Sunday, November 8, 2009

It’s the Economy Stupid

In Malawi, one has a lot of time to think. I think while I pump water (Jes and I pump all our water with an MSR hand-pump), I think while I walk down the road, and I think with quite little distraction when the power goes out every night at 6pm. What has come as quite a shock is that my mind has chosen to occupy itself with economics during these moments of monotony. In college, Adam Smith was about the only economic theorist I read. Over the last several months I have been kicking myself for never taking an economics class. I am sure many people share my regrets based on the recent bamboozling financial quagmire. However, being cutoff from all but the most superficial and inane news, my impetus for economic learning has been quite different.

Malawi provides a unique perspective from which to observe economics. I can literally watch the flow of goods as they move from farmers to market, and as they are distributed from wholesalers along a chain of increasingly smaller, more expensive, and more remote shops. When I walk into the market and see only one stand selling tomatoes, I know the price will be steep. A haggling system also makes painfully clear that prices are motivated, not by value or cost of production, but by what someone is willing to pay. In the United States, although the same forces of competition and scale are at work, they are shrouded from view by an economic system so large and complex that it operates beyond public perception.

Poverty is probably the most visible economic phenomena in Malawi. The last time I saw poverty as severe was on a school trip to India several years ago. I remember wondering why people, who appear to contain the same intelligence and ability as Americans, have so much less wealth. The question seemed simple enough, and I asked several of the economic majors on the trip. Their answers were never satisfying and seemed to explain the poverty simply by restating it. “Indians are poor because the country has a low GDP,” and, “people are poor because their wages are low,” were common responses. The response concerning low wages progressed my question, but simply shifted the quintessence of my query to wages; why are wages low? After returning to the United States and school my thoughts were diverted to more immediate concerns.

In Africa, however, the question resurfaced, and I once again started asking people about the cause of poverty. Malawians usually have two responses to this question. First, they claim that Malawi is not poor, only its people. Now this sounds nonsensical at first, but it is really a statement about wealth distribution. Malawians see BMWs drive down the road, they see wealthy resort owners, and they assume that the wealth is there and that they aren’t getting their share. As appealing as this explanation is, it is utter hogwash. In a country where there are few natural resources and the per capita income hovers around 500 US dollars, even the most egalitarian economic distribution would still leave Malawi, and its people, poor.

The second rationalization I get from Malawians is that the country is lazy. This explanation is really a statement about how hard and how much Malawians work. It is true that the country enjoys a more relaxed professional culture than America. People take long lunch breaks, take mid-day naps, and work far fewer hours than Americans. However, when I see a Malawian tirelessly building a house in 100 degree heat, or carrying lumber for 10km on foot, I can’t believe Malawians are categorically lazy. Even if Malawians do work less than Americans, say 4 hours instead of 8 hours per day, the pay differential should be one half, not one orders of magnitude greater.

Although the laziness argument is a bit of a scapegoat, it did make me think about how much Malawians really accomplish with their labors. I was recently provided with a rather illuminating example at a roadside basket stand. An elderly woman sat on the ground, surrounded by stacks of woven baskets, mats, and little miniature cars targeted at tourists. I asked the woman how long it took her to weave one of her mats and she replied that it took about a day and a half. A person working in a factory in the United States could probably produce 100 or more such mats in the same amount of time. It was at this moment I realized the answer to my question. Wealth is simply the result of productivity. A person who creates 100 mats will have 100 times the wealth and purchasing power as a person who creates one mat. The man who hauls lumber on his back will probably work harder than a man transporting lumber with a truck, but he will transports far less lumber and therefore have far less wealth. At the rate Malawians weave mats and transport lumber, a considerable number of people are required to satisfy the country’s need for mats and lumber transport. In the United States, those same people are free to pursue other endeavors of production. They make cars, make television, build houses, and create the multitude of things we associate with wealthy societies.

Overall, Malawi’s human capital is probably held tied up most by its unproductive agriculture. Malawian farmers till their fields by hand and, as a result, cultivate far less land than a mechanized farmer. The national statistics are staggering; 87% of the population is employed in farming, not because Malawi is a prodigious agriculture exporter (although they do export food), but because unproductive farming necessitates massive human capital. In a developed country only 2-3% of the population is needed to produce sufficient food.

It seems clear that Malawians are poor because their overall productivity is low, however, within specific sectors of the economy the productivity argument appears to break down. What about teachers? Malawian teachers provide an inestimably valuable product and produce it at productivities roughly equivalent to their higher paid American counterparts (In some instances the teachers in Malawi may actually be more productive due to larger class sizes). If compensation is related to productivity, why then are Malawian teachers paid 2,500 dollars a year while American teachers receive more than ten times as much. I only saw the reason after I accepted that teachers, like other service professionals, don’t really produce anything. Now this seems harsh, especially given my current occupation. But to admit that teachers (and people in other service professions) are unproductive is not to say their labors are without value. Education and other service sectors are like oil to the economic engine; it aids the productivity and functionality of the engine, without actually providing the power or means of movement. The educational sector trains workers and develops production technologies. The health sector keeps everyone alive so that they can continue to work. And the financial sector determines how to distribute capital so that it best increases productivity and growth (at least in theory). Nowhere in these activities are the material goods associated with wealth produced. Therefore, the compensation of individuals in the services sector is inextricably tied to the wealth of the industrial complex that surrounds it. The teachers in Malawi are paid by student fees which are collected from families that are employed unproductively. The teachers can only charge what families can afford to pay and this fact limits the wages of Malawian teachers as well as all other service professionals.

Even from the examples of the basket weaver and the lumber transporter the root of Malawi’s low productivity becomes obvious, technology. The basket company in the United States uses machines to construct the baskets. A transport company uses trucks driven on paved roads, a practice far more efficient than carrying freight by hand over rough ground. Observing the consequences of low productivity in Malawi has given me a new appreciation for the touchy issue of automation in the United States.

Whenever a new machine or process eliminates jobs in the United States there is public outcry. Generally such occasions are viewed as evil companies maximizing profits at the expense of workers. I don’t really care to debate the morality of businesses, but looking at the end result of automation is instructive. Lets assume a new machine is created that eliminates the need for bank tellers (okay this has already happened, but it is a good example nonetheless). The most visible consequence is lost jobs and this is unfortunate indeed. However, people often fail to follow the less visible consequences of automation. Some of the money once paid to employs will pay for the ATMs, which will inevitably fund new jobs in the growing ATM-making industry. The bank, at least in the long term, will also realize an increased profit since the ATMs must cost less than humans to justify their use. The bank can then use that profit in three different ways: it can lower bank fees (effectively raising the income of everyone that uses banks), it can reinvest in the company (creating more jobs), or it can invest the money outside the company (creating jobs in other industries). Even if banks choose to lower bank fees, jobs will be created because consumers will now have more money to spend or invest in different areas of the economy, growing employment in those areas.

However, the most important effect of the ATMs is an increase in productivity. The banks continue to operate at the same capacity but with fewer employees. The laid-off workers (or to say it nicer, “liberated human capital”) can now be employed in new fields that provide new products to society. Imagine if all those people were employed at a new electronics company that produced wristwatch televisions. Everyone could have a wristwatch television; wouldn’t that be great? Well, maybe not. But some of the people could also become therapists and spiritual leaders to help people cope with the societal consequences of ubiquitous wristwatch televisions. My point is, is that liberated human and physical capital can be used in new endeavors to improve everyone’s quality of life.

This process of ever increasing automation, efficiently, and productivity is what has allowed the United State to enjoy such a high quality of life. The absence of such a process in Malawi has left the country devastatingly poor. In the developed world, the effort we spend castigating companies for improving efficiency at the loss of jobs would probably be better spent helping the now unemployed workers retrain and retool. If you question whether this process of ever-increasing productivity is worth the turmoil caused for employees and their families, I have one bit of advice: come to Malawi.

Most Malawians (almost 80%) live a rural subsistence lifestyle, largely due to 30 years of economic and social policy under President Banda. Because of Banda’s policies, Malawi represents the starting point of economic development. The humanitarian costs inherent in such a state of existence are staggering. The low productivity and ensuing poverty means that many are malnourished, healthcare services are appalling, and the education system is accessible to few. I think few Americans would find the standard of living in Malawi acceptable.

The economic question de jour then becomes: how can the quality of life in Malawi best be improved? One approach is outside humanitarian aid. Malawi receives so much outside aid that it accounts for 15% of the country’s nominal GDP. The money certainly assuages some human suffering, but after a year as an aid worker I question its long-term effectiveness. Fifty years of aid-culture in Malawi has bred significant dependence and done very little to progress people’s standard of living. There are of course pockets of success, but by most social measures the country has stagnated for the past 50 years. Much of the humanitarian aid that enters Malawi also has the downside of being unsustainable, a fact that was painfully revealed to MCV (and many other NGOs) during the latest economic recession.

Another way to increase quality of life is to increase productivity. This inevitably involves moving people away from a traditional lifestyle towards a more productive and developed economic system. For this to be realized you need technology, you need the tractors, machines, and factories that fuel affluent lifestyles. Unfortunately, Malawi lacks the capital for the significant internal investment needed for development and consequently requires external input. In short, the economy needs to become more open to investment. Before coming to Malawi, this investment-economic approach to achieving humanitarian aims always gave me pause. It always struck me as exploitive. International companies extracting huge profits while the locals receive a pittance. I was also concerned with the reports of cultural disintegration and the dilution of traditional beliefs with the popular culture of the western world. My angst with both criticisms of development has been tempered, though not eliminated, by my time in Malawi.

Let me begin with the argument that development and globalization destroys traditional culture. Every night outside my house I am serenaded by the singing and drumming of the female boarding students. Their performance is nearly always prompted by the nightly hour-long brownout. In the unlikely event the Malawi Power Board avoids a blackout, the girls remain inside and the air is silent. The other night, as I sat listening to their performance in my sweltering hut, I began to wonder how much singing and dancing is afforded nationwide by the regular blackouts. What effect would just one more hour of electricity have on the culture heritage of Malawi? Who knows, but I suspect the singing outside my window would stop. As people’s lifestyles change it seems inevitable that beliefs and behavior will follow. However, I doubt that this cultural change will morph Malawi into a nondescript country without any semblance of locality.

The missionaries who came to Malawi started the process of globalization over 150 year ago and still the religious character of Malawi remains as unique as ever. Yesterday I was relaxing under our school’s baobab tree with other teachers in a vain attempt to escape the mid-day heat. As the conversation turned to religion (as it so often does when a heathen such as myself is present) I asked what effect they thought Christianity and Islam had on their traditional religions. I thought the biology teacher had an interesting point; he said that the evangelical religions brought new options that were relevant in some, but not all, situations. He appreciated both his Christian and traditional beliefs and embraced both ways of thinking without any apparent contradiction. People in Malawi are always on the prowl for new religions to try; religions are almost viewed as an a la carte offering. Jes is constantly being asked to start up a Jewish group and half the teachers hold strong convictions that I should start a congregational church so they can have a go. Religion here is a smorgasbord of options and even the imported religions like Christianity and Islam have a strong local flavor. Overall, I would describe the religious culture here as more interesting and unique because of outside influences. As more culture and technology is imported into Malawi I do see some traditional culture disappearing, but just as often I see new ways being blended with old to make a culture that is uniquely Malawi. Last night I saw a group of students singing and dancing around the tinny drum beat of a cell phone speaker, giving me hope that the bane of development will fail to usurp the vivacious character of Malawi.

From more cultural concerns, I would like to move on to the argument that investment led development is inherently exploitive. When outside companies (usually manufacturers) enter a developing country the rewards of the partnership often seem one-sided. When a company ships manufactured goods from the 3rd-world they attach an enormous mark-up, little of which is seen by those actually making the product. When I walk into an American department store and pay 50 dollars for a new pair of jeans, the thought that those making the jeans are paid less than a dollar a day is a little unsettling. Such measly wages seem almost immoral. However, after living in Malawi for a year that dollar-a-day figure doesn’t have the same shock value it once did. In Malawi, there is nothing insulting about paying a worker a dollar a day; in fact, it is a good wage that many would be happy to receive. I can actually foresee it being socially disruptive to pay factory workers significantly more than the local market income. What sort of harmful incentives would be created in an economy where a seamstress in a textiles plant makes four or five times as much as a teacher or nurse? Is that justice? Regardless of how one-sided the rewards of third world investment appear to be, it is wrong to assume that local communities do not benefit; they actually benefit a great deal.

The MCV sewing program recently made the choice to enter into what is called piece work, basically a compensation system where companies (often international) auction out large sewing orders at very low per item rates. The piece work system is how most commercial sewing is conducted and has a bit of a stigma because it produces a ruthless bidding system that leads to low wages (at least by American standards). MCV is making prison uniforms at 70 kwacha a piece, or about 50 cents. The people working in the sewing program start at 170 kwacha a day (about 1 dollar) and are expected to produce a certain number of uniforms, though I don’t think a quota system is in place. Although piece work has a bit of a stigma, I actually applaud Nettie’s (Nettie is the director of the sewing program) decision to change the sewing program. Previously, the sewing shop was routinely empty as the tourist orders on which the program relied were infrequent. “Piece work” may not have the same cachet as “tourist boutique,” but it has allowed the sewing program to train and employ a roomful of people, giving skills and a dignified livelihood to individuals who previously had none. Even at a dollar a day, employees can save for the future, pay for their children’s education, and appreciate the stability of an income. Now when I walk into the sewing shop there is a positive vibe; people are in a great work environment and proud of their vocation. The biggest complaint I hear in Malawi is that there is no work. People want and need employment.

As long as a humane work environment is maintained, I see nothing immoral with outside companies bringing factories to Malawi. This may feel exploitive, but for all its evils this type of investment-led-development has helped lift millions out of poverty. China, and to a lesser extent India, have both embraced this style of economic development and have seen their incomes and access to basic services increase dramatically. Meta studies have consistently shown that developing countries with open economies and high levels of external investment post much larger economic and humanitarian gains than countries relying on internal investment alone.

I still have reservations about the future of development in Malawi. If wealthy companies enter Malawi, the lopsided power between companies and employees could easily create an environment where workers are exploited in ways far more damaging than low wages. I would be most concerned by inhumane working conditions where a disregard for human dignity could quickly nullify any humanitarian gain offered by increased wealth. I think that Malawi’s development needs to move forward cautiously and deliberately. To not move forward at all would be robbing people of a proven path towards increased productivity and prosperity.

1 comment:

  1. Fascinating post, Jesse. It is nicely tied in to the previous post on generosity that discusses (among other matters) the difficulty of capital formation in a society wherein social norms distribute capital and divert it into consumption. That is insightful.

    Does microlending have a presence in your community?