Wednesday, March 23, 2011

The tangled web of Malawi, the IMF, and fertilizer

The many critics of the World Bank and the International Monetary Fund say that their policies have prevented some economies from preforming better. The critics say how the WB and IMF prescribes one-size-fits-all free market solutions may not be the right remedy for each country. One example they often give is Malawi, who instead of using a free market approach to farming inputs, gives away fertilizer through a government distribution program.

Matt Collin from the blog Aid Thoughts has this reminder that it was through the help of the IMF that such a fertilizer distribution program was possible. The IMF had to help clean up the books of Malawi government before the program began.

Let’s rewind a bit to the beginning of multi-party democracy in Malawi, which also introduce a surge in inflation. The two-term presidency of the first democratic president, Bakili Maluzi, was marked by excessive government spending, poor macroeconomic management and a surge in corruption and theft of public funds.

Inflation is sometimes seen as a bit of a boogeyman, but there is very little that is pro-poor about a 40% annual inflation rate. It was only through the hard work of the Malawian government and the IMF (under the PRGF) that inflation was brought under manageable level, as was government spending. There were probably some negative consequences to this imposed austerity (many assert that the IMF’s pressure to keep the wage bill down hurt social programs in the country, although the evidence of this is mixed), but I think few people would consider Malawi’s position before the introduction of the PRGF to be sustainable.

In 2006 Malawi finally reach its HIPC completion point, resulting in a slashing of its debt burgen by nearly $3 billion dollars. The amount that Malawi saved on immediate debt from this relief nearly equaled the amount they chose to spend on fertilizer in the subsequent budget year, so the benefits of the relief are quite clear. Aside from the immedite benefits, being nearly debt-free gave the country the wiggle-room neccessary to pursue more expansionist fiscal policy, and it is highly doubtful that they could safely be spending so much on fertiliser today if they hadn’t behaved a little beforehand.

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