US embassy cable - 05LILONGWE302

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, Economic, Political 
SUBJECT: PREACHING FREE MARKETS IN MALAWI 
 
Introduction 
------------ 
 
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 
------------------- 
 
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 
-------------------------------------------- 
 
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 
--------------------- 
 
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