Blog #3: Malawi and the 2007-2008 Financial Crisis
The global financial crisis of 2007-2008 was a result of the increased liberalization of the economy and the risks that came with it. In countries across the globe, the economy was gradually deregulated. This was due to the idea that any government interference in the economy hampered its innate equilibrium. Instead, the disappearance of economic regulations did not balance the global economy but introduce it to even greater risk. The global financial crisis of 2007-2008 was caused by a global acceptance of higher risk investments that introduced a false confidence in the global economy.
A large part of the deregulation of the global economy was led by the International Monetary Fund and the World Bank. In the 1970’s, these organizations offered poorer nations financial aid if they agreed to follow guidelines that would liberate their economies (2). In these agreements, the countries were required to devalue their currency, reduce state interference in the economy, eliminate government subsidies, and ease global trade restrictions. Malawi was one of the countries that accepted aid from both the IMF and the WTO in 1979. Even now, forty percent of Malawi’s budget comes from foreign aid. Malawi has relied on this aid to foster economic growth in the country.
While the country depends on its foreign aid to stimulate economic growth, the conditions of the foreign aid may not help its people. Malawi needs its foreign aid so badly that it does not have any power to negotiate with international organizations to determine what the country must do in return for its aid. This results in policy that was not created by or desired by the Malawian government. Interestingly, a report published by NGO A SEED showed that the implementation of World Bank policies correlated with an increased level of poverty in the region because the government is forced to reduce spending for social programs (2). This highlights that the liberalization of the economy is not a perfect concept, and the free market may not trend towards equilibrium.
Although the terms of Malawi’s foreign aid have forced the country to interact on the global market, the country has remained relatively isolated from the financial crisis of 2007-2008. Malawi and other sub-Saharan countries have remained so resilient during the crisis because a large part of what drives these countries’ economies is the domestic market. Because most of the population of Malawi is in poverty, they do not have the resources to sell goods to other countries. They instead go to local markets to buy and sell goods. Despite their strong domestic economy, the country is not completely detached from the rest of the world. A significant portion of its economy exports tobacco, tea, and sugar to other countries. With a global drop in demand for foreign goods, this portion of the economy did suffer because of the global financial crisis (1).
In 2010, the Malawian government fought with its donors on the issue of devaluing the country’s currency. Because Malawi ignored the IMF’s directive, and it was a convenient time for countries to reduce spending after a global crisis, Malawi lost aid from Britain, The World Bank, The EU, The African Development Bank, Germany and Norway (2). This has hit the Malawian economy very hard, but they still receive some foreign aid from China and other international organizations.
As the world has turned towards a gradual deregulation of the market, Malawi has been swept along with it. In return for foreign aid, they have implemented policies that encourage free trade and less government intervention in the economy. Because of their increased participation in the global economy, they certainly felt the impacts of the global financial crisis of 2007-2008 in their agricultural exports. However, most of the country’s economy is domestic, and it has insulated Malawi from the total devastation that some countries have experienced.
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