Info Service on Finance and Development (May13/02)
Dear friends and colleagues,
We are pleased to share with you Part II of a report of the panel discussion titled “From the Arab Revolutions to Global Austerity,” held on 20 April on the sidelines of the spring meetings of the IMF and World Bank in Washington D.C.
The event was organized by Third World Network and Arab NGO Network for Development, in cooperation with Cairo-based Egyptian Center for Economic and Social Right and Initiative for Policy Dialogue at Columbia University in New York.
In Part I we reported on the presentations of Manuel Montes from South Centre (Geneva) and Isabel Ortiz from Initiative for Policy Dialogue.
Part II below reports on the presentations of Mahinour El Badrawi from Egyptian Centre for Economic and Social Rights (Cairo), Kinda Mohamadieh from Arab NGO Network for Development (Beirut).
With best wishes,
Third World Network
From the Arab revolutions to global austerity
Will the peoples’ uprising fall on deaf ears in the current wave of austerity?
Washington, D.C., 2 May (Bhumika Muchhala and Kinda Mohamadieh) – The involvement of International Monetary Fund in the post-revolution Arab region was the focus of discussion at the panel discussion titled “From the Arab Revolutions to Global Austerity,” held on 20 April on the sidelines of the spring meetings of the IMF and World Bank in Washington D.C.
Morocco and Jordan have two-year loan packages, Yemen has an emergency credit line and Tunisia just recently signed on to a precautionary financing arrangement. Meanwhile, Egypt is in the throes of contentious negotiations with the IMF country mission team on its loan programme.
The first two presenters on the discussion panel were Manuel Montes from South Centre (Geneva) and Isabel Ortiz from Initiative for Policy Dialogue (New York) – see Part I of this report.
Mahinour El Badrawi from the Egyptian Center for Economic and Social Rights discussed the IMF policy recommendations to Egypt before the 2011 revolution and the current negotiations between the IMF and Egyptian authorities around a new loan. Shortly after the toppling of the Mubarak regime, an IMF team started negotiations of financial assistance to Egypt, which was presented as a step for stabilizing the Egyptian economy and promoting needed structural economic reforms. The proposed loan is of the value of USD 4.8 billion.
El Badrawi said that the terms of negotiations of loan are not made public or undertaken in a transparent way. The national economic plan presented to the IMF was not made public except after civil society organizations brought forward a case in front of the national administrative court requesting transparency in the terms of negotiations with the IMF.
El Badrawi noted that IMF loans are often presented by the country teams as free of conditions and based on ‘home-grown’ economic plans. However, the economic plan released by the Egyptian authorities in November 2012 mirrored the policy recommendations that came in the IMF Article IV consultation report for Egypt, released in April 2010. This IMF report advanced recommendations for broadening the tax base through expanding the application of the regressive value-added tax, and through cuts to the fuel and food subsidy programs.
The IMF Article IV report also advanced recommendations for the resumption of privatization processes while encouraging public-private partnerships. These recommendations were reflected in the economic plan of the Egyptian authorities made public in November 2012.
El Badrawi noted that the reforms proposed within the framework of the discussions with the IMF were to be carried out on both the average Egyptian and the well-off investors. On subsidies’ reform, they were supposed to be lifted from heavy industries besides the energy use of the households. Similarly, the tax rise was supposed to be implemented on business transactions and capital gains. Yet, what actually took place was the removal of subsidies from household energy use, which increased 150% from 3 to 8 Egyptian pounds, besides the removal of subsidies on basic food products. Other planned reforms on business transactions and investors were not implemented.
Overall the ‘reforms’ are falling disproportionately on the average Egyptian and the poor. The official explanation presented for not undertaking the other reforms is declared to be an attempt not to scare away investors. In the same line, the Egyptian Security Council of Armed Forces undertook a legislative change after the revolution through issuing Law #4 for year 2012, giving immunity for investors found to be corrupt or in violation of national law from being sued in national courts and substituting that with a mediation procedure undertaken by the executive body (ministry) that was responsible for designing the contract with the investor in the first place.
Such steps, El Badrawi explained, features into the past cycle of marginalizing productive investments and economic patters. Furthermore, it hinders the process of retrieving national assets and resources that were ill-used under the previous regime. Under such anti-developmental legislative framework, the sort of investor that is being invited into Egypt would reproduce the cycle of weakening chances for real productive development.
El Badrawi highlighted alternatives for the kind of austerity-focused reforms that are currently designed, which carry a burden that disproportionately falls on the average Egyptian citizen. She indicated the need for progressive taxation systems, including a non-fixed progressive corporate tax that supports small and medium enterprises.
She also highlighted the importance of recovering the stolen assets of the country, which are the peoples’ assets. Furthermore, she addressed the importance of recovering the value of the national assets and state-owned enterprises, which have been de-valued and privatized under the previous regime.
Kinda Mohamadieh from the Arab NGO Network for Development discussed the structural policy advice advanced by the IMF country reports on Arab countries. Mohamadieh cautioned that the IMF continues to advance recommendations for reducing or dismantling tariffs, widening the scope of liberalization, and de-regulation under investment policy.
Furthermore, such trade and investment related policy advice could often fall in contradiction with safeguarding these countries’ balance of payments positions, thus leading them into more exposure to debt accumulation and need for IMF assistance. Such longer-term structural change restricts the policy space of governments to design a dynamic longer-term plan that serves production, industrialization, decent employment, and social justice.
Mohamadieh explained that economic and social challenges facing Arab countries include the challenge of reversing the declining trends in productive capacities and share of wages in gross domestic product, along with redesigning macroeconomic policies in support of a longer-term dynamic development project.
While many Arab economies experienced an average annual real economic growth above 5 percent during the last 20 years, growth in productivity was less than half of that and negative in some cases. Many Arab countries have witnessed significant decline in manufacturing capacities, and deindustrialization trends in many Arab countries, most notably Egypt and Morocco. Overall, the structural economic problem in the region has been stagnating shares of agriculture and manufacturing, and rapidly expanding concentration in low value added services activities.
Wage depression, reflected in the regress of wages as a share of national income, has been associated with the kind of investment and trade policies that have been followed, which prioritized export-oriented sectors. This wage depression reflected the violations of economic and social rights and the marginalization of the citizen participation in the economic cycles and national growth trajectories.
Foreign direct investment (FDI) has also been traditionally concentrated in low job generating sectors, like mining and real estate. Overall, the role of macroeconomic policies in supporting a longer-term development-oriented strategy was neglected. Macroeconomic policies were re-oriented to prioritize short-term inflation targeting, attracting foreign direct investment, and increasing openness to trade and capital flows. Arab countries need a reverse of these trends, and a revival of productive capacities, employment generation, and redress of inequalities and wage depression.
Mohamadieh highlighted that the IMF is the same institution that was lauding Tunisia’s and Egypt’s sound macroeconomic management and structural reforms, just a few month before the peoples’ revolutions in these countries. The IMF even called for more austerity measures to contain public spending on wages and food and fuel subsidies at a time these countries were facing rising food prices due to global pricing fluctuations.
After the revolutions, the IMF along other international financial institutions involved in the Arab region were quick to present the policies undertaken during the last two decades as too partial to take real hold given the decline in legitimacy of state, corruption and nepotism. This argument was central for presenting the shortcomings of the economic model they promoted to previous regimes as stemming from its application within undemocratic and oppressive contexts, and not, as a failing of the economic model itself.
Shortly after the revolutions, in its report entitled “Economic Transformation in MENA: Delivering on the Promise of Shared Prosperity” presented to the G8 Summit in May 2011, the IMF advanced recommendations for liberalization of trade in services, liberalization of capital flows and investment, freedom of establishment, and regulatory convergence in areas such as competition policy, trade and investment regimes, public procurement.
The Report’s recommendations included as well calls for further improving the business climate, which are centred around promoting more investment zones where investors are credited with lower regulation and taxation, as well as strengthening investor rights.
Similar recommendations were presented in 2013 by the Director of the IMF’s Middle East and Central Asia Department, thus advancing recommendations for further dismantling tariffs and widening the scope of liberalization, along with de-regulatory recommendations in investment, including removing the barriers to starting or closing a business, and relaxation of entry requirements, minimum capital requirements and restrictions on foreign ownership, along with removing exit regulations and decriminalizing business failure .
Mohamadieh noted that the vision presented to the region is one of deeper liberalization and deregulation, without serious assessment of the implications that such previous policy experiences have reaped for the region. Such line of recommendations has been consistently advanced through staff country reports (Article IV consultation reports) before the global crisis, and before the revolutions in the Arab countries, as well as afterwards.
Mohamadieh highlighted that in 2009, the Independent Evaluation Office  of the IMF published its evaluation report on the IMF involvement in international trade policy issues. The report highlighted that the “interventionist approach of the late 1990s, when the IMF played an uneven but at times aggressive role in trade policies through conditionality, gave way to substantial reluctance to state strong positions even on trade policies that have macroeconomic import” .
The report importantly noted that “on some issues- particularly PTAs and trade in services stand out- the objectives and approach for IMF involvement were not made clear (by the IMF Board). Nor were the criteria for macro-criticality that were to guide staff decisions on when to become involved in trade policy issues. Without such clarity, staffs are unlikely to be effective in looking out for trade policy –related threats to macroeconomic and financial stability” . The report specifically highlighted the IMF’s role and recommendations in regard to trade in financial services, whereby the IEO report noted that IMF bilateral surveillance in this area “was less thorough, tending indiscriminately to urge greater openness to foreign financial service providers with little direct assessment of risks” .
Mohamadieh noted that trade policy is not neutral in terms of impact on balance of payments, especially when imports rise disproportionately to the rise of exports. In such context, countries face tighter external constraints, decrease in revenues, larger trade deficits and thus dependency on capital inflows, leading them into potential increase in external debts.
Furthermore, the deregulatory recommendations on the investment policy front contradicts the need to actively redesign investment policies in the Arab region to support a developmental trajectory, and achieve an active interface between foreign direct investment, capital formation, and advancing of national private enterprise and national productive and industrialization capacities. Without addressing the nature and orientation of FDI, rapid flow of capital and over-concentration of FDI in non-tradable sectors could hold significant impacts on the balance of payment positions of these countries.
Overall, the design of structural policy recommendations advanced by the IMF in the Arab region lock the economies of the region in a state of dependency and weaken the domestic productive capacities. It would not allow the design of trade and investment policies in a way that supports and allows for the revival of productive and employment generating capacities. Besides limiting the policy space available for governments to dynamically use trade and investment to support industrialization and employment generation, it could also have significant destabilizing implications at the macro-economic level, especially on the balance of payment position of these countries.+
 Masood Ahmed (March 2013); “Toward Prosperity for All- Finance & Development,” March 2013, Vol. 50, No. 1
 The IEO was established in 2001 with the task of undertaking independent evaluations on issues related to the IMF. According to its self-presentation: the “IEO operates independently of IMF management and at arm’s length from the IMF Executive Board”. See page iii of the report (2009) on IMF involvement in international trade policy issues produced by the IEO.
 IEO report, Chapter seven on “Findings and Recommendation”.
 IEO report, Chapter seven on “Findings and Recommendation”.
 IEO report, Chapter seven on “Findings and Recommendation”.