Monday, August 10, 2009

Diploma Mill Economics

Pacific Western University (PCU) of California, USA is described by Wikipedia, the web based, free content encyclopedia project, as "an institution criticized on multiple occasions as a substandard educational institution or 'diploma mill'. Among the ranks of its alumni is our own President, Bingu wa Mutharika who obtained a PhD in Development Economics from there.

In the last couple of weeks, a number of economic decisions made in Malawi in my view, have gone to confirm the questionable of economics one would expect from a diploma mill like PCU. On July 31st, the Daily Times run an article headlined "Forex Shortage affects Unilever". According to this article, Unilever, is struggling to procure raw materials for its products from outside Malawi due to forex shortage. As a result, the company is currently unable to produce enough products for the local market.

Two days before the Unilever story, the same paper had carried an article chronicling the struggles of one Eunice Kendulo, a fifty-one year old cotton farmer from Salima district in central Malawi. This story reports that cotton buyers have 'voted with their feet' by staying away from buying after the President imposed a minimum buying rate of K70 per kilogram while the buyers were offering half of that. The end result is that the likes of Ms. Kendulo are stuck with a commodity that they cannot sell or consume.
President Mutharika's responses to these episodes? Closing down of forex bureaux and threatening cotton buyers with deportation (never mind that none are currently buying) if they refuse to pay the set minimum price. Tobacco buyers have in recent years faced similar threats of deportation when the President has, in his wisdom, set minimum prices for the tobacco crop.
The President's desire to ensure Malawian farmers get the most for their produce is a noble goal. Similarly, the refusal to float the Malawi Kwacha is being justified as an attempt to cushion local consumers from price increases that would result from devaluing the local currency.

While I am not a believer in unfettered laissez-faire economics, it surprises me to see the levels of protectionism that the Bingu government is undertaking in Malawi (perhaps the outcome of 1960s protectionist economics?). For one, the resistance to liberalize the currency exchange market is as ridiculous as it is self defeating. Not only are Malawian companies unable to procure necessary raw materials for their domestic production, but it also results in the very thing that Bingu is trying to avoid- price increases as fewer goods are produced in a market that demands more. Additionally, an overvalued currency also makes Malawian goods very uncompetitive on the international market, reducing the inflow of foreign currency, further perpetuating the forex shortages.
As for the minimum price settings, the President would do better to convince the farmers not to sell below his preferred minimum price. Let Ms. Kendulo and her fellow cotton farmers decide whether to sell at lower prices or keep their cotton harvest unsold. The President should not adopt this self-defeating know-it-all attitude.

As for these constant threats of deporting foreign investors, well, who is the ultimate loser? While I am not naive enough to assume that all 'investors' have the good of Malawi at heart, I strongly feel this scare-them policy only serves to scare away other investors, depriving hardworking Malawians of employment opportunities. And frankly, all this gives the impression of a leader who is not in control.