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Egypt should say 'yes' to emergency assistance, but 'no' to the failed development model of the past

The wrong medicine at the wrong time

While Egypt clearly needs international financial assistance, such aid should be designed to help the country increase its current public spending in order to stimulate GDP growth, employment and investment, rather than imposing the classic IMF medicine of budget cuts and austerity. Critics of the IMF’s conditions argue that in periods of recession and high unemployment, austerity policies are counterproductive and tend to have an adverse impact on the poorest segments of the population. They point to the disasters unfolding in Europe, in which many countries followed IMF austerity policies only to see GDP growth slow, unemployment worsen and deficits continue to rise amidst deepening social protests and political crises. In fact, on October 9, 2012, the IMF made an historic concession about how terribly wrong its models estimating the degree of social and economic harm caused by the deep budget austerity had been. New IMF research found that the economic damage from aggressive austerity measures may be as much as three times greater than they had previously assumed, conceding that deep budget cuts in the midst of an economic slowdown is counterproductive for restoring economic growth (and eventually getting deficits down). As critics of the IMF have long warned, deep public expenditure cuts in a time of recession actually make things worse; it’s akin to digging oneself into a deeper hole, because the subsequent drop in employment, consumer demand and future growth rates all contribute to lower tax takes and, in turn, larger deficits.

Demonstrators again take to the streets of Cairo, this time to
protest negotiations with the IMF. Photo: Gigi Ibrahim

While attention is focused on the immediate financial crisis facing Egypt, it should be noted that the policies likely to be included in a new IMF loan program will continue supporting the same free market development model endorsed by the Mubarak regime that included premature trade liberalization, financial liberalization and privatization while undermining civil society, social movements and independent labour unions. In the current rush to secure international aid, there is a danger this will be overlooked and the mistakes of the past repeated.

Even prior to the Arab Spring revolts, the official rate of unemployment in the Arab region was the highest in the world. As Ali Kadri, a Visiting Fellow at the London School of Economics, explains, “The labour share was as low as a quarter of national income. Productivity was negative. If a more sensible method of assessing unemployment was carried out, more than half of the labour force could be considered unemployed. For a good part of two decades, real wages in Egypt and the Arab region have either declined or stood still while labour supply has continued to outgrow labour demand.”

While large-scale public employment initiatives have long-served as a lifeline for many, the privatization and market-based land reforms promoted by the IMF and World Bank and other western aid donors took their toll. In Egypt, privatization programs – particularly in the context of the unaccountable and non-transparent Mubarak regime, transferred public assets into private hands, rolled back earlier more progressive land reforms, and curtailed the development of an autonomous civil society, in particular labour unions. As with many developing countries which adopted this model, the privatization programs also facilitated the transfer of resources abroad through foreign investment deals at fire-sale prices. IMF-supported capital account liberalization likewise facilitated capital flight. These were resources that could otherwise have been recirculated within the national economy, helping sustain decent living conditions for the working population.

While the western media focused on the role of Twitter and Facebook by activists in Tahrir Square, more in-depth analyses show that the social movements had deeper roots and were a long time in the making. According to Paul Amar, an associate professor in the Global & International Studies Program at the University of California, the revolt began gradually at the convergence of two parallel social forces that had gained strength in the last few years before the revolution: the movement for workers’ rights in the newly revived factory towns and micro-sweatshops of Egypt and the movement against police brutality and torture that had been mobilizing communities across the country. The leadership of these new and vibrant mass movements included women of all ages and youth of both genders.

The movement for workers’ rights came about in response to efforts by Mubarak’s son, Gamal, who had put together a team of “technocrats” in 2005 to step-up free market reforms and make the investment climate more attractive to foreign investors. According to Amar, many new factories were built in a series of free-trade zones and manufacturing developments led by investors from Russia, China, Brazil, Turkey, the Central Asian Republics and the Gulf Emirates, who were moving out of the oil sector and real estate and into manufacturing, piece-goods, informatics, and infrastructure. Many of the workers in Egypt’s revived textile industries and piece-work shops are women. They labour in innumerable small informal shops that make purses and shoes, and put together toys and computer circuitboards for sale in Europe, the Middle East and the Gulf. These shop workers joined with the Independent Trade Union Federation and other factory workers to establish the “6 April” labor rights movement in 2008, which was met with harsh state repression.

Microcredit loans were given, with the IMF and World Bank’s encouragement, to stimulate entrepreneurship and self-reliance. These loans were often targeted specifically towards women and youth. But since economically disadvantaged applicants have no collateral to guarantee these loans, payback was enforced by informal criminal law rather than civil law in a system through which the police extract pain and humiliation if you do not pay your bill. Thus, the microenterprise system became a massive set of police rackets and “loan shark” operations in which police using strong-arm tactics became “regulators” of the massive small-business economy. It was in this context that women and youth attempted to organize into a social force opposing the police-state and built a broad-based anti-police brutality movement. For example, this movement gained momentum in the wake of the brutal police murder of a youth, Khalid Saeed, who was in a small internet café that he partially owned when police demanded a bribe from him. When he refused, the police beat him to death, crushing his skull while the whole community watched in horror, in an act which further galvanized the movement nearly a year before the Tahrir Square uprising.

Under this system, the corruption of the military and well-connected elites was not in itself the problem. Rather, the systemic nature of corruption became an unavoidable fact of doing business in an unregulated and nontransparent privatization process favoured by western aid agencies. To describe blatant exploitation of the political system for personal gain as simply petty corruption by individuals misses the forest for the trees. High-ranking members of the government and the economic elite were not thieves in an ordinary sense and did not necessarily steal directly from the treasury. Rather they were enriched through a conflation of politics and business under the guise of privatization. This was less a violation of the system than business as usual. The privatization programs reallocated public resources for the benefit of a small and already affluent elite. In his article, “A revolution against neoliberalism?”, Dr. Walter Armbrust, a University Lecturer in Modern Middle East Studies at Oxford University, explains, “Privatization provided windfalls for politically well-connected individuals who could purchase state-owned assets for much less than their market value, or monopolize rents from such diverse sources as tourism and foreign aid.” According to Armbrust, “Huge proportions of the profits made by companies that supplied basic construction materials like steel and cement came from government contracts, a proportion of which in turn were related to aid from foreign governments.”

As to the results of IMF-driven budget restraint, public investment rates fell from highs of over thirty percent in the 1980s to around fifteen percent by the 2000s, severely undermining future prospects for economic growth and development. The net result was lower quality economic growth and fewer jobs than otherwise might have been created under more expansionary fiscal policies.

Instead of realizing greater civil and political rights, tighter restrictions on civil liberties came about under Mubarak’s regime, retarding the social and political development that might have otherwise been possible. This development model sanctified private property rights irrespective of the degree of mal-distribution and endorsed a repressive approach to independent labour unions and a liveable minimum wage. Instead of building a broad middle class and democratic institutions, Egypt experienced political exclusion, rapidly rising rates of child malnutrition and growing economic inequality, reflected today in estimates that two percent of the Egyptian population controls 98 percent of the Egyptian economy. The Egyptian Food Observatory, a quarterly government study prepared in cooperation with the World Food Programme (WFP), found that 86 percent of Egyptian households surveyed in September 2012 were unable to meet their basic monthly needs – a 12 percent increase over the June figure. It noted that among vulnerable households, over 60 percent of income goes toward food.

Over a year before the uprising against Mubarak began, the UK’s Guardian reported on a remarkably critical report about the failure of the Egyptian development model which was published by Egypt’s General Authority for Investment (GAFI). The 2009 report systematically destroyed the myths and distortions that have driven the country's economic policy for the previous two decades and shattered the illusion that Egypt’s recent high GDP growth rates had anything to do with widespread, sustainable social prosperity. The report reviewed the series of wide-ranging free market economic reforms praised by the IMF and World Bank, including relaxed price controls, reduced subsidies, trade liberalization and a post-1996 privatization drive and noted that such policies had resulted in a rapid deterioration of working conditions and a wave of strikes so powerful that one analyst labeled it the largest social movement seen in the Middle East in half a century. It also noted that 2004 tax cuts, which cut the top rate of tax from 42 percent to 20 percent left multimillionaires paying exactly the same proportion of their income into government coffers as those on an annual salary of less than £500. It further revealed that following the creation of new special economic zones (SEZs), foreign investment reached dizzying heights ($13bn in 2008) and, in the previous three years, Egypt registered GDP growth at a consistently high 7 percent, although the minimum wage remained fixed at less than £4 a month throughout. These developments led the IMF and the global business community to applaud Mubarak's rule as “bold”, “impressive” and “prudent”.

However, the GAFI report startled champions of free market policies by pointing out that 90 percent of the population had yet to see any of the fruits of such success. Most of the foreign investment had been channeled into sectors like finance and gas which create few new jobs. While national resources like natural gas have been sold at subsidized rates to the tycoon owners of iron and fertilizer factories, the cost of ordinary commodities like bread and cooking oil spiraled. When IMF-sponsored reforms began, 20 percent of the population was living on less than (inflation-adjusted) $2 a day; today, that figure stands at 44 percent.

Less than a year before the uprising began, the IMF was still praising the policies adopted by the Mubarak regime. In an April 2010 annual review of Egypt’s economy, the IMF found that, “Sustained and wide-ranging reforms since 2004 had reduced fiscal, monetary and external vulnerabilities, and improved the investment climate. These bolstered the economy’s durability, and provided breathing space for appropriate policy responses”. In the previous year of 2009, the report had found, “economic performance was better than expected, although headline inflation remains elevated . . . as the recovery gains strength, the focus of policies can shift back toward fiscal consolidation and other growth-oriented reforms”. None of the imminent, overwhelming problems at the root of the social and political uprising which were underway at the time were acknowledged by the IMF. Instead, these were either avoided or it chose not to report on them.

The IMF went on to offer its standard set of policy prescriptions, underscoring that it would be important for Egypt to continue its momentum towards free market policies. Although it neglected the GAFI report that found most people were not benefiting from high GDP growth, it suggested, “Rapid growth is crucial to tackling poverty and the high level of unemployment. In this context, reinvigorating the structural reform agenda should help raise productivity and reinforce Egypt’s competitiveness.” Further, it affirmed that “Prioritizing reforms that promote macroeconomic stability and improve the investment climate will support the resumption of foreign direct investment. As noted, the planned fiscal adjustment and tax reforms are an important element of generating confidence, improving the business environment, and ensuring space for the private sector. Resumption of privatization and development of public-private partnerships (PPPs) will help mobilize private sector financing and know-how. Contingent liabilities associated with PPPs, however, should be monitored closely.”

The 2010 IMF report also encouraged Egypt to continue with reforms linked to the Egyptian Central Bank’s low-inflation policy agenda, which promised to keep interest rates high as a way of lowering inflation. But this made commercial credit too expensive for many small and medium sized enterprises (SMEs), thereby hampering production and employment. It also called on Egypt’s banks to maintain reserve levels in accordance with the Basel II global standards.

Thus, in a country with massive unemployment, low wages and a child malnutrition crisis, the IMF was simply promoting “public private partnerships” which, in the context of an unaccountable and nontransparent kleptrocracy, amounts to prescribing further looting and redistribution of wealth to the top. Additionally, it should be remembered that the Basel II standards did little to prevent US and European banks from imploding because of their unregulated and reckless over-leveraging pre-2008. That these constituted the best advice of the IMF to Egypt in the final months before the social crisis exploded in Tahrir Square illustrates how out of touch with reality the institution was.

Section 3: A new development model for a new Egypt →

The views expressed in this article are those of the author and do not necessarily reflect the position of CESR.