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Can a Free Market Solution Solve Malawi’s Poverty Crisis?

By Ibrahim Anoba

The International Labour Organization (ILO) recently reported that over 12 million Malawians could become poor by 2030 if poverty reduction rates remain the same. This is despite Malawi’s slight improvement in GDP per capita since 2004, and the implementation of numerous measures to counter poverty, including increased government spendings on infrastructure and social welfare programs. Rather than reduce poverty and stimulate economic development, these policies have further impoverished the nation–half of its population earns below 687 Malawian Kwacha (less than one US dollar) per day.

The International Monetary Fund (IMF) and the World Bank have assisted Malawi with numerous economic development policies since 1981 and have given millions of dollars in loans to support their implementation. Many required an increase in tax rates to make up for bigger spending on welfare programs like the Structural Adjustment Programmes (SAPs). But despite robust spending, these policies have been ineffective, mostly due to faulty structuring.

For instance, the SAPs contain proposals for trade liberalization and privatization, which are good recommendations considering Malawi’s need for a vibrant private sector, its implementation are, however, expensive for a low-income country like Malawi. The SAPs commits the country to expensive welfare schemes like agricultural subsidy programs and social safety nets. Policies like the Malawi Growth and Development Strategy (MGDS II), the Farm Input Subsidy Programme (FISP), and the Social Cash Transfer (SCT) have equally burdened the country’s revenue. The FISP alone targets 1.5 million annual beneficiaries by providing 6 million bags of seeds and fertilizers accounting to millions of dollars; the MGDS II and SCT include similarly expensive subsidy programs and all culminates into heavy financial burden Malawi has struggled to sustain. It is unlikely that Malawi’s capacity to finance them will change anytime soon, considering its dwindling revenue. Agricultural exports, which constitute 90 percent of Ethiopia’s annual income, and 80 percent of all labor force, have sharply declined due to fluctuations in international tobacco prices and the negative effect of drought on maize and cassava production.

Malawi’s economy is paying heavily for central planning. This is evident from its placement on the latest Ease of Doing Business Index (133) and global GDP competitiveness rankings (159). The country can still beat the negatives by adopting free market solutions in key sectors, especially agriculture. Privatization would open them to more investments that would result in increased economic output. This organically injects more money into the economy and increases government revenue to support the falling export earnings. Local markets would equally gain from a competitive economic climate. The cost of basic commodities like food and medical supplies would drastically reduce while the demand for labour increases. It can result in an increased share of working-age adults in the future and possibly create a demographic dividend in the end.

This increase in employment opportunities bounds to lessen government’s burden on safety nets and job creation. It is a sure way to avoid future economic disaster since Malawi must find jobs for its 6.8 million children in the next decade. Beside the labour gains, a competitive economy is necessary to attract investors. Eighty percent of Malawi’s labor force works in agriculture. The Malawian government can disengage from the sector and review its stringent regulations to reduce tax and import tariffs. If the country can achieve a competitive agricultural industry, it will eventually reflect on household income and GDP per capita.

Exploring the possibility of economic diversification would also fortify Malawi’s business climate. Having numerous productive sectors bounds to increase government revenue and shield the economy in case of shocks in the agricultural and manufacturing industries. Malawi’s overdependence on agriculture has made it vulnerable to unforeseen international market crises. But opening up the country’s budding tourism sector would reduce the pressure on agriculture and bolster its annual revenue.  

Malawi’s tourism industry is among the most promising in the Southern Africa with numerous historical sites like Lake Malawi, Liwonde National Park and Mulange Mountain Reserve. Having more private investments in the industry would likely increase interest in sub-sectors especially entertainment and hospitality. Presently, tourism accounts for four percent of jobs and a similar percentage of GDP. If Malawi completely liberalized the sector, the country would have another prolific industry to its economic advantage.

Instead of the usual top-down strategies, Malawi should open its agricultural sector to more competition, diversify its economy, and build an inclusive business climate to help its mostly-young population thrive over the course of the next decade.

Market liberalization does not hurt. It simply gives the economy a chance to grow without the hassle of centralized economic planning. After decades of unending economic travails, Malawians deserve a better life. All the government and their donors should do is simply give free markets a chance.

This op-ed was republished from TownHall.com.

 

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