Will the calls of the Arab uprisings fall on deaf ears in the austerity wave?

The policies pushed by the likes of the IMF and austerity advocates in the Arab world run counter to widespread demands for economic justice and risk stifling the region’s development potential, warned participants at a recent discussion session.

by Bhumika Muchhala and Kinda Mohamadieh

WASHINGTON: The post-revolution Arab region has been high on the recent agenda of the International Monetary Fund (IMF). 

Besides its annual Article IV or macroeconomic assessment reports which prescribe national policy blueprints, the IMF has been engaged in the region in a variety of ways. 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. 

These programmes are designed with detailed policy conditionality on various fronts, including fiscal policy (with a region-specific focus on fuel subsidies), monetary and exchange rate policy, and structural policy related to domestic labour markets. Trade liberalization, privatization, public-private partnerships, and financial and banking policies are also part of the loan packages. The IMF’s role in the region is only amplified by its historical links to bilateral donor and capital market financing.

 To highlight some of the complex dynamics and challenges of the IMF’s role in the Arab region, in a context of continuing popular uprisings that are calling for social and economic justice and for transforming the national development paradigm, and to link this to the waves of austerity across Europe, the US and other regions, a panel discussion titled “From the Arab revolutions to global austerity” was held on the sidelines of the spring meetings (19-21 April) of the IMF and World Bank here. 

The event held on 20 April was organized by Third World Network and Arab NGO Network for Development, in cooperation with the Cairo-based Egyptian Centre for Economic and Social Rights and the Initiative for Policy Dialogue at Columbia University in New York.   

The discussants at the event included Manuel Montes from the South Centre, Isabel Ortiz from the Initiative for Policy Dialogue, Mahinour El Badrawi from the Egyptian Centre for Economic and Social Rights, Kinda Mohamadieh from the Arab NGO Network for Development and Bhumika Muchhala from Third World Network as chairperson of the panel. 

Problematic paradox

Opening the session, Bhumika Muchhala said that there is a problematic paradox between the endeavours of the international development community to formulate a post-2015 global development agenda and the global consensus on austerity, particularly in the form of public spending cuts and regressive tax policies.  Both sides of the Mediterranean are facing similar macroeconomic stability programmes that prioritize deflationary macroeconomic policies over expansionary ones that could stimulate public investment, create urgently needed jobs and reorient tax policies towards wealth redistribution for greater socioeconomic equality.

The Arab region is already facing a troubling degree of macroeconomic instability in public and private debt, fiscal  imbalances  and  foreign reserves. Fiscal consolidation can carry many risks, such as exacerbating youth unemployment, reinforcing economic inequalities and various social discriminations, and deepening economic and financial dependency on external donors and creditors. This would, in tragic irony, lead to a re-creation of the same unjust and failed economic model that led to the people’s uprisings over the last several years. The people’s revolution in the Arab region was not merely a reaction to corrupt dictatorships, but also the outcome of unjust and failed economic and social models. In this sense, the aspirations and demands of the people are directly connected to international financial and trade regimes, in that systemic policy-setting and rules shape national and local realities.

Austerity goes against the very grain of development strategy, said Muchhala. A development strategy involves a proactive and developmental state that builds a social contract with citizens and possesses the policy space and political will to implement transformation processes that are structural, institutional and normative. 

This includes, for example, directing public expenditure and investment towards building strong social sectors, particularly in health, education and social protection; creating decent work through strategic sectoral investments, boosting wages and strengthening productive capacity; and ensuring food security and economic self-resilience against volatile global commodity prices.

Debt-servicing priority

Manuel Montes, Senior Financial Advisor in the South Centre, said that Arab countries confront both political transition and economic recovery, and it is not clear if one will support the other or whether the nature of the economic recovery would facilitate or hinder political transition, or even if economic recovery will be consistent with a change in growth dynamics that will avoid a repeat of the economic crisis.

These processes of transition, according to Montes, involve the geopolitical and commercial interests of external donors, with international financial institutions serving as the technocratic policy channel for donor interests, along with the old and newly emerging domestic forces.

A similar intervention by international financial institutions was witnessed in the Philippines’ transition during the 1986 overthrow of Ferdinand Marcos, which took place in the midst of the 1982 debt crisis (which swept through Latin America and many African countries). Montes explained that the World Bank and IMF economic conditions prioritized “paying back every penny” according to contractual terms to the international private sector and the servicing of public debt inherited from the previous government.

Having been intimately connected with the overthrown dictatorship in the national context of the Philippines, the IMF and World Bank staff made strenuous efforts to rehabilitate the reputations of their agencies, which began to be seen as playing a dual role of both upholding corrupt authoritarian or strongman regimes and then attempting to aid a “democratic transition” after their overthrow.

Montes said that some of the major Arab countries today face severe balance-of-payments crises, including Morocco, Tunisia, Egypt and Jordan. These countries have been facing current account deficits during the last three years along with elevated debt levels, and austerity is being proposed as the way towards stabilizing the macroeconomic situation in the region.

Montes explained that the IMF programmes are based on what he calls a “backward calculation”, whereby the focus is placed on the financing gap of the coming 12 to 24 months, with the most important claim on resources being the amount of debt servicing that can be extracted from public revenues and domestic private savings, with an emphasis on maintaining the Fund’s own parameters of “debt sustainability”. 

The important implicit assumption is that a restructuring of external debt inherited from the previous regime is not on the table as an option. Within this approach, economic recovery and the absorption of unemployed capital and labour become the residual result after debt servicing is prioritized.

Montes highlighted that the problem with the word “austerity” is that it implies that everyone’s spending is cut. However, the way austerity often plays out in reality is that households, factories and their workers (i.e., the real economy) and the public sector face spending cuts while creditors, donors and the financial sector receive payments owed to them at market interest rates as contractually due. Unlike in developed countries where perhaps austerity has some element of social psychology to try to motivate a well-developed private sector to begin taking risks and making investments again, in developing countries austerity is not done for its own sake – it is done to set aside resources to ensure repayment of debt owed.

Thus, the IMF’s financial loans to a country often stand for helping the country to meet its external debt service obligations, Montes explained. It also means that it is not the country that is being rescued, it is rather the creditors and institutions who have outstanding debt owed to them. In the meantime, under these programmes with the IMF, the government must undertake austerity-driven policy reforms whose long-term impact on investment and growth has proven to be highly dubious in previous experiences.

For example, measures such as removing fuel subsidies should be a medium- and long-term undertaking done with proper deliberation. Only if resources saved from the immediate elimination of such subsidies are guaranteed to be applied to employment and job creation, and not debt servicing, can the removal of fuel subsidies be a legitimate part of an emergency strategy.

IMF interventions are associated with recommendations for ambiguous but large-scale terms such as “enabling environment”, which often translates into blanket investor protections and straitjackets on capital controls that unduly restrict growth-oriented domestic policies. Such measures tend only to elicit short-term, speculative investments from abroad. They do not create the platform for long-term and sustained public investment that generates jobs and spurs new economic activities. The impact of policy restrictions in favour of “enabling environments” could also mean loss of control over domestic interest rates, lending rates for long-term investment and the exchange rate, which amplifies risk and obstructs long-term investment.

Yet, Montes said that countries have multiple alternatives to consider. Countries could “calculate forward” instead of backwards, by identifying how much of the factories and workers are idle, the rate of macroeconomic growth that would be required to reabsorb unemployed resources, and the investment rate that will absorb new entrants into the labour force and improve the competitiveness of the economy over the medium term.

Countries can also consider monetary easing, in the same way that advanced economies are doing, Montes highlighted. However, this will require imposing or reimposing capital controls to maintain adequate control over exchange rates and domestic interest rates.

Such heterodox policy programmes would require up-front debt restructuring, given the debt load of many countries in the Arab region, in order to open the possibility and mobilize the resources to support national development strategies that open up political space and reshape the terms of relation with external financiers.

Montes questioned whether Arab countries in the post-dictatorship context are facing “choiceless democracies”.  Under such a context, even though democratic processes are introduced, the choices for economic programmes are still deeply limited. Thus, the policy agenda carried out is often a continuation and acceleration of the old government’s agenda, even though the old rulers have already been overthrown.

On the way forward, Montes argued that the alternative to fast growth associated with greater inequality and higher or more vulnerable unemployment is slower but sustained growth, with less vulnerable employment, less subject to cyclical and volatile booms and busts, and more protection of the livelihoods of the poor and the middle classes. Such growth protects domestic policy space and permits the government to implement policies to protect employment and stimulate investment in new, more productive jobs. Montes reminded the participants that past experience showed that the cost of the bust (which also lasts many more years) exceeds the benefits from the boom. For example, some 12 years after the financial crisis, Southeast Asian investment rates have not recovered to the levels they averaged before the crisis.

Montes concluded by noting that there are alternative policies, but only a genuinely functioning democracy, based on a social contract of accountability and dialogue with citizens, would allow such policies to emerge.

Widespread austerity

Isabel Ortiz, Director of the Global Social Justice Programme at the Initiative for Policy Dialogue, presented a paper co-authored with Matthew Cummins titled “The age of austerity – a review of public expenditures and adjustment measures in 181 countries”.

Ortiz stated that contrary to public perception, austerity measures are not limited to Europe; in fact, many adjustment measures feature most prominently in developing countries. According to IMF data (World Economic Outlook, October 2012), 119 countries will be adjusting public expenditures in 2013, increasing to 131 countries in 2014, and the trend will continue at least until 2016.

She noted that there are two main phases of the global crisis. In the first phase (2008-09), most governments introduced fiscal stimulus programmes and ramped up public spending. However, premature expenditure contraction became widespread in 2010, despite vulnerable populations’ urgent and significant need for public assistance.

Fiscal contraction is most severe in the developing world. Moreover, comparing the 2013-15 and 2005-07 periods suggests that a quarter of countries are undergoing excessive contraction, defined as cutting expenditures below pre-crisis levels.

In terms of population, austerity will be affecting 5.8 billion people or 80% of the global population in 2013; this is expected to increase to 6.3 billion or 90% of persons worldwide by 2015.

Regarding austerity measures, a review of 314 IMF country reports published between January 2010 and February 2013 indicates that governments are weighing various adjustment strategies. These include: (i) elimination or reduction of subsidies, including on fuel, agriculture and food products (in 100 countries); (ii) wage bill cuts/caps, including the salaries of education, health and other public sector workers (in 98 countries); (iii) rationalizing and further targeting safety nets (in 80 countries); (iv) pension reform (in 86 countries); (v) healthcare reform (in 37 countries); and (vi) labour flexibilization (in 32 countries).

One of the most alarming trends in austerity policies worldwide is that of subsidy reduction and elimination, even in a global context of high food prices. The paper highlights that subsidy reduction, primarily in fuel but also in electricity, food and agricultural inputs like seeds, fertilizer and pesticides that can sustain local production, is being discussed in 100 countries (78 developing and 22 high-income).

If basic subsidies are withdrawn, food and transport costs increase and can become unaffordable for many households. Higher energy prices can also contract economic activities. Increased hunger and malnutrition has irreversible impacts on children. Ortiz recalled that in recent years, food protests have erupted in Algeria, Bangladesh, Burkina Faso, Egypt, India, Iraq, Jordan, Morocco, Mozambique, Nigeria, Senegal, Syria, Tunisia, Uganda and Yemen, to name but a few.

As recurrent expenditures like salaries tend to be the largest component of national budgets, an estimated 98 governments in 75 developing and 23 high-income countries are considering a reduction of the wage bill, often as a part of civil service reforms. This policy stance may translate into salaries being reduced or eroded in real value, payments in arrears, hiring freezes and/or employment retrenchment, all of which can adversely impact the delivery of public services to the population.

Ortiz stressed that 94 countries (63 developing and 31 high-income) are considering options to boost revenue by raising value-added taxes or sales tax rates or removing exemptions. However, increasing the cost of basic goods and services can erode the already limited incomes of marginalized groups and stifle economic activity. Since this policy does not differentiate between consumers, it can be regressive, shifting the tax burden to families in the bottom income quintiles of society and exacerbating inequalities. Alternatively, progressive tax approaches should be considered, such as taxes on income, inheritance, property and corporations, including the financial sector.

Ortiz also noted that 80 countries (55 developing and 25 high-income) have been rationalizing or further targeting social safety net systems. The IMF’s policy advice generally associates targeting social programmes to poverty reduction, including in countries with large populations below the poverty line, where the logic of targeting to the poorest of the poor is weak. Overall, policymakers should consider that, in times of crisis, it is important to scale up social investments instead of scaling down. A strong case can be made to extend a social protection floor for children, the elderly, persons with disabilities and other vulnerable groups.

Pension reforms are being considered in 86 countries (47 developing and 39 high-income) and involve measures such as raising pension contribution rates, increasing eligibility periods, prolonging the retirement age and/or lowering benefits.

Health system reforms are taking place in 37 countries (12 developing, 25 high-income), involving the increase of fees and co-payments paid by patients along with cost-saving measures in public health centres. The main risk of these two adjustment measures is straightforward: vulnerable groups are excluded from receiving benefits or assistance is diminished at a time when their needs are greatest.

At least 32 governments are considering labour flexibilization reforms eroding workers’ rights. Labour market reforms are aimed at increasing competitiveness and supporting business in the context of recession, compensating for the underperformance of the financial sector. However, labour market flexibilization will not generate decent jobs; on the contrary, in a context of economic contraction, it is likely to generate labour market “precarization”, depress domestic incomes and ultimately hinder recovery efforts.

The United Nations has repeatedly warned that austerity is likely to bring the global economy into further recession and increase inequality. In issuing this warning, the UN has called on governments to undertake forceful and concerted policy action at the global level to make fiscal policy more countercyclical, more equitable and supportive of job creation; to tackle financial market instability and accelerate regulatory reforms; and to support development goals.

It is imperative that policymakers recognize the high human and developmental costs of poorly designed adjustment strategies and abandon the myopic scope of macroeconomic and fiscal policy decisions, and instead consider alternative policies that support a recovery for all persons.

The paper by Ortiz and Cummins, which is co-published by the Initiative for Policy Dialogue and the South Centre, is available at http://policydialogue.org/files/publications/Age_of_Austerity_Ortiz_and_Cummins.pdf.

Wrong-headed reforms

Mahinour El Badrawi from the Egyptian Centre 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 Hosni Mubarak regime, an IMF team started negotiations on 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 $4.8 billion.

 El Badrawi said that the terms of the loan negotiations are not made public and the talks are not undertaken in a transparent way. The national economic plan presented to the IMF was not made public until 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 for cuts to the fuel and food subsidy programmes. The 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.

 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. Subsidies were supposed to be lifted from heavy industries besides the energy use of households. Similarly, 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, 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 puts it down to an attempt not to scare away investors. Along the same lines, the Egyptian Supreme Council of the Armed Forces undertook a legislative change after the revolution by issuing Law #4 for year 2012 giving immunity to investors found to be corrupt or in violation of national law from being sued in national courts, 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, are in line with the past cycle of marginalizing productive investments. Furthermore, it hinders the process of retrieving national assets and resources that were ill-used under the previous regime. Under such an 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 to the kind of austerity-focused reforms that are currently designed, which carry a burden that falls disproportionately 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 people’s assets. Furthermore, she addressed the importance of recovering the value of the national assets and state-owned enterprises which were devalued and privatized under the previous regime.

Structural policy advice

Kinda Mohamadieh from the Arab NGO Network for Development discussed the structural policy advice put forward 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 deregulating investment policy. 

 Such trade- and investment-related policy advice could often fall in contradiction with safeguarding these countries’ balance-of-payments positions, thus further exposing them to debt accumulation and the 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 of above 5% 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, 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 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 reoriented to prioritize short-term inflation targeting, attracting foreign direct investment, and increasing openness to trade and capital flows. Arab countries need a reversal 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 macroeconomic management and structural reforms just a few months before the people’s 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 when these countries were facing rising food prices due to global price fluctuations.

 After the revolutions, the IMF along with 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 the 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 [Middle East and North Africa]: 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, and public procurement.

 The report’s recommendations included as well calls for further improving the business climate, which were 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 deregulatory 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, as well as 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 policies have reaped for the region in the past. Such line of recommendations has been consistently advanced through IMF 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 (IEO) of the IMF published its evaluation report on the IMF’s 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 IEO report importantly noted that “on some issues – particularly PTAs [preferential trade agreements] 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, staff 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, noting 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 the balance of payments, especially when imports rise disproportionately compared to exports. In such a context, countries face tighter external constraints, decrease in revenues, larger trade deficits and thus dependency on capital inflows, leading them into a situation of potential increase in external debts.

 Furthermore, the deregulatory recommendations on the investment policy front contradict the need to actively redesign investment policies in the Arab region to support a developmental trajectory and achieve an active interface between FDI, 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 have significant impacts on the balance-of-payments positions of these countries.

 Overall, the structural policy recommendations advanced by the IMF in the Arab region lock the economies of the region in a state of dependency and weaken domestic productive capaci-ties. 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 macroeconomic level, especially on the balance-of-payments position.              

Third World Economics, Issue No. 546, 1-15 Jun 2013, pp 5-9