I wrote before about how both Malawi and DFID were in a bizarre bluffing game over the recent expulsion of the British High Commissioner following the leak of a memo criticizing Bingu wa Mutharika’s government. It seems that we’ve reached the end of the game, with the British Government moving first:
Malawi will no longer receive general budget support from the UK Government, Andrew Mitchell announced today.
General budget support is used to allow governments to deliver their own national strategies for poverty reduction against an agreed set of targets. This has now been suspended indefinitely.
The Development Secretary took the decision after the Government of Malawi repeatedly failed to address UK concerns over economic management and governance.
This is, of course, a load of toff. DFID has put up with Mutharika’s authoritarian streak for several years now. Maybe this is the underlying reason behind Mitchell’s decision, but this would not have happened nearly as soon without the diplomatic crisis several weeks ago.
Still, this is a pretty amazing reversal of what looked to be an incredibly robust relationship during Mutharika’s first term. This all changed when the election cemented his position. Ironically, the British have (in part) to blame for this by helping fund the fertilizer subsidy which made him so popular.
As I explained before, the more successful the aid is rerouted, the less successful this action will be at actually incentivising change. Life will be less painful in the short run, but what about the long run?
Of course, DFID takes a moment to take as much credit for past progress as possible:
The UK has helped improve food security in Malawi for over seven million people a year by providing them with high yielding maize and legume seeds via the Farm Input Subsidy Programme.
UK support to strengthen the health service has helped save the lives of 3,200 pregnant women and 40,000 children since 2004. UK funding has built over 3,200 primary school classrooms and 4,800 toilets since 2001, helping keep more girls in school.
I think we've covered Mr. Small's philosophy before on this blog
From the abstract of a paper soon to appear in the JPE:
Researchers and retailers have documented that consumption declines before the receipt of income, and then rises afterwards. In this paper, we identify a related phenomenon, where mortality rises immediately after income receipt. We find that mortality increases following the arrival of monthly Social Security payments, regular wage payments for military personnel, the 2001 tax rebates, and Alaska Permanent Fund dividend payments. The increase in short-run mortality is large, and occurs for a large number of causes of death.
The authors’ explanation?
‚ÄúThere is increased economic activity after payday,‚ÄĚ Evans says. ‚ÄúSome of the activity, like driving and trips to bars, will naturally increase risk. Many types of activities are also known to trigger heart attacks.‚ÄĚ
‚ÄúWhat surprised us was how broad-based the phenomenon was,‚ÄĚ says Evans. ‚ÄúWe found increased mortality after payday for the young and old, low and higher income groups, for married and single individuals. The increase in short-run mortality also occurs for a large number of causes of death. The effect was particularly pronounced for car accidents, heart attacks and especially substance abuse,‚ÄĚ according to Evans.
So there’s a flurry of activity whenever people get paid, and whenever there’s a flurry of activity we expose ourselves to more risk. I would be interested to see a similar study done in a developing country. In Malawi (get ready, I’m going into generalization from the back of a taxi cab mode), many of those in informal, but regular wage employment are paid at the end of the calendar month.
This tendency to use an explicit payday leads to not only a flurry of economic activity, but also, I presume, a flurry of criminal activity, as suddenly everyone at the market is flush with cash. My gardener at the time found this out the hard way when he was attacked and slashed with a knife. We switched to middle-of-the-month payments after that.
I would like to see some similar estimates for developing countries – and wonder if the eventual creep of banking services would do more to reduce this. The mortality of the payday is likely the result of two things: an inability to smooth consumption over time (either due to financial constraints or due to old fashioned impatience) and the inability to have your paycheck sent directly to your bank account, making you a walking, cashed-up target.
In the wake of the diplomatic row between Malawi and the UK over a leaked memo criticising Bingu Mutharika, the UK has suspended all aid to Malawi. Jimmy Kainja, over at the Guardian blog, notes that Mutharika suddenly looks a little more willing to compromise:
However, Mutharika announced on Monday that “genuine dialogue and consultations have been initiated” between the two countries. He was confident that “new modus operandi will be agreed to the mutual regard” of Britain and Malawi’s “shared common vision and interests”.
“With regard to Malawi’s bilateral relations with the United Kingdom, I wish to assure this august house that both Malawi and Britain are committed to strengthen such relations in all aspects ‚Ä¶ we expect our development partners to continue to support us,” Mutharika said during the Malawian parliament’s budget session.
This seems to suggest that Mutharika was never entirely serious, or perhaps misunderstood the full ramifications of expelling the British high commissioner. DFID has historically been a major contributor to Malawi’s fertiliser subsidy program, so this aid crunch has the potential to do a lot of political damage to the current government.
Many consider the aid freeze to be too harsh. This is one of those big, unanswered questions – how should we weigh the “aid shouldn’t incentivize bad governments” against the “cutting aid will hurt the poor argument”? This might be strongly determined by how much you discount future suffering versus suffering today.
Kainja argues that we can have it both ways, if DFID would only re-route its aid through NGOs and civil society organisations. This is problematic for two reasons: Firstly, a large hunk of DFID’s aid is a combination of general budget support and sectoral budget support. They give money to the Malawian government to do things, like run hospitals and buy fertilizer. It would be extremely difficult for DFID to fund similar operations in the NGO sector, especially in the short term.
Finally, rerouting the aid, if successful, doesn’t really do much to `punish’ the Malawian government. This row isn’t over corruption or theft of aid, it’s over creeping authoritarianism. If the average Malawian sees no change in access to aid-funded resources, it will be unclear exactly what a rerouting would accomplish.
The other day Ranil wrote an excellent analysis of the creeping recrudescence of authoritarianism in Malawi, following Bingu wa Mutharika’s re-election victory, which basically eliminated the fragility of his position.
What is worth discussing a little further is the means through which Mutharika secured that victory. While ethnicity has never been as salient an issue in Malawi as many other SSA countries, its politics have long been dominated by regional `super-ethnic’ voting. It used to be the case that one of the easiest ways to know how someone was going to vote was to know whether they were from the Northern, Central, or Southern regions of the country
When I lived in Malawi, one of my night watchmen (who was from the Central region) expressed a deep affinity for John Tembo, the current political leader of the Malawi Congress Party, former right-hand man of the deceased dictator Hastings Banda. Tembo was a wicked thug during Banda’s time, yet my night watchman’s support was unwavering: “He is my uncle”, he affectionately put it, expressing regional solidarity.
Shortly after winning his first election on a United Democratic Front (UDF) ticket, Bingu wa Mutharika created the Democratic Progressive Party (DPP). This was in early 2005, a time when politics was still marked by regionalism. Shortly after, an Afrobarometer survey was conducted in the country (see below), confirming the regional bias: voters preferred the DPP in the north, the MCP in the Center, and the UDF in the south.
But between the 2005 Afrobarometer survey and the 2009 elections, something shifted in the way the population expressed political support: the DPP and Mutharika managed incredible gains across all regions (see this Afrobarometer paper for more info about the shift in voting habits). This table from the report sums up this shift in support:
News that the Government of Malawi is (allegedly) expelling the British High Commissioner from the country in response to a leaked memo expressing dissatisfaction with the Governance situation there only serves to further emphasise the decline of Malawi as a donor darling. I lived and worked in Malawi for almost four years and retain an of enormous amount of affection for it: it‚Äôs one of the most beautiful places in the world and populated by some of the best people I‚Äôve known. This being the case, I‚Äôve been following its progress closely since I left. The changes in Malawi demonstrate the extremely important role of conflict in the domestic political process and relative powerlessness of donors.
When I left Malawi, I was full of optimism: elections (free, fair and gracefully conceded by the losing party) were about to be held; the economy was in it‚Äôs strongest state in years; aid was increasing almost exponentially, while we were ever moving closer to best practices in aid management and transparency; and the Government was committed to poverty reduction and economic growth. Since then, however, things have gone south quickly. The re-elected President, Bingu wa Mutharika, began to take on increasingly authoritarian tendencies; he sacked and removed many of the most competent Ministers (most notably Malawi‚Äôs excellent ex-Minister of Finance Goodall Gondwe) and reshuffled the Principal Secretaries, with many new appointees having strong ties to the President. This trend was only emphasised when the President at one point took on the same portfolio of Ministries as Dr. Hastings Banda, Malawi‚Äôs long-time dictator. He began to call himself ‚ÄėNgwazi‚Äô (hero), which was the name given to Banda. He even had the national flag redesigned: where before Malawi was represented by a rising sun, it is now fully risen, presumably in gratitude to the new regime.
The effects were eventually felt in Government policy. Progress on Governance issues began to reverse, and poor performance against the IMF programme in country led to a freeze on general budget support (since lifted by most donors), in turn causing a foreign exchange shortage which led to a situation of petrol scarcity which continues to date. The Government also began to exert malign influence on the universities, forbidding the discussion of certain topics by lecturers, and on civil society, by imposing financial requirements for permission to demonstrate. These changes are not simply academic ‚Äď they are affecting people‚Äôs lives.
What‚Äôs most remarkable about these changes is the role of the Government under Mutharika. Matt has posted before about Malawi‚Äôs performance on inflation, crediting the IMF‚Äôs PRGF programme for helping kick start this improvement. This is definitely accurate, but there‚Äôs no doubt that the serious effort and political will of Bingu‚Äôs first Government played a massive role in ensuring that expenditure was reined in, and that all the IMF targets were taken seriously. Under Mutharika, corruption cases were brought to bear against various members of the previous Government, too. These may have been partly political, but it‚Äôs clear that they were also aimed at people who had stolen vast sums in the past ‚Äď establishing an extremely important precedent for Malawi. The Government also put serious effort into improving the budgeting system and implementing and monitoring a national development strategy. So what changed?
In my opinion, the single biggest factor in Malawi‚Äôs turnaround has been the change in the security of Mutharika‚Äôs position. When he was first elected in 2004, Mutharika was a member of the UDF party. However, once in office, he left this party and created his own, the DPP, inducing a number of MPs to cross the floor and join the DPP from UDF and other parties. In response, the UDF made the claim that this was illegal citing a vaguely worded article of the Constitution ‚Äď Section 65 ‚Äď as rendering illegal any attempt to cross the floor. The DPP vigourously disputed this claim, but avoided any attempt to resolve it through the courts, because if the ruling had gone against them, they would have all lose their seats and had to stand for re-election, leaving the President isolated.
What this meant was that every time Mutharika‚Äôs Government wanted to pass anything controversial, be it a National Budget, or loan agreement or a new bill, the opposition could grind Parliament to a halt by refusing to vote until Section 65 was resolved. As a result, the Government had to work very hard to make sure that every step it took was justifiable in the public eye, and could be clearly explained in rational terms ‚Äď any attempt to delay using Section 65 would then encounter popular resistance, as happened more than once when Budget delays led to demonstrations and scuffles near Parliament.
In fact, four of the five fastest growing developing countries in the late 1990s were those that rejected neoliberalism. After a severe famine in 2005, Malawi rejected IMF and World Bank prescriptions and subsidised fertiliser for poor farmers. As a result, during the 2007/08 food price crisis, Malawi was not only able to feed its population, but became a bread basket to the region.
A seemingly simple story about a developing countries throwing off the shackles of structural adjustment in order to do the right thing? Maybe not – Ms. Doah has failed to do her homework on Malawi’s recent history with the IMF.
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 burden 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 necessary 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.
What’s the lesson here? Sometimes `neoliberal’ policies are beneficial and sometimes they aren’t. Blanket policies are not very useful in the post-crisis world, but neither are blanket condemnations.
The best rationale for Malawi-style input subsidies is that small-scale farmers have profitable investment opportunities that they fail to exploit.¬† This logic is hard for economists to swallow.¬†¬† Economists really only ever tell one joke, but it fits here:
An economist and his friend are walking down the street when the¬†friend sees a ten dollar bill on the sidewalk.
‚ÄúLook,‚ÄĚ he says, ‚Äúit‚Äôs a ten dollar bill‚ÄĚ.
‚ÄúNonsense,‚ÄĚ says the economist. ‚ÄúIf that was a ten dollar bill,¬†someone would have picked it up by now.‚ÄĚ
By this logic, if fertilizer were profitable, farmers would be using it already.¬† Unless you can point to a clear market failure or some widespread failure of economic rationality, subsidies are just money down the drain.
Justin goes on to discuss a few empirical studies which come down both for and against subsidising agricultural inputs, noting that we need more robust evaluations before we can be confident one way or the other.
Working in Malawi, I am always pleased to see interest in the country‚Äôs Input Subsidy Program. While it may not generate the same column inches as recently introduced legislation wrongly deemed to outlaw farting; a forthcoming paper written by Dorward and Chirwa evaluating the first 4-5 years of the program has drawn a response from Max Lawson on Max Lawson‚Äôs Oxfam blog From Poverty to Power.
According to the blog:
Thanks largely to the subsidy Malawi has had seven years of economic growth, based on agriculture, which has had a major impact on reducing poverty, helping to halve child mortality rate. For me the key point is the huge role a government subsidy like this can play in getting an economy back on its feet and in stimulating (rather than stifling) growth and poverty-reducing private sector development.
I, like Max Lawson, instinctively want to like the AISP for a number of reasons. This is a domestically led program in a country where all too often policies are driven by the priorities of donor countries. 85% of Malawians work in the Agricultural sector, yet agriculture has often been overlooked by policy makers as development partners fight over initiatives in Health and Education.¬† The program is also ambitious ‚Äď distributing fertilizer to 1.6 million farmers is a hugely impressive logistical achievement in such a poor country. There is also something eminently satisfying about seeing a small country like Malawi asserting its right to set its own economic policies in the face of criticism from the developed world that reeks of hypocrisy, given the agricultural subsidies employed there.
While there is little doubt, that judged against the narrowest stated objectives of the policy, namely to achieve food self-sufficiency and increased income of resource poor households, the impact of the policy has been impressive. Notwithstanding challenges in collating reliable agricultural statistics, there seems little doubt that the program has led to major gains in crop production and statistics provided do seem to suggest a degree of poverty alleviation.
In 2005, Malawi undertook one of the most ambitious drives to develop its agricultural sector witnessed in a generation.¬† The initiative involves targeting fertiliser and seed inputs using ‚Äėsmart subsidies‚Äô, aimed at supporting the poorest smallholder farmers in the country.¬†¬† The policy was launched following a drought which left close to five million people in need of food aid.¬† Between 2005 and 2009, Malawi‚Äôs maize production doubled and real per capita GDP increased by 40%.
Andrew Dorward and Ephraim Chirwa have written a series of papers¬†chronicling¬†the program’s development – their most recent paper was released last month. ¬†They have been consistently supportive of the program, arguing that fertiliser subsidies have increased food availability, increase real wages and led to wider economic growth and poverty reduction.¬† However, this has come at a cost. In 2008/9, the program cost over $250m.¬† At 16% of the national budget and 5.6% of GDP, the money spent is equivalent 147% of total health spending and 175% of education expenditure.
When analysing a project of this scale, the concepts of opportunity cost and sustainability should form the main criteria for assessment. Not concepts such as operational efficiency – the focus of Dorward‚Äôs and Chirwa‚Äôs most recent work.¬† I would argue that the fertiliser subsidy program performs poorly on these criteria for two main reasons.
First, it is unclear that the benefits of the scheme actually outweigh the costs.¬† In 2008, Dorward and others estimated the benefit to cost ratio of the program in 2006/7 – a year of good rains and relatively low fertiliser prices.¬† The estimate was 1.06 ‚Äď a small net benefit ‚Äď and had a wide variance.¬† However, in later years, fertiliser prices have been considerably higher ‚Äď suggesting that if the same methodology was applied, the results would be negative (costs>benefits).¬† The paper rightly argues that many of the benefits of the program are hard to measure, so have been excluded from this metric. But there are also unknown costs, for example the displacement of the private sector in the agricultural industry by massive government intervention.
Second, the focus on fertiliser to raise crop yields leaves the economy vulnerable to exogenous shocks ‚Äďall the eggs are in one basket!¬† For instance, fertiliser won‚Äôt work if there is no rain.¬† At present much of the country‚Äôs foreign exchange is used for fertiliser imports ‚Äď reducing the amount available to import food in the event of a drought.¬† Money spent on the subsidy could also be used to improve the country‚Äôs near non-existent irrigation network (despite Lake Malawi covering a third of the country).¬† Or the money could be used to diversify the economy away from the volatile agricultural sector.¬† All of these make the economy more resilient.
There are many other costs and benefits associated with the program.¬† My point is that it is not enough to state that the fertiliser subsidy program is a success because maize yields have risen, or because the government has improved its logistical operations.¬† Instead, we should be asking whether this program will help Malawi move away from subsistence farming? What are the complements to subsidised fertiliser? And what are its substitutes inside and outside of the agricultural sector?
Malawi now stands at cross-roads.¬† On one hand the politically very popular subsidy program could continue to expand, raising its cost and complexity, to a level similar to the wasteful and counter-productive subsidies of the 1970s and 1980s.¬† On the other hand, the program can be brought under control, both in terms of scope and scale.¬† This will free up valuable resources to target complementary intervention within agriculture and support other government priorities outside of agriculture.¬† In order to stimulate a Green Revolution in Malawi, where increased production is used to invest in raising productivity, a holistic approach must be taken, with several interventions being pursued simultaneously.
Bingu wa Mutharika, the President of Malawi, has just remarried, a few years after the death of his first wife, Ethel. The Times is reporting that it was quite a bash. Bingu arrived in true P. Diddy style, emerging from a white Chrysler flown in from South Africa for the occasion wearing a white tuxedo with white gloves, having driven over two roads specially built to take the bride and groom to Civo Stadium for their restrained and tasteful nuptials. The bridal party arrived in a fleet of new Mercedes‚Äô, and the whole wedding is alleged to have cost about GBP 2 million, part of which paid for a twenty-eight tier wedding cake.
Apart from the identity of the joker who convinced Bingu that he looked good in his white tux, the big question here is where the money came from. If these were state funds, it is a perfect example of the kind of spending that the fungibility article from the Lancet raised fears of, and which I discussed last week. Is aid money facilitating this kind of opulence? Two things need to be true before we can conclude this. Firstly, it must be the case that the President used state funds for his wedding. This isn‚Äôt clear. The Times article offers the following, neither part of which is particularly convincing:
Senior officials, speaking on condition of anonymity, have claimed that the president used public funds for the celebrations, an accusation that the government denies‚Ä¶
The Malawian government‚Äôs information minister rejected claims that public money had been used to pay for the wedding. ‚ÄúThe [¬£2m] cost of the wedding has been met by the president himself and friends who wish him well,‚ÄĚ he said.
The second issue is whether, even if state funds were used, aid money made any difference. It‚Äôs quite possible that the same wedding would have taken place, with the same cost, but with developmental spending suffering even more. If this is the counter-factual, then aid money isn‚Äôt facilitating bad spending but mitigating the damage it causes.
With regards to the first issue, as I said in the comments section of Matt‚Äôs post on fungibility, audit is where we should be focusing: a comprehensive audit should give us a very good idea of whether or not this money came from Government coffers or Bingu‚Äôs personal wealth, together with those of his supporters, some of whom are so fervent I have witnessed them running after his Presidential vehicle waving huge framed posters of him as he disappears from view. I‚Äôm going to discuss audit in a bit more depth later this week, but to their credit, the Times does mention the findings of a recent audit of Malawi‚Äôs Government expenditure in its article:
A report by the country‚Äôs auditor general [showed] that more than ¬£800,000 of public funds had been spent on goods and services between 2003-05 which could not be accounted for.
The drawback? Despite the article being written by a Malawian (Mabvuto Banda, judging by the name, is at least of Malawian heritage), the article fails to point out that the audit reports it refers to relate to a previous Government, that of Bakili Muluzi. Members of this Government have already been investigated and indicted on corruption charges, and further arrests and investigations are always possible.