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7 December 2007:

Celia W Dugger on Malawi and Free Markets, in the New York Times (with an assist by James Surowiecki, in The New Yorker).

On the front page of Sunday's New York Times, there was a photograph of men — presumably men — standing on sacks of fertilizer. The story, "Ending Famine, Simply by Ignoring the Experts," by Celia W Dugger, reported the success of an important policy reversal in Malawi.

Over the past 20 years, the World Bank and some rich nations Malawi depends on for aid have periodically pressed this small, landlocked country to adhere to free market policies and cut back or eliminate fertilizer subsidies, even as the United States and Europe extensively subsidized their own farmers. But after the 2005 harvest, the worst in a decade, Bingu wa Mutharika, Malawi’s newly elected president, decided to follow what the West practiced, not what it preached.

Ms Dugger's story presents a clear and simple picture of what made free-market policies — at least with respect to fertilizer — such a disaster for Malawi. Growing populations led to smaller landholdings and ever more intensive cultivation, exhausting the soil while producing smaller yields. This vicious circle could only be intensified by the market price of fertilizer, which was, of course, increasingly beyond the farmers' means. Mother Nature herself made it impossible for Malawians to "compete" their way out of famine. The World Bank's policies sounded a grim harmony to this threnody. Finally, an elected official called a halt to the folly.

Rich-nation response to the volte-face has been spotty. Great Britain is supportive, but the United States is not.

The United States, which has shipped $147 million worth of American food to Malawi as emergency relief since 2002, but only $53 million to help Malawi grow its own food, has not provided any financial support for the subsidy program, except for helping pay for the evaluation of it. Over the years, the United States Agency for International Development has focused on promoting the role of the private sector in delivering fertilizer and seed, and saw subsidies as undermining that effort.

Is there anything as stupid as the sleep of those who stick to their principled guns? Almost as stupid is the failure to take geohistory into account. The elements of free-market economy were developed in the prosperous, industrializing economies of Northern Europe during a protracted, century-long boom. Although the nations that fostered it have almost never applied it to their own agricultural sectors, they appear to expect a pre-industrial African country, completely outside the charmed circle of Western affluence, to kick-start an essentially agricultural economy by blocking government intervention. Whether in the form of price support or supply subsidy, government interventions have proved to be ineradicable in the United States and Europe. Our economic mandarins would perhaps be more credible if they could foist their medicine upon their own paymasters.

The story of fertilizer in Malawi is one more item in the case against free-market absolutism, which steadfastly refuses to distinguish the raw economic environments that are likely to flourish under free-market controls from those that are not.

Oops! Not always so steadfastly — as James Surowiecki reminded me a week or so ago in his New Yorker column, "Sovereign Wealth World." When it comes to the direct investment by foreign governments and their proxies in "important" domestic industries, legislators who long ago stopped actually thinking about free markets fall into panic mode.

Not surprisingly, Western politicians aren’t thrilled by this prospect. The U.S. recently toughened requirements that any foreign acquisition be vetted by a commission that would assess its impact on national security. Germany has introduced legislation that would permit the government to bar, on national-security grounds, any foreign investment worth twenty-five per cent or more of a company’s value. And some E.U. commissioners have suggested that stringent regulations on sovereign wealth funds may be in the offing.

I can imagine what Bingu wa Mutharika might have to say about that.

***

As a coda to the foregoing, I have to wonder what all that "sovereign wealth" is doing tied up in foreign investments. Doesn't Abu Dhabi have a few projects closer to home than the Citigroup bailout? If, as Mr Surowiecki claims, China's new fund "could buy Ford, G.M., Volkswagen, and Honda, and still have a little money left over for ice cream," why isn't it spending that money instead on equalizing radical regional inequalities? Do the laws of free-market economics compel public treasuries to behave like rentiers?

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