Malawi and IMF SAPs

Adrienne Tuffin: 211119484 Cory Jansson AP/SOSC 2800 A 10 March 2014 Malawi: SAP’s Gone Wrong In its 2007/2008 Human Development Index the United Nations Development Programme ranked Malawi 164 out of 177 countries measured (Kalipeni, 23). Malawi is a small land-locked country located in southern Africa. The majority of its GDP is from export of primary commodities; tea, coffee, cotton, and tobacco (Harrigan, 848).After achieving Independence from British rule in 1964 Malawi experienced unprecedented growth; averaging a real GDP rate of 6.1% from 1971-1980 (Kwengwere, 143). However, a mixture of internal and external shocks would bring this growth to a standstill in 1979/80. The rise in oil prices, the civil war in neighbouring country Mozambique, and declining export prices in the 1970 contributed to Malawi’s economic demise beginning 1979/80 (Lele, 1207). Following the creation of OPEC and it’s convention in 1968 protecting the sovereignty of petroleum producing countries to exercise full sovereignty of their natural resources for their national development, oil prices began to rise. Exacerbating this increase in oil was the civil war in Mozambique. This war interrupted the use of the train route through Mozambique to the Indian Ocean (Kwengwere, 137). This train had initially been used to transport exports but upon its interruption a new method of truck routes was adopted. One estimate has that it cost the government an additional $50 million in transportation costs (Lele, 1209). Simultaneously, there was a 35% collapse in terms of trade (Harrigan, 849). Internally, these falls in primary commodity prices were followed by a drought in 1980 (Harrigan, 849). Thus from 1981 to 1988 Malawi implemented three structural adjustment programs. SAP I consisted of funding from the International Bank for Reconstruction and Development of $45 million, the second SAP was provided by the International Development Association of the World bank and consisted of $55 million, and the third SAP was a combination of funding from the Japanese of $22.6 million, the Germans development-bank, Kreditanstalt für Wiederaufbau, contributed $6.4 million, and USAID contributed $15 million (Kydd and Hewitt, 541). The aim of these loans was to improve the balance of payments, cut the budget deficit, and give market mechanisms greater influence in determining prices, wages, resource allocation, and the structure of production (Lele, 1211). 1995 to date, Malawi has implemented three Fiscal Restructuring and Deregulation Programmes (FRDP) supported by the World Bank. Malawi also qualified for the IMF Heavily Indebted Poor Country Initiative in 2006 after completing its Poverty Reduction Strategy paper in 2001. However, my paper will cover the first three SAP from 1981 to 1988 as these were some of the earliest SAP implemented in the developing world and much scholarship has been written about its consequences. This paper has found that these initial SAPs had an overall negative effect on Malawi’s political, economic, and social development. Politically the effects have led to the democratization of Malawi, however this democracy is weak (Matchaya, 157). Economically, the economic growth post-SAP implementation has been negative compared to pre-SAP years (Kwengwere, 143). Socially, SAP’s have deepened gender inequality and restricted access to health services to the wealthy and those with health insurance (Kalipeni,27). Political Malawi was a part of the third wave of democratization. The third Wave, coined by American academic Samuel Huntington, was initiated by the Carnation Revolution in Portugal in April 1974. From then to the early 1990 roughly 30 authoritarian states converted to democracy (Kurlantzick, 39). Since Independence in 1964 Malawi has been ruled by dictator-for-life Hastings Banda. Western educated Dr. Banda would be ousted by Bakili Muluzi in the country’s first free elections in May 17 1994 (Matchaya, 157). Emmanuel argues that Malawi’s democratization can be traced to the pressure exerted by the donor community, Malawi’s heavy reliance on aid, and on domestic pressure to democratize (416). Political conditionally is when aid is used as both the carrot and the stick to move authoritarian regimes towards democracy reform (Emmanuel, 415). In Malawi three sets of factors enabled the success of this political conditionally set by international donors to the country; aid dependency, donor coordination, and domestic opposition (Emmanuel, 416). Malawi was heavily dependent upon foreign aid; from 1990-1999 approximately 25% of its GNP consisted of foreign aid (Emmanuel, 428). Moreover, donors were highly organized in opposing Malawi’s atrocious human rights record and lack of political freedom. In May 1992 a World Bank meeting of the Paris Consultive Group would suspend all bilateral and non-humanitarian aid to Malawi (Emmanuel, 429). This conference was attended by European powers such as Great Britain, Germany, and Italy, as well as the UNDP, World Food Programme, and the IMF. These events were triggered by internal opposition towards Banda’s government. In 1992 the upper hierarchy of the Malawian Catholic Church wrote a letter condemning the Malawian government and calling for political opening (424). This triggered widespread protests in which the government cracked down killing 78 in 1992, and 23 in 1993 (Emmanuel, 431). Ihonvbere also notes that a 1992 report by Amnesty International showed many abuses in the prison system (227). Thus Malawi’s democratization can be traced to donor pressure, internal opposition to authoritarianism, and the heavy aid dependence of the government on foreign aid. Malawi’s democracy was weak. Ihonverbe notes that Muzuli’s government detained high numbers of opposition leaders (238). Matchaya furthers Ihonvbere’s point about the weakness of Malawi’s first democratic government citing; “corruption, financial mismanagement, and moral erosion resulting in widespread and deepening poverty” as characteristics of the Muzuli government (157). Economic Agriculture production is the backbone of Malawi’s economy. Harrigan notes that the agricultural sector is accounting for just over a third of GDP, generating over 90% of the country’s export earnings and providing wage and self-employment to the bulk of the country’s population (847).Thus when Malawi experienced declining terms of trade for its tobacco products in 1979 followed by a drought in 1980 the current account deficit increased to exceed 12% of GDP in 1980, and a virtual doubling of the debt service ratio between 1978 and 1980 (Lele, 1209). Thus the 1981-1988 SAP focused on liberalizing the agriculture sector by increasing producer prices paid by the government Agricultural Development and Marketing Corporation (ADMARC) and cutting the government fertilizer subsidy (Harrigan, 849). The market liberalization of the agriculture sector led to a food crisis in 1987 (Harrigan, 849). Producer prices for maize were increased in 1985, while no non-price initiatives were introduced to increase maize production; rather, fertilizer subsidies were cut from 29% in 1984 to 17% in 1985 (Lele, 1209). This price liberalization put an enormous financial strain on ADMARC. Food prices also rose by 50% from 1985 to 1988 (Harrigan, 850). To combat these increased prices and the financial strain that resulted from them, the government reintroduced fertilizer subsidies at 22% and increased maize producer prices by 36% to provide incentive to producers (Harrigan, 850). In aggregate terms, the Malawian economy did not benefit from market liberalization. Kwengwere notes that GDP pre-SAP from 1971-1980 averaged 6.1%, while 1981-2000 GDP on average was 3% (143). However, he did note that the current account deficit of the balance of payments as a percent of GDP decreased from 13.1% in 1971-1980 to 9.4% in 1980 to 2000 (143). Social The effects structural adjustment programs have had in Malawi are overwhelmingly negative. The removal of fertilizer subsidies under the 1985 SAP has disproportionately affected subsistence farming women (Gladiwn, 143). Moreover, the required cuts in government expenditure have led to an atrocious life expectancy and the privatization of a majority of Malawi’s health care sector has restricted access to medical care to the rich or those whose employers provide health insurance (Kalipeni, 27). Cuts in fertilizer subsidies under SAP II have negatively impacted women famers. In Malawi women are responsible for producing subsistence Maize, while men are responsible for cash crops such as tobacco (Gladwin, 144). In 1985 USAID contributed $15 million to Malawi and created the Economic Policy and Reform Program which had two reforms: subsidy removal and substitution of high analysis fertilizer for low analysis (Gladwin, 142). The government immediately cut the subsidy from 29% to 17% but refused to cut it more in 1987/88 (Gladwin, 142). This refusal led USAID to withhold $5 million of the planned $15 million (Gladwin, 142). The proposed alternative to subsidy removal was to increase producer prices of crops. However, only 15% of farming households were self-sufficient in producing maize while the remainder was women buyers (Gladwin, 147). This increase in price negatively affected women and the rural and urban poor. The cut in fertilizer subsidy also threatened women’s maize production which came second to their husband’s cash crop (Gladwin, 144). Moreover, women experienced many constraints in receiving credit for agriculture development further jeopardizing their production of maize (Gladwin, 151). Cuts in government spending in health services have negatively impacted the poor in accessing these services. Kalipeni notes that three aspects of the 1981-1988 structural adjustment programs have “worked to paralyze the ability of government to provide social services” (25). They are: foreign exchange and trade liberalization, monetary reforms, and public-sector reforms. He says that the public sector reforms have been the most detrimental in the decline of health infrastructure and increase in poverty and malnutrition (25). 60 % of health care services are provided by the Ministry of Health while the remaining 40% are provided by private health actors (25). Provisions for health care have declined over the SAP implementation period; from 7.35% of government expenditure in 1978/79 to 5.59% in 1987/88 (Kalipeni, 27). While this 1.76% difference may seem negligible, Kalipeni notes that inflation rose from 9% to 33% in the same period meaning real expenditure fell by more than the 1.76% difference indicated (27). This decline in health care provision has led to large layoffs, salary reduction, severe shortage of essential medicines, and the brain drain of nurses and doctors (Kalipeni, 26). Kwengwere notes that “there are more Malawian Doctors residing in Manchester, England than in Malawi” (145). Moreover, these cut in provisions and adoption of private health care have restricted access to health care provision to the rich and to those whose employers provide health insurance (Kalipeni, 27). Matchaya comments that this in turn affects the size of the healthy labour force which is a precondition for economic growth (154). Malawi was one of the first developing countries to adopt World Bank and IMF structural adjustment programs. The scholarship has resoundingly shown that these policies have been detrimental on Malawi’s political, economic, and social development. Although Emmanuel argues that reliance on foreign aid paired with internal opposition to authoritarian rule and donor coordination contributed to the democratization of Malawi, others, such as Matchaya, show that this democracy has been relatively weak. Economic growth has been similarly weak. Malawi experienced unprecedented growth from Independence to 1979, averaging a GDP of 6.1%. However, SAP years, 1981-2000 averaged 3% GDP (Kwengwere, 143). Moreover economic policies centered on liberating Malawi’s agriculture sector via increasing production prices of maize and decreasing the fertilizer subsidy led to a food crisis in 1987 and the reintroduction of a fertilizer subsidy (Harrigan, 849). Socially, the cut in the fertilizer subsidy from 29% in 1984 to 17% in 1985 exacerbated gender inequality (Gladwin, 143). In Malawi women are responsible for producing subsistence crops such as maize and the cut in fertilizer subsidy. Kalipeni also demonstrated how a cut in government expenditure on health services and the introduction of a privatized health care system led to the restricted access of health care services by the rich and those with health insurance (27). Unfortunately Malawi is not an outlier, but rather a common demonstrator of the failure of Western economic models in countries with very different histories, geographies, and climates. Today, Western institutions continue to enforce their domination via international financial institutions like the WTO. The most pressing question of our time is when, if ever, will the developing world collaborate to form an opposition to Western economic domination?  Works Cited Emmanuel, G. Nikolas. “Democratization in Malawi: Responding to International and Domestic Pressures.” African and Asian Studies 12 (2013): 415-34. Print. Gladwin, H. Christina. “Gendererd Impacts of Fertilizer Subsidy Removal Programs in Malawi and Cameroon.” Agricultural Economics 7.2 (1992) 141-53. Print. Harrigan, Jane. “U-Turns and Full-Circles: Two Decades of Agricultural Reform in Malawi 1981-2000.” World Development 31.5 (2003): 847-63. Print. Ihonvbere, O. Julius. “From Despotism to Democracy: The Rise of Multiparty Politics in Malawi.” Third World Quarterly 18.2 (1997): 225-47. Print. Kalipeni, Ezekiel. “Structural Adjustment and the Health-Care Crisis in Malawi.” Proteus 21.1 (2004): 23-30. Print. Kurlantzick, Joshua. Democracy in Retreat: The Revolt of the Middle Class and the Worldwide Decline of Representative Government. New Haven: Yale University Press, 2013. Print. Kwengwere, Paul. The State, Privatisation, and the Public Sector in Malawi. Durham: Carolina Academic Press, 2007. Print. Kydd, Johnathan and Adrian Hewitt. “Limits to Recovery: Malawi after Six Years of Adjustment, 1980 to 1985.” Development and Change 17.3 (1986): 531-55. Print. Lele, Uma. “Structural Adjustment, Agricultural Development and the Poor: Some Lessons from the Malawian Experience.” World Development 18.9 (1990): 1207-1219. Print. Matchaya, C G. “Trends in Life Expectancy and the Macroeconomy in Malawi.” Malawi Medical Journal 19.4 (2007): 154-8. Print. Tuffin 9