Sunday, November 4, 2012

The White Man's Burden in Egypt

              In chapter three of The White Man’s Burden, William Easterly makes the assertion that free markets work, but free market reforms often do not. The historical account Easterly gives of Russia’s ‘shock therapy’ program hints at the idea that trying to ‘plan’ a market economy actually results in a less democratic state. To see if this connection between a decrease in the democratic freedoms of a society as the World Bank and the IMF institute ‘structural adjustments’ in a country held true in a different cultural context, I decided to examine the IMF’s involvement in Egypt both pre and post Arab Spring.  An article in Muftah (an online newspaper that fosters debate in the Middle East) described the history of the relationship between the IMF and Mubarak regime (link to the article is at the bottom of the post). In 1990 and 1991, the Mubarak regime was forced to adopt an IMF stabilization program to combat an overvalued currency, mounting inflation, and foreign dept. For face value (and why the IMF and other international financial institutions called Mubarak’s Egypt an economic ‘miracle’) the stabilization program resulted in a drop in the government deficit.  However, if one steps back and examines the full history of the IMF in Egypt, a different picture is painted. Domestic resistance to Mubarak implementing IMF reforms was intense because most of these ‘reforms’ were detrimental to the population at large. In order to quell this discontent, Mubarak’s IMF-forced economic reform coincided with a wave of political repression (government raids of NGOs, mosques, and trade unions) designed to anticipate and squash political opposition. However, the first wave of economic reforms in the 1990s failed to deliver, resulting in rural and urban poverty increasing by over 10% and real wages sagging. Rather than recognizing that economic reforms failed because of bad governance (as Easterly points out is most often the case in developing countries), the IMF made a deal with Mubarak in 1996 to extend additional credit to Egypt if they adopted an aggressive privatization agenda. This aggressive privatization agenda resulted in 345 public companies being privatized and sold on the Egyptian stock exchange. Although IMF officials predicted that this massive transfer of resources from the public to private arena would result in an explosion of productivity, it rather unleashed another wave of political repression and corruption. Many privatized companies were either liquidated of significantly downsized; others were sold to regime cronies at a fraction of their real value. This massive corruption was coupled with the fact that the new management of these privatized companies gutted the labor force and reduced their benefits. As a result, there was a wave of strikes against the privatization program, which in turn resulted in increased political oppression. As the standard of living and political freedom for a majority of Egyptians steadily decreased throughout the 2000s, the IMF applauded Egypt’s progress because the country was producing a record level GDP growth averaging 5% annually (privatization did result in short-term macroeconomic growth which did, in turn, attract foreign investment). Ironically, in February 2010, just a year before the Arab Spring, the IMF released a glowing report praising Egypt’s commitment to economic reform, calling them an ‘example of a successful economic transition.’
            However, in 2011, the growing economic gap between the wealthy and poor of Egypt, the terrible standard of living for a majority of the population, the political oppression and entrenched corruption within both the public and private sectors resulted in an outbreak of protests, which culminated in the overthrow of Mubarak. Now, we see a new president, Mohammad Morsi, faced with a difficult decision. Should he accept the IMF’s offered $4.8 billion loan? In an interview with Masood Ahmed, director of the IMF's Middle East and Central Asia department, he said that while Egyptian authorities do not have the details of an economic plan worked out, they have two major challenges: first, combating the rising government deficit resulting from the global financial crisis and domestic instability, and second, building a better future for all Egyptians. Any of that broad and vague rhetoric sound familiar?
Adam Hanieh, a political economist at the School for Oriental and African Studies in London, believes that “The conditions will likely be the usual set of ‘reforms’ – privatization, deregulation, and opening up to foreign investment flows.” He doesn’t think that the IMF has changed their approach at all. In fact, he knows this just by looking at the policies they are currently advocating in Greece and other parts of the world.  Conditions placed on aid does not change government behavior, but rather opens new areas in which the government can make bad policy decisions that results in personal benefit. With the political system in Egypt being so new and fragile, whether or not the IMF’s new plan of structural adjustment in Egypt with result in Mubarak-era political repression is a looming question. The example of Egypt and Russia hint at the fact that when the IMF pursues broad, idealistic programs in countries with bad governance, the political freedoms of that country decrease.

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