Those who seriously think and worry about the future of Malawi talk of the need to diversify the economy. Diversification has to take place at twolevels; the primary stage where additional agricultural crops should be introduced to replace the uncertain tobacco industry. At the secondary stage, this will entail embarking on full scale industrialisation. It is about industrialising this country that I want to share in this article, especially about the role of finance.
It has been said often that even if you provide people with capital they may not succeed in business if they lack such qualities as hard work, thrift and entrepreneurship.
All the same, when all other factors are available, what role can finance play in industrialising a country? This question must be answered because most Malawians plead lack of capital as the reason they do not venture into manufacturing.
Instead of dwelling on theories, we will look into the history of other countries that developed with appropriate attention to finance.
These days, a developing country seeking financial assistance from international lending institutions or donors will be lectured on the virtues of keeping the State off the economy and leaving the private sector to dominate the market. Yet when we read about late starters among developed countries such as Germany and Japan, we learn that the State took a key role in providing credit to industries.
After the World War II, South Korea (then a developing country) and France, a developed country, directed credit to preferred industries, this means that when finance is scarce certain industries must be given preference in accessing it.
It is about the role finance played in industrialising Taiwan that we must explore further. Taiwan was a Japanese colony until the end of the World War II. The Japanese left behind a good educational system and widespread literacy. Soon after they left, mainland Chinese who belonged to the Kuomintang (Nationalist) regime of Chiang Kai Shek came in calling their regime National Republic of China. These mainlanders constituted less than 20 percent of the Taiwanese population, but they were the islandâ€™s captains of industrial growth.
There are basically two ways a state can influence the financing of industries. It can set up State banks which will receive directives as to which industries to support with loans and what interest rate to charge. Alternatively, it may let private financial institutions provide funds, but may put a ceiling on the level of interest rates to be charged. Industries categorised as strategic may not only be granted preferential credit, but also at interest rates that are said to “repressed” meaning that they are lower than what they would be if market forces were allowed to operate freely.
From the beginning of the post-World War I period, the state in Taiwan had direct control over the financial system. Like Singapore and Japan, Taiwan was very successful in mobilising domestic savings. These savings together with assistance from the United States played a big role in import-substitution industries.
Policy loans were broadly targeted to support exports. Technocrats advised the state to give loans at the production level before providing funds for exports. This advice was not taken at one.
State banksâ€™ loans were mostly given to state enterprises. State banks were not keen to lend to private businesses State bank loans were mostly for what were called social investments.
The head of Taiwanâ€™s central bank was appointed for a period of five year and was answerable only to the president not to the legislature.
To promote exports and to gain access to the international market, the Taiwanese government admitted foreign banks. It also made full use of overseas Chinese who were loyal to Taiwan to set up their own banks in Taiwan and to promote Taiwanese exports in the countries these Chinese lived and had their businesses.
A variety of specialised banks operated in the Taiwan economy. In agriculture, the stateâ€™s objective was to raise the standard of living of the rural masses to the level of those who dwelt in urban centres.
The Land Bank and the Farmers Bank were assigned the task of renovating the agriculture sector. The Export-Import Bank was formed to provide credit risk exports, particularly machinery exports.
What we notice from the Taiwan financial system is that provision was made for specialist banks to give long-term loans and to provide venture capital. In a country such as Malawi, small business people who approach commercial banks for loans are turned away empty handed because they are seen to be too early. We cannot fault commercial banks for adopting this policy. They keep peoplesâ€™ deposits which the banks must give back to the owners whenever they ask for their money.
If we are serious about building secondary industries in Malawi, we must sooner than later make sure that the financial system has institutions which can provide venture capital both for agro-based industries and others. Many countries have experienced economic transformation through imitating others. Why should Malawi not do so?