission in the atmosphere.

In particular, Lipton Tea Company in Malawi needs to develop and implement measures for environmental management, proper use and applications of agrochemicals, biodiversity conservation, soil and water conservation, energy use and waste management. For the company to achieve a sustainable environmental adaptability, it has to adopt region specific and scalable solutions to help it counter the impacts of climate change. It has to monitor environmental changes within its plantations and use the statistics to predict eventualities. This would enable the company to provide climate change mitigation measures to the impacts of climate change.

Lipton Tea Company should consider exploiting wind energy so as to substitute the wood energy. This would enable the company slash its carbon emission into the atmosphere and also help it conserve the natural forests so as to better adapt to climate change. The company should also consider use of organic fertilizers and abolish the use of agrochemicals since agrochemicals raises the soil acidity and destroy the soil quality, biodiversity and pollutes the water in rivers around the company.

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