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IMF Does Not Trigger ‘Bread Riots’ But Sticks to Old Policies

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By Ronald Joshua | IDN-InDepthNews Analysis


BERLIN (IDN) - Hundreds of thousands of poor people joined spontaneous “bread riots” in most major cities in Egypt back in 1977, protesting termination of state subsidies as dictated to the country’s government by the World Bank and the International Monetary Fund (IMF). Those uprisings, which were crushed by the army, underlined the callousness with which the two organizations enforced their aggressive policies of liberalization, turning a blind eye to the sufferings of the people.

Both Bretton Woods organizations are meanwhile said to have become more responsive to constraints of global political and economic realities, particularly after the 2011 Arab uprisings. But a new report by the Bretton Woods Project (BWP), a UK-based NGO, which analyses IMF policies in four MENA countries pre and post 2011, finds “little substantive change”.

“While IMF rhetoric may have changed in response to widespread popular demands for domestic reforms, policies it endorses appear little changed,” says Mohammed Mossallem, author the study.

He recalls that in May 2011, a group of international institutions and the G8 governments gathered under the umbrella of the Deauville Partnership and pledged up to $40 billion in loans and other assistance towards what they termed the ‘Arab Countries in Transition’ (ACT).”

By 2012, the IMF had signed four loan agreements in the region: two-year loan packages with Morocco and Jordan, an emergency credit line with Yemen and a precautionary financing arrangement with Tunisia. Egypt went through two controversial rounds of negotiations with the IMF for a potential loan program, neither of which ultimately resulted in a loan.

The 24-page report surveys in detail the IMF’s impact on post revolutionary Arab states by documenting the history of IMF involvement in the region. It traces the change in IMF rhetoric and practice before and after 2011 in four Arab countries: Tunisia, Morocco, Jordan, and Egypt.

These countries were selected because they have adopted extensive structural reforms on encouragement of the IMF and were often put forward by international financial institutions (IFIs) as successful reformers.

In light of the recent downturns in both developed and developing economies, the report titled The IMF in the Arab World: Lessons Unlearnt pleads for “shift to countercyclical policies and higher public spending to avert recession, revitalize the economy, generate productive employment, support development needs and repair the social contract “.

The report casts a close look at state subsidies, austerity and liberalization and privatization.

State subsidies

The BWP considers it crucial for the IMF to realize that Arab governments provide substantial energy and food price subsidies to their populations to offer relief from high commodity prices.

The fact that the region does not have well-developed social protection systems means that the current promoted measures to aggressively reduce subsidies will lead to further impoverishment and widening inequality gaps, warns the report.

It asks the IMF to consider development of social protection schemes as a prerequisite to any serious reform to the subsidy and pensions systems. “The IMF in its post 2011 reports has proposed mitigating measures to accompany subsidy reforms, including expansion of social safety nets and targeted energy subsidies/cash transfers.”

These measures, however, overlooked the underdeveloped social protection schemes in Arab countries. Inadequate administration capacities, large informal economies and corruption to name a few obstacles make these mitigating measures sound more hopeful than feasible.

“Admittedly these subsidies are inefficient and a significant portion is used by the rich businesses as opposed to the segment of the population with the most need,” says the report.

Nevertheless, as another report by Hassan Sherry argues, by demanding short- to medium-term phasing out of energy subsidies, the IMF is targeting the symptoms rather than the causes of the deep rooted social and economic injustices that sparked the region’s uprisings, adds the study.

“Reversing the underperformance of Arab countries will not be achieved without profound changes in the productive structures of their economies by building effective institutions that make economic and social development a priority.”

Austerity

The author of the BWP report recalls numerous studies that have highlighted the threat austerity measures pose to inclusive growth in any economy. The United Nations and ILO have repetitively warned against austerity and how it is threatening to bring the global economy into further recession and increase inequality.

They have also “called on governments for 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”.

The report adds: The IMF itself has recently conceded it was wrong about austerity and hence if there’s a time for a certain policy to be revised this is definitely the time for austerity to be reassessed.

Liberalization and privatization:

Mossallem further argues that investment liberalization and privatization, in the absence of supporting institutional infrastructure, have been questioned in the light of the experiences of many developing countries over the past few decades.

This has proven to be also true in practice for the Arab region. Among the more important measures adopted and continue to be encouraged are: lowering of tariff barriers; the removal of many quantitative import restrictions; the reduction of subsidies to domestic producers; the privatisation of government business enterprises as well as utilities; and the easing of foreign exchange controls.

Moreover, opening of markets through import competition and FDI (foreign direct investment) liberalization might bring enhanced competition, but if no safeguards exist, foreign firms might also engage in anti-competitive practices and abuse dominant market positions, declares the report.

The study finds that the IMF approach in the region in the aftermath of 2011 is characterised by deeper liberalisation and privatisation without any serious amendment to the pre 2011 strategy, despite the negative implications that the IMF promoted policies on liberalised trade and investment policy have had on the region.

“Aggressive liberalisation adopted by Arab countries often led to the rise of imports in a disproportionate manner to the rise of exports, and a decline in the productive and manufacturing capacities in these economies,” notes the report.

These policies ignored the lack of capacity and competitiveness of domestic industries, and meant that local manufacturers became increasingly unable to compete and hence the linkages with the domestic sectors/industries were diminished, stunting job creation.

The same applies to privatisation where, due to the lack of legal safeguards, corruption has led to privatisations benefiting a narrow circle of figures connected to the regime in one way or another.

On the other hand, privatisation of public utilities that have been widely acknowledged as sectors that should remain in public control be it in developed or developing countries (such as water and electricity), has led to the transformation of them into corporations which were required to operate at a profit. These corporations began to practice full cost recovery by passing on costs to citizens through rate increases.

Again, adds the report, if experience has taught the IMF anything it should be that they should abandon their one-size fits all approach to privatisation and liberalisation. “It is well documented that economic development is not achieved by simply liberalising its trade or privatising all its state owned industries. Institution building in combination with a partial and more importantly ‘gradual’ opening up to imports and foreign investment are a more effective way to also provide a significant source for growth.”

The report urges the IMF to acknowledge that each country has the sovereign right to identify its own model of development, and the institutional reforms that are required, where trade regime/liberalisation is a part of such reforms.

Also, how and when is the best time to open the market is different for each country as they have to take into account their different contexts, such as national legislation; foreign trade partners; export-oriented sectors; share of primary exports; rate of trade to GDP; and vulnerability of country to foreign exchange, to name a few.

The report’s author Mossallem adds: “It is no secret that historically, industrialised countries achieved economic growth by strategically and selectively adopting protectionist trade policy and were not forced to immediately open up and privatise, as is the case for the developing world today. More recently we have examples of East Asian countries that liberalised trade after about one decade of growth; the same is in the case of India.”

The IMF should also consider placing pre-requisites for privatisation of public entities ensuring the safeguards are in place both legally and on the policy level in terms of economic and social policies. It should further refrain from promoting the privatisation of strategic public utilities like water, electricity and transportation in a region where large proportions of the population are marginalised and under the poverty line. [IDN-InDepthNews – 18 December 2015]

Photo: Collage of Arab Spring scenes | Credit: Wikimedia Commons

2015 IDN-InDepthNews | Analysis That Matters

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