Report Blames Economic Policies for Over 1000 Deaths

Famine in Malawi Exposes IMF Negligence

2002 by Arnaud Zacharie


Editor’s Note: The following article is based on information in a landmark report, “State of Disaster: Causes, Consequences & Policy Lessons From Malawi,” released by ActionAid on June 13, 2002. The full report, written chiefly by Stephen Devereux, along with a summary prepared by ActionAid USA (“Death by Starvation in Malawi: The Link Between Macro-Economic & Structural Policies and the Agricultural Disaster in Malawi”), may be found on the web at www.actionaid.org/newsandmedia/malawi.shtml. Some of the conclusions in this article are extrapolated from the evidence and analysis in the report, but may not represent the position of ActionAid or its affiliates. The 50 Years Is Enough Network takes full responsibility for the content of this article.]

Reports of a devastating famine in Malawi first surfaced as rumors coming from rural areas of the country around October 2001. Malawians in the cities, including government officials in Lilongwe, the capital, were slow to believe, or act on, the persistent accounts. Even when well-known advocacy groups like the Malawi Economic Justice Network (MEJN) and the Catholic Commission for Justice and Peace presented data to back up the reports, they were dismissed as lacking credibility. But incredible as it may have seemed, Malawi - hardly a desert state, but a densely-populated country in a lush region - really was facing catastrophic food shortages in the wake of a combination of flooding and a regional drought, and after over a decade of “structural adjustment Structural Adjustment Economic policies imposed by the IMF in exchange of new loans or the rescheduling of old loans.

Structural Adjustments policies were enforced in the early 1980 to qualify countries for new loans or for debt rescheduling by the IMF and the World Bank. The requested kind of adjustment aims at ensuring that the country can again service its external debt. Structural adjustment usually combines the following elements : devaluation of the national currency (in order to bring down the prices of exported goods and attract strong currencies), rise in interest rates (in order to attract international capital), reduction of public expenditure (’streamlining’ of public services staff, reduction of budgets devoted to education and the health sector, etc.), massive privatisations, reduction of public subsidies to some companies or products, freezing of salaries (to avoid inflation as a consequence of deflation). These SAPs have not only substantially contributed to higher and higher levels of indebtedness in the affected countries ; they have simultaneously led to higher prices (because of a high VAT rate and of the free market prices) and to a dramatic fall in the income of local populations (as a consequence of rising unemployment and of the dismantling of public services, among other factors).

IMF : http://www.worldbank.org/
” policies designed by the IMF IMF
International Monetary Fund
Along with the World Bank, the IMF was founded on the day the Bretton Woods Agreements were signed. Its first mission was to support the new system of standard exchange rates.

When the Bretton Wood fixed rates system came to an end in 1971, the main function of the IMF became that of being both policeman and fireman for global capital: it acts as policeman when it enforces its Structural Adjustment Policies and as fireman when it steps in to help out governments in risk of defaulting on debt repayments.

As for the World Bank, a weighted voting system operates: depending on the amount paid as contribution by each member state. 85% of the votes is required to modify the IMF Charter (which means that the USA with 17,68% % of the votes has a de facto veto on any change).

The institution is dominated by five countries: the United States (16,74%), Japan (6,23%), Germany (5,81%), France (4,29%) and the UK (4,29%).
The other 183 member countries are divided into groups led by one country. The most important one (6,57% of the votes) is led by Belgium. The least important group of countries (1,55% of the votes) is led by Gabon and brings together African countries.

http://imf.org
.

The crisis in rural Malawi finally hit the headlines on February 22, 2002, when MEJN succeeded in attracting attention to its call for government and donor action. It dewmanded that “the Government should acknowledge that there is hunger in Malawi; make the holding of maize a crime, subsidize the price of maize in Malawi; government and civil society should provide food supplies to vulnerable groups.” At this point, the mainstream international media started broadcasting reports of a famine emergency, desperation and critical food shortages.

An international blame game has emerged between the government of Malawi and the IMF. Malawi’s President, Bakili Muluzi, declared: “The IMF is to blame for the biting food crisis. They insisted the government sell maize from its strategic reserve and requested that the government abandon its starter pack agricultural subsidy program.” The IMF’s representative in Malawi commented: “We have no expertise in food security policy and we did not instruct the Malawi Government or the National Food Reserve Agency (NFRA) to dispose of the reserves.”

Famine, Democracy, and Economic Policy

An intensively agricultural country like Malawi should, with adequate planning, have been able to endure a year of localized flooding (2000-2001) followed by a year of drought. Nobel Prize-winning economist Amartya Sen has made his reputation by showing that killer famines do not occur simply because of weather or natural disasters, but arise from a combination of factors which usually includes the subordination of common sense planning to political distortions, ranging from war or military occupation to corruption. Sen’s most famous corollary to this observation is that democracies do not suffer famines, since the government must be responsive to the population.

But Malawi is a democracy, at least formally, even if it is hardly a model democracy (President Muluzi recently said he would not resist the label “dictator”). One of the questions that must be asked in light of the ActionAid report, which finds that the International Monetary Fund (IMF) must share Share A unit of ownership interest in a corporation or financial asset, representing one part of the total capital stock. Its owner (a shareholder) is entitled to receive an equal distribution of any profits distributed (a dividend) and to attend shareholder meetings. the blame for permitting at least one thousand people to die of hunger in Malawi, is whether a government under intense pressure from the IMF and similar financial institutions to accept inappropriate policies is afflicted with a political distortion serious enough that it can no longer be called “democratic.”

The IMF/World Bank World Bank
WB
The World Bank was founded as part of the new international monetary system set up at Bretton Woods in 1944. Its capital is provided by member states’ contributions and loans on the international money markets. It financed public and private projects in Third World and East European countries.

It consists of several closely associated institutions, among which :

1. The International Bank for Reconstruction and Development (IBRD, 189 members in 2017), which provides loans in productive sectors such as farming or energy ;

2. The International Development Association (IDA, 159 members in 1997), which provides less advanced countries with long-term loans (35-40 years) at very low interest (1%) ;

3. The International Finance Corporation (IFC), which provides both loan and equity finance for business ventures in developing countries.

As Third World Debt gets worse, the World Bank (along with the IMF) tends to adopt a macro-economic perspective. For instance, it enforces adjustment policies that are intended to balance heavily indebted countries’ payments. The World Bank advises those countries that have to undergo the IMF’s therapy on such matters as how to reduce budget deficits, round up savings, enduce foreign investors to settle within their borders, or free prices and exchange rates.

Privatization Agenda

The context for the crisis in Malawi is the IMF’s (and the World Bank’s) continuing quest to privatize every portion of the economy that can conceivably be wrested from the government. This mission is by no means limited to Malawi; it is fast becoming the new modus operandi for the institutions everywhere they operate. More and more, observers are coming to fear that near-wholesale privatization of developing country governments is the agenda for the IMF and World Bank after 20 years of devastating their capacity through structural adjustment programs.

At the heart of the privatization agenda in Malawi is the agricultural liberalization program. Among its features are the reduction or elimination of programs supplying small farmers with fertilizer, seeds, and credit, often subsidized, and providing consumers with subsidies for basic food and other “price stabilization interventions.”
The IMF has prioritized the privatization of the agencies that have provided support for farmers and food security, the Agricultural Development and Marketing Corporation (ADMARC) and the National Food Reserve Agency (NFRA).

Background to the Crisis

There appears to be enough blame for both the government and the IMF to share ample portions. The ActionAid report isolates one important factor - the failure of macro-economic and structural policy to safeguard against the famine in Malawi. At the same time, the report states: “We remain conscious of the myriad of complex variables, both causal and correlative, often associated with famine situations.” It does not claim that economic policy was the sole culprit, but rather a major contributing factor, and one that could have been changed.

For Malawi’s farmers, 1998/99 and 1999/00 were good production years. Localized flooding reduced the 2000/01 maize harvest, leaving a shortfall estimated at 237,000 metric tons. By the end of 2001, as drought persisted, the maize shortfall had almost tripled. Predictions were made, however, that a bumper harvest of cassava and others root and tuber crops would partially offset the deficit. The prediction resulted in what ActionAid terms “misplaced complacency,” since it turned out to be incorrect.
Signals of the impending food crisis were missed, and the government accepted the IMF’s insistence that the Strategic Grain Reserve should be reduced.

The original sin seems to lie with the IMF and the European Union, which repeatedly called for Malawi’s grain reserve to be privatized and run on a “cost-recovery basis.” This resulted in the 1999 spin-off of NFRA from ADMARC, with a mandate to maintain adequate buffer stocks of grain and to protect Malawians against fluctuations in food production, availability and prices. Neither the government nor the donors thought it necessary to provide the NFRA with any starting capital, however. After the rich harvest of 1999, the NFRA followed its mandate by purchasing 167,000 metric tons of maize. But in order to do so, it had to take out loans from both commercial and government banks. ActionAid quotes a donor official as saying, “The decision for a commercial loan to be taken to capitalize the NFRA - that was a crazy decision.”

Some of the loans are reported to have carried an annual interest Interest An amount paid in remuneration of an investment or received by a lender. Interest is calculated on the amount of the capital invested or borrowed, the duration of the operation and the rate that has been set. rate of 56%. (Interest rates Interest rates When A lends money to B, B repays the amount lent by A (the capital) as well as a supplementary sum known as interest, so that A has an interest in agreeing to this financial operation. The interest is determined by the interest rate, which may be high or low. To take a very simple example: if A borrows 100 million dollars for 10 years at a fixed interest rate of 5%, the first year he will repay a tenth of the capital initially borrowed (10 million dollars) plus 5% of the capital owed, i.e. 5 million dollars, that is a total of 15 million dollars. In the second year, he will again repay 10% of the capital borrowed, but the 5% now only applies to the remaining 90 million dollars still due, i.e. 4.5 million dollars, or a total of 14.5 million dollars. And so on, until the tenth year when he will repay the last 10 million dollars, plus 5% of that remaining 10 million dollars, i.e. 0.5 million dollars, giving a total of 10.5 million dollars. Over 10 years, the total amount repaid will come to 127.5 million dollars. The repayment of the capital is not usually made in equal instalments. In the initial years, the repayment concerns mainly the interest, and the proportion of capital repaid increases over the years. In this case, if repayments are stopped, the capital still due is higher…

The nominal interest rate is the rate at which the loan is contracted. The real interest rate is the nominal rate reduced by the rate of inflation.
are often kept high in countries under IMF programs, though it is not clear if that was the reason for the 56% rate.)

The grain reserve was at near-capacity for three years. The costs of maintaining it, in addition to the rapidly-growing debt from the loans, made the donors nervous. Additionally, with no cash on hand, the NFRA had no way to pay its employees. The IMF and the World Bank agreed that the NFRA should sell some of its grain stock. However, the price of maize in Malawi at that time was low, and the sales were made at heavy losses.

In fact, it appears that the government went further than the IMF suggested. The IMF reports it recommended reducing the reserve from 165,000 to 60,000 metric tons by selling it outside the country, so as to avoid further depressing maize prices for Malawian farmers. The NFRA initially sold 30,000 tons to Kenya and 5,000 tons to Mozambique. But it then seems to sold almost all of the remaining reserve, much of it on local markets. There is some evidence that much of it was sold to local traders, who stockpiled it and profiteered from hunger.

When food shortages arose after an unexpectedly poor harvest, the government tried to purchase food from other countries. Not only had prices shot up, but a series of logistical problems caused fatal delays and added to the pressure on retail prices, which soon exceeded affordable levels. In a tragic irony, donors, who suspected corruption had soaked up the proceeds of the grain reserve, responded by suspending aid to the government.

Assessing the IMF’s Role

ActionAid concludes that regardless of who was most at fault for the miscalculations that led to the sale of the strategic grain reserve, “the IMF displayed remarkable insensitivity and ideological narrow-mindedness in the Concluding Statement of its Mission in May 2002, which resolved to withhold disbursement of $47 million to Malawi. While acknowledging the need for ’urgent action to prevent starvation,’ the IMF statement failed to mention that hundreds of starvation deaths had already occurred just 2-3 months previously, and it implied that ADMARC and NFRA activities to minimize famine mortality were unjustified and ’unproductive.’”

The IMF’s report from last month stated “the parastatal sector will continue to pose risks to the successful implementation of the 2002/03 budget. Government interventions in the food and other agricultural markets ultimately led to the NFRA and the ADMARC taking heavy recourse to budgetary financing, crowding out more productive spending.” It all depends, of course, on what is considered more “productive”: dollars or human lives.
The IMF has suspended not only disbursements in its current program in Malawi, but also interim debt relief under the HIPC Heavily Indebted Poor Countries
HIPC
In 1996 the IMF and the World Bank launched an initiative aimed at reducing the debt burden for some 41 heavily indebted poor countries (HIPC), whose total debts amount to about 10% of the Third World Debt. The list includes 33 countries in Sub-Saharan Africa.

The idea at the back of the initiative is as follows: a country on the HIPC list can start an SAP programme of twice three years. At the end of the first stage (first three years) IMF experts assess the ’sustainability’ of the country’s debt (from medium term projections of the country’s balance of payments and of the net present value (NPV) of debt to exports ratio.
If the country’s debt is considered “unsustainable”, it is eligible for a second stage of reforms at the end of which its debt is made ’sustainable’ (that it it is given the financial means necessary to pay back the amounts due). Three years after the beginning of the initiative, only four countries had been deemed eligible for a very slight debt relief (Uganda, Bolivia, Burkina Faso, and Mozambique). Confronted with such poor results and with the Jubilee 2000 campaign (which brought in a petition with over 17 million signatures to the G7 meeting in Cologne in June 1999), the G7 (group of 7 most industrialised countries) and international financial institutions launched an enhanced initiative: “sustainability” criteria have been revised (for instance the value of the debt must only amount to 150% of export revenues instead of 200-250% as was the case before), the second stage in the reforms is not fixed any more: an assiduous pupil can anticipate and be granted debt relief earlier, and thirdly some interim relief can be granted after the first three years of reform.

Simultaneously the IMF and the World Bank change their vocabulary : their loans, which so far had been called, “enhanced structural adjustment facilities” (ESAF), are now called “Growth and Poverty Reduction Facilities” (GPRF) while “Structural Adjustment Policies” are now called “Poverty Reduction Strategy Paper”. This paper is drafted by the country requesting assistance with the help of the IMF and the World Bank and the participation of representatives from the civil society.
This enhanced initiative has been largely publicised: the international media announced a 90%, even a 100% cancellation after the Euro-African summit in Cairo (April 2000). Yet on closer examination the HIPC initiative turns out to be yet another delusive manoeuvre which suggests but in no way implements a cancellation of the debt.

List of the 42 Heavily Indebted Poor Countries: Angola, Benin, Bolivia, Burkina Faso, Burundi, Cameroon, Central African Republic, Chad, Comoro Islands, Congo, Ivory Coast, Democratic Republic of Congo, Ethiopia, Gambia, Ghana, Guinea, Guinea-Bissau, Guyana, Honduras, Kenya, Laos, Liberia, Madagascar, Malawi, Mali, Mauritania, Mozambique, Myanmar, Nicaragua, Niger, Rwanda, Sao Tome and Principe, Senegal, Sierra Leone, Somalia, Sudan, Tanzania, Togo, Uganda, Vietnam, Zambia.
program (see article on HIPC in this issue). Despite the crisis, NFRA continues to be viewed by the IMF only as a drain on budgetary resources and emphasis continues to be placed on lowering operating expenses and to generating sufficient funds to pay off outstanding debts.

The Government’s Role

ActionAid reports that IMF documents confirm that the government of Malawi has been reluctant to implement aspects of the IMF’s agricultural liberalization program.
However, faced with with the need to access balance of payments Balance of payments A country’s balance of current payments is the result of its commercial transactions (i.e. imported and exported goods and services) and its financial exchanges with foreign countries. The balance of payments is a measure of the financial position of a country vis-à-vis the rest of the world. A country with a surplus in its current payments is a lending country for the rest of the world. On the other hand, if a country’s balance is in the red, that country will have to turn to the international lenders to meet its funding needs. support from the IMF, the government instituted the policy package. ActionAid says that in trying to compare the government’s actions and the IMF’s, “the willingness to accept inappropriate policy reforms in the final instance and an inability to formulate policy alternatives makes [the government] equally responsible.”
Despite concerns about corruption and operational inefficiencies acknowledged by the IMF and other donors about ADMARC, during the 1991-92 drought the agency, which at the time included the function of NFRA, had the capacity to dispense food through depots in the most inaccessible rural communities at affordable prices. This capacity has collapsed in 2002. And, as the February 2001 executive summary of the IMF’s report on Malawi’s 2000 Article IV Consultation [annual economic analysis] and PRGF [structural adjustment program] reveals, the IMF has actively sought to reduce the state’s capacity to provide subsidies and stabilize food prices. The report states: “The marketing of maize used to be the sole preserve of ADMARC. These monopoly provisions have been removed and ADMARC is no longer able to borrow for intervention activities under Government guarantee. However there is considerable resistance to full privatization partly because of the difficulties involved in encouraging private traders to take over ADMARC’s loss-making operations in far-flung rural areas. For the time being, ADMARC will undergo further commercialization. The Fund and the World Banks staffs urged retention of the target of full privatization by end-2002 but the authorities were unwilling to confirm such a commitment.” The IMF’s priority can also be seen with regard to the provision of services to farmers. The ActionAid report states, “The main constraint on agricultural production in Malawi since the early 1990s has been constrained access to inputs (fertilizer, seeds, credit). It is in this context that the government of Malawi’s ’ Starter Pack’ - or Targeted Inputs Program - makes an important contribution to the national harvest and household food security. Distribution of Starter Packs was abandoned two years ago, restricted to 1 million households last year on the advice of international donors, but will be expanded this year, up to 2.5 million households.”
The consequences of the removal of subsidy programs for farmers are clear. The number of farmers growing tobacco, Malawi’s largest export crop, has, says the IMF, increased, as has their productivity. But, as the IMF also acknowledges, farmers’ income has actually declined 25%, largely due to having to pay increased prices for fertilizers, seeds, and credit.

ActionAid notes that the IMF apparently accepts no responsibility for its own role in the confluence of events leading up to the deaths of over a thousand people. As noted earlier, it has gone on record saying that it has no expertise in the area of food security policy, yet provided policy advice in an area which directly affected food security. The report ultimately asks “what the relevance of development of macroeconomic targets, private sector led GDP GDP
Gross Domestic Product
Gross Domestic Product is an aggregate measure of total production within a given territory equal to the sum of the gross values added. The measure is notoriously incomplete; for example it does not take into account any activity that does not enter into a commercial exchange. The GDP takes into account both the production of goods and the production of services. Economic growth is defined as the variation of the GDP from one period to another.
growth, fiscal discipline and export growth targets are, if such variables seemingly have little impact on the ability of the economy to support food security?”
ActionAid concludes by pointing to the fact that the IMF is not simply a power that must be reckoned with on its own terms, but a public institution which must take responsibility and be held accountable for its advice, conditionality and lending practices. In light of a famine caused, or at least exacerbated, by economic liberalization, it should no longer be possible to insist on a rigorous liberalization program at all costs, or to brush off demands for acceptance of a government’s right to provide agricultural subsidies, develop greater regulatory state capacity of the market and prioritize preservation of essential food-crops.

After extensive contact with the Malawian Government, civil society and donors on a draft version of its report, ActionAid has issued a call for the IMF to:

1. Institute an urgent moratorium on structural reforms so that food security objectives can be formulated, set and met by the government, civil society, and donors.

2. Tolerate governmental regulation of various forms of financial manipulation.

3. Determine who may have benefited from the sell-off of the Strategic Grain Reserve and the reduction of regulatory capacity.



cadtm.org
Arnaud Zacharie

Secrétaire général du CNCD-11.11.11

CADTM

COMMITTEE FOR THE ABOLITION OF ILLEGITIMATE DEBT

35 rue Fabry
4000 - Liège- Belgique

00324 226 62 85
info@cadtm.org

cadtm.org