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The Paradox of Tightening Belts

Updated: Jan 21, 2020

A perspective emerged as the world weathered the effects of the financial crisis and its implications compelling countries to tighten up belts as a way of making through the storm with minimal damage. While it was considered by many, particularly in Western Europe, as the proper thing to do, a fringe of opposing views diverged on account of the extent to which austerity measures affect aggregate demand, in turn perpetuating the economic downturn. But, as the austerity movement grew among donors to countries like Malawi in Western Europe, so did the preference for developing countries receiving their aid to shift the buckle a few notches in.

The longer the crisis extends into the latter part of this second decade of the millennium, the more regularized austerity is becoming an instrument of favourability of leaders in donor recipient countries. Donors smile when a country is bent on staying within budget. It is everyone’s guess, then, that Bingu wa Mutharika, who never knew austerity, would never have passed for good boy. Mr. Mutharika’s problems were, well, different. His policies did not, for the most part, encourage public investments that would stimulate demand in the medium term. As he grew more narcissistic, he instead preferred to use public resources to pay for amenities that earned him the lifestyle of a monarch.

When Joyce Banda took over, she quickly made a U-turn and went full-throttle on cutting public spending, pleasing many of the donors who had withdrawn from giving her lavish predecessor some cash for running the government. Tough, resilient woman, many financiers called her. But under her government, Mrs. Banda mastered squeezing the belt tighter than Malawi could take, making extra savings she sifted out of the coffers into her own bank account.

Many people, including many Malawians, believe in prudence of the government’s management of the budget. Accounting acquaints us with the need to go to sleep on a balanced account. But there is an important technical difference between a business firm, non-profit or household with government that economists have studied during economic downturns. Government spending, done right, has significant multiplier effects on the economy that are crucial to bouncing back not just production, but the consumer confidence that supports it as buyers revert to the stores.

Advice for austerity need be taken with caution and not head-on as Mrs. Banda would rather have it. Still, public spending needs to be done right, by focusing on sectors that will bring about the desired multiplier effects. Such spending that goes into quality education, keeping the universities resourced and, more importantly, open; infrastructure development, in which thousands of Malawians would be employed; preventive healthcare and lifestyle improvements, which would guarantee a healthy nation that not just works but also saves on expensive medications; just to mention a few examples. Many of these sectors mentioned are the very sectors recent development literature has termed pro-poor. Importantly, it helps to direct away the transfer of resources to the rich, who, because of a relatively higher propensity to save, will keep resources that could be used for investment locked up in an unproductive quest for interest earnings.

Now, before losing our readers who believe in the automatic correlation between savings and investment, we need to make a point clear regarding recessions. Recession economics inevitably identify the presence of a situation called a liquidity trap, which depicts how provision of cash to the financial sector (including government transfers to banks) will be met with individuals and, particularly banks, who are timid to release cash into the economy because of the uncertainties a slump presents financial markets.

Data Source: Reserve Bank of Malawi

To clear out another blurred moment, one asks if Malawi is in recession to warrant this type of economic orientation we suggest. The answer is, yes, and it has also been fragile for a while. (See our article of 13 February 2017 on fragility.) To substantiate this claim, statistics from the Reserve Bank of Malawi show that, between 2005 and 2016, the country’s real growth rate has been on a general decline. Any expressions of healthy growth the government shouts out on publicly-funded media are only utterings of positive aspirations than reality.

Responsible Global Citizenship

A new development perspective is dawning in on global development dynamics. Many developing countries receiving aid now exhibit an important lesson on how development aid has failed to bring about the development of Africa and developing countries of other regions. In part, because the ruling model of development has been one of an enterprise in which the beneficiaries have been…developed countries. Other win-win development models are encouraging the exchange, not of cash, but of commodities through trade, nicely capped with capacity development and investment that will enable the establishment of export sectors with guaranteed markets, as development of production systems is done. Investment in capacity is one area that Malawi’s long-standing agreement with the United States of America under the Africa Growth and Opportunity Act (AGOA), itself vested heavily in oil and gas commodities, has failed to capture.

A model example is couched in the principles of the newly-developed Scottish Government Development Strategy, which goes beyond aid to include mutual respect between the donor and recipient, and promotes international trade with investment in capacity and systems. Malawi needs to start focusing on fostering such ties with all its development partners so that it remains in charge of its destiny. The growth of the fair trade movement is a rare opportunity for encouraging local produce to become profitable for the local farmer. Negotiations with traditional donor countries to purchase locally produced commodities in lieu of aid will be a longer term solution for development, which, while expanding labour and entrepreneurship into the formal economy, will inflate the revenue collection base the government needs to satisfy its obligations to Malawians.

The feel of tight leather around the waist has never been our way of enjoying life. The incumbent Mr. Mutharika needs to lead Malawi’s calibration of its development. He does not always have to play good boy to the whims of those who hold the key to the safe. He needs to recognize it may take trade-oriented aid, like one with the Scotts or a revised AGOA, to manipulate aggregate demand and boost revenues for his government. But certainly, a contractionary approach as austerity will not be the answer to the prayers Malawi has prayed for decades.

And Mr. Mutharika can surely get our thumbs-up by keeping our waists a little loose.


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