PREACHING FREE MARKETS IN MALAWI

UNCLAS SECTION 01 OF 02 LILONGWE 000302

SIPDIS

STATE FOR AF/S, AF/EPS
USAID FOR AFR/SA
TREASURY FOR INTERNATIONAL AFFAIRS/AFRICA/LUKAS KOHLER

E.O. 12958: N/A
TAGS: PGOV ECON EFIN EAID EAGR KMCA MI
SUBJECT: PREACHING FREE MARKETS IN MALAWI

Introduction
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1. Over the past several months, Mission Lilongwe's economic
team has undertaken a concerted effort to promote the
virtues of free markets among Malawi's key decision makers.
The country has made halfhearted efforts toward market
reforms in recent years, and the new president is pressing a
pro-growth development agenda. But there is widespread
popular distrust and misunderstanding of the private
sector's role in leading economic growth. Malawi has
excellent growth potential, but only if the government will
lift its heavy hand and permit markets to work. We are
actively using a combination of diplomatic persuasion and
public diplomacy tools to help move Malawi in the direction
of reduced regulation, greater liberalization, and free
markets.

Ripe for Conversion
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2. Malawi is a classic example of an African state-
controlled economy that is making a halting transition
toward a market-based system. Many of the country's
economic institutions were born in the pre-independence
heyday of British socialism in the 1940s and 50s. When
Hastings Banda came to power in 1963, he applied the
socialist model with a vengeance, exerting government
control in virtually every major sector of the economy.
Banda launched dozens of parastatal companies to run almost
everything-- agriculture, tourism, retail, manufacturing,
transportation, and much more.


3. The enthusiasm of the youthful country combined with
sizeable injections of donor funding carried the parastatals
along for a while, but like similar institutions elsewhere
in the world, their performance eventually began to lag.
While the developed world moved toward deregulation and
liberalization in the 1980s, the aging Banda regime
stubbornly held onto those economic dinosaurs. By the early
1990s, many sectors of the economy were virtually dead,
strangled by government red tape and a lack of real economic
incentives. The final insult came with the corrupt Muluzi
administration (1994-2004),which looted the remains of many
state corporations and ran them into bankruptcy.


4. At the prodding of donors, Malawi launched a
privatization program in 1996, and the government began to
shed some of these unprofitable enterprises. Over 50
companies were privatized, and many were successful. But
widespread corruption and an economic downturn caused by
excessive government borrowing put a serious brake on
private sector growth from the late 1990s. As in other
countries, there was a popular backlash against the
privatizations, with accusations that state companies had
been sold at giveaway prices. When President Mutharika came
to power in mid-2004 he halted the privatization program to
investigate corruption, and only restarted it in January of
this year.

Getting the Idea, But Not Yet True Believers
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5. As Mutharika begins to lead Malawi toward reform, we are
finding that commitment to free market principles among
government policymakers is quite thin. An economist by
training, Mutharika speaks often of the need to "transform
Malawi from a consuming country to a producing country". He
promotes the virtues of hard work and self-reliance, and
touts the private sector's role in creating growth.


6. But it is clear that many government ministers,
parliamentarians, and the public in general don't fully
grasp the basic concepts of a market economy. Because of
the long history of state intervention, Malawians tend to
look first to government for solutions to most problems.
Since the Banda days, government has always told people what
to do, right down to when to plant their crops and when to
harvest. This mentality persists to the present day; last
week the ministry of agriculture placed an ad in local
papers telling farmers to weed their fields. People are
often suspicious of the market, because the reform process
has taken away some of the stability of the old system and
contributed to a sense of uncertainty and insecurity.


7. Malawians, including senior economic policymakers, see
the value and necessity of economic transformation, but they
tend to think that government should lead the process. The
idea that government can stand aside and let the private
sector take the risk and do the work is still a foreign
concept.
Spreading the Message
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8. In this target-rich environment, we take every
opportunity to sell the free market message, whether we are
talking about food security, transportation, agriculture,
telecom, anti-corruption, or any of the myriad topics on
which we engage the GOM. In every conversation with a
minister or other senior official we purposely plug the
virtues of free markets and the private sector.


9. We actively participate in the National Action Group
(NAG),a unique bimonthly dialogue forum of leaders from
government, private sector and donors which seeks to
identify problems with the business climate. Our presence
and that of other donors, particularly at head of mission
level, serves to pressure senior GOM officials to attend and
interact with their private sector counterparts. The forum
has been very successful at identifying key constraints to
investment and giving government a clear plan of action to
address the problems.


10. We are using a superb PBS video series called
"Commanding Heights: The Battle for the World Economy" as a
teaching tool. This excellent and accessible three-part
series tells the story of the new global economy and
illustrates how the world has moved from favoring state
controlled economies for most of the 20th century to
liberalized free markets in the past 25 years. The video
shows how formerly state-controlled economies like Poland
and Russia have made the difficult transition to markets,
and how developing countries like India and Tanzania have
become part of the global economy. Recently the Charge and
Econoff invited a select group of ministers and senior
policymakers for a screening of the video, over dinner at
the Ambassador's residence. The group was enthralled, and
spent two hours afterwards discussing it. We are planning
several more screenings for a range of economic
policymakers. We have also presented a copy of the
"Commanding Heights" DVD to President Mutharika's office.


11. We are purchasing a selection of popular economic books
that reinforce the free market message, for presentation to
policymakers and opinion leaders. We are targeting our
Information Resource Center outreach audience with articles
on the same theme.


12. Finally, we are telling our own success stories. Over
the past several years, USAID has fostered a quiet
revolution in the development of the private sector in
Malawi, particularly in the smallholder agricultural sector.
USAID projects in dairy, coffee, paprika, aromatic rice,
groundnuts and other agricultural products have boosted
incomes for tens of thousands of farmers and have spurred a
growing diversification of agriculture in Malawi. Thanks to
those programs, more people are growing high value cash
crops and can afford to buy food and improve their lives.
This change has gone largely unnoticed by many government
officials, who still tend to think of agriculture in terms
of traditional subsistence farming. New USAID programs in
microfinance are helping to spur a budding small business
sector in urban areas, with particular success in empowering
women entrepreneurs. We are actively telling these success
stories, and we will continue to increase our efforts.


13. Old habits are very hard to break, but our message to
Malawians is that if they truly want to realize President
Mutharika's dreams of building a modern society and joining
the global economy, they must take the politically difficult
steps to reduce the role of government in the economy,
unleash the private sector, and let the markets work.
GILMOUR