In Malawi, at the moment, food markets are generally not working as well as they should.
 A goal for Malawi policy makers should be free, active and highly competitive food
 markets.

 Factor Markets

 Factor markets are central to increasing agricultural and non-agricultural productivity and
incomes of rural households. How well these markets function will determine how fast and how
equitably economic growth will occur. These factor markets include markets for capital, land,
labor and inputs.

 Capital Markets

 Most of the larger estates have always had access to commercial credit. But for the
 smallholder sector, even before the failure of the SACA, only about 20 percent of
 smallholders had access to formal credit (Msukwa et al., 1994). Estimates of formal credit
 coverage under the reorganized MRFC range from eight to twenty percent. For most
 smallholders, traders and even smaller estates, credit is viewed as a problem. Current
 interest rates are about 50 percent. Rural inflation is estimated at between 60 and 80
 percent in 1995 (EP&D 1996). At these levels o matlaion, a 5t rres
 actually negative. For small farmers, however, nomia interest rates are still a problem.
 Official inflation figures do not accurately reflect many small farmers' actual consumption
 behavior and are not relevant in the pricing structure they face.

 More importantly, a focus on credit problems and financial market weakness may hide a
 more fundamental problem related to capital markets: a lack of viable investment
 opportunities for smallholders and small traders. True investment opportunities are needed
 to create demand for widespread credit, not vice versa. Investment opportunities for full
 input maize production, for example, are marginal at present price ratio of inputs to farm
 gate prices. Not surprisingly, credit is hard to find for maize production and marketing.
 Investment opportunities in tobacco, on the other hand, are very good, and the credit
 system is working better with this crop.

 As markets improve, investment opportunities both on and off-farm should also improve.
 It is likely that the capital market will come forward to serve this improving investment
 climate. It is extremely important for donors and government to avoid the temptation,
 under these circumstances, to shift price ratios artificially or administratively to achieve
 what may be seen as a positive economic or social outcome. Efforts to raise producer
 prices for maize administratively to increase production, for example, will only lead to
 market distortion and misallocation of resources.

 From a market-oriented point of view, a particularly cost effective form of credit is dealer
 credit. To a limited extent this form of credit is now being seen at the distributor/dealer