Egypt should not take a new IMF loan

There is no doubt Egypt needs external financing, but it should resist an IMF loan. The IMF's rhetoric may have changed slightly after the global financial crisis, but there is no evidence that it has abandoned its core fundamental tenets.

Rick Rowden

EGYPT should do as many Latin American and East Asian emerging market economies have done in recent years and purposefully avoid contracting another harmful loan programme from the International Monetary Fund (IMF).

As several of these countries learned the hard way over many years, the IMF is not a friendly development institution, nor an objective fireman ready to help put out financial fires. Instead, it acts on behalf of its executive board whose members are directed by the US Treasury and the finance ministries of other leading creditor economies, who in turn are each under immense lobbying pressure by their respective finance industry associations. The IMF's job is to ensure borrowing countries stay creditworthy and repay their foreign creditors on time.

In the last 30 years, a massive global shift of financial resources has occurred from the real sector of national economies (where real jobs and goods and services are created) to the financial sector (or casino sector) under the rubric of 'financial liberalisation'. The IMF's priorities are to enforce reforms in borrowing countries that prioritise the short-term needs of creditors, while subordinating the needs of those living in the real economy. Egyptians who would instead prefer to prioritise job creation should make no mistake about this core function of the institution.

To be sure, the IMF has changed its rhetoric in the wake of the global financial crisis, and, in Egypt's case, in the wake of the revolutionary forces sweeping the Arab world. For example, at a conference examining the pitfalls of IMF orthodoxy in the aftermath of the global economic crisis, held at its headquarters in early March, Olivier Blanchard, economic counsellor and director of the Research Department at the IMF, acknowledged the need for central banks to be allowed a more flexible range of monetary policy options and the need for new regulatory policies to ensure 'macro-prudential' financial regulations for increased global financial stability. And on 15 April, Egyptian Facebook activist Wael Ghonim got a high-profile concession out of IMF Managing Director Dominique Strauss-Kahn at the IMF/World Bank meetings in Washington. Strauss-Kahn responded to claims of prior IMF misdeeds in Egypt by saying that the IMF indeed must do a better job of linking its abstract economic and financial indicators with 'what is really important to the people in the street' and to address the problems of high unemployment and growing income inequality.

Conservative logic

Yet despite such high-profile talk of changes, Egyptians should be aware that there is no evidence that the IMF has at all shifted from its core fundamental tenets guiding its economic philosophy, its macroeconomic framework and its financial programming model. This approach comes from a very conservative logic brought into ascendancy by US President Ronald Reagan and UK Prime Minister Margaret Thatcher over 30 years ago, which is actually just a value judgment that believes that if there is a trade-off it is better to have lower GDP, lower employment, lower tax revenues and lower spending than to have even moderate inflation or fiscal deficits.

When this logic was introduced it had been widely understood as one very conservative option among an array of other viable policy options. But it has since come to be understood as the one and only 'prudent' and 'sound' option as taught by the best economics departments at the best universities for the last two or three generations, including to Gamal Mubarak's 'technocrats'. However, as Nobel laureate Joseph Stiglitz recently summarised at the IMF conference in March, 'The idea that low and stable inflation would lead to a stable real economy and to fast economic growth was never supported by economic theory or evidence and yet became a central tenet of central bank policy.'

Today Egypt should reject this orthodoxy and instead maintain its freedom to consider a wider range of alternative fiscal, monetary, financial and trade policies, many of which could proactively generate higher GDP growth, more employment, greater tax revenues, and increased public investment as a percentage of GDP - all of which will be essential for creating the millions of jobs needed and closing the income gap over the longer term.

'Stabilisation-focused' policy

Although Gamal Mubarak's team of 'technocrats' put together in 2005 to step up reforms then claimed that the IMF macroeconomic policy would increase growth and create employment in Egypt, in fact the priorities of the programme were not at all focused on economic growth or employment generation. Instead, the IMF programme had the Egyptian Central Bank preparing to adopt a rigid 'inflation targeting' policy designed to keep inflation in the low single digits as the exclusive target of monetary policy, and to subordinate fiscal policy goals to this objective.

Under this monetary policy, other important goals - such as financial stability, more rapid economic growth and employment creation - have been seen as inappropriate direct targets of central bank policy. Rather, the orthodox approach views stability, growth and employment as the hoped-for - even presumed - by-products of an inflation-focused approach to monetary policy. Accordingly, the goal of Egypt's monetary policy under an IMF programme is likely to be only for 'stabilisation', rather than for achieving higher growth, employment or public investment for development. The approach presumes that once 'stabilisation' is achieved, higher economic growth, employment, and poverty reduction will eventually follow spontaneously.

Despite such claims by the IMF and its advocates over the last 30 years, the track record has shown that higher growth and employment are not automatic by-products of the IMF's 'stabilisation-focused' central bank policy. Instead, although the IMF has successfully driven down inflation to low levels and 'stabilised' many countries, growth rates and employment rates have been markedly lower in these last 30 years than they had been under different approaches in the previous 30-year period, and as income inequality has worsened.

Such was also the conclusion of the high-level 2008 Spence Commission on Growth and Development when it explained: 'Very high inflation is clearly damaging to investment and growth. Bringing inflation down is also very costly in terms of lost output and employment. But how high is very high? Some countries have grown for long periods with persistent inflation of 15-30%.' Commission member Montek Singh Ahluwalia added: 'The international financial institutions, the IMF in particular, have tended to see public investment as a short-term stabilisation issue, and failed to grasp its long-term growth consequences. If low-income countries are stuck in a low-level equilibrium, then putting constraints on their infrastructure spending may ensure they never take off.'

As the United Nations Department of Economic and Social Affairs recently said of the IMF approach, 'Focusing on inflation and fiscal deficits alone reflects too narrow a view of stabilisation. Therefore, stabilisation needs to be defined more broadly to include stability of the real economy, with smoothened business cycles and reduced fluctuations of output, investment, employment and incomes. Achieving such stability of the real economy may require larger fiscal deficits and higher rates of inflation than prescribed by the conventional macroeconomic policy mix, especially in the face of economic shocks or natural calamities.' However, despite such concerns, IMF policy is not likely to allow anything of the kind for Egypt if it adopts a new IMF programme.

Even though the current level of inflation in Egypt is largely exogenous, coming from the outside due to increased fuel and food prices on global markets, the IMF's programme for Egypt as approved from just a year ago had planned for Egypt to respond to this situation by raising interest rates as the main way of getting inflation down. But today Egypt should move beyond the IMF's narrow 'inflation targeting approach' to monetary policy and increase the numbers of available policy targets to include higher employment levels and higher growth rates while also keeping an eye on inflation. If the US Federal Reserve can be instructed by the Humphrey-Hawkins law to maintain both low inflation and high levels of employment as goals, then certainly Egypt should also be able to adopt similar changes to the Egyptian Central Bank's monetary policy goals and targets.

Capital controls

To its credit, the IMF has recently made one notable policy change on its longstanding opposition to any kinds of capital controls, in this case finally issuing an edict that says now certain types of capital controls to prevent the damage caused by sudden large inflows of foreign capital may be temporarily acceptable, under certain conditions, and as a last resort. In other words, after 30 years the IMF is begrudgingly conceding there is a role for the state in regulating finance after all. Yet the political and chronological reality is that nearly a dozen or so emerging market economies had already gone ahead and implemented a range of such capital controls over the last two years in efforts to stem such large inflows from global investors of the industrialised countries. What is equally noteworthy is that they did so without having waited for the IMF to say it was OK. Therefore, while the belated IMF policy modification is welcomed, it was behind the curve on actual practice among those countries not dependent on its loan programmes and that were thus free to experiment with greater policy latitude.

Egypt should be similarly free to consider all of its options regarding monetary and fiscal policies and priorities, and not be locked into the IMF's preferred ideological straightjacket. Egypt should have the policy space to prioritise scaling up public investment and increasing employment to whatever degree it deems necessary by a new and more representative government, and not be limited by policies that reflect the priorities of external creditors.

Egypt should be able to make use of capital controls as a permanent tool in its policy toolbox, not merely as a temporary last resort. It should work with others to renegotiate the General Agreement on Trade in Services (GATS) and Non-Agricultural Market Access (NAMA) arrangements at the World Trade Organisation, as well as the many free trade agreements (FTAs) and bilateral investment treaties (BITs) that all call for sped-up, premature trade and investment liberalisation. Under many such agreements, rules stipulate that governments may not be able to adequately reregulate their financial sectors to ensure stability, may not be able to implement capital controls, or use adequate levels of trade protection for their nascent manufacturing industries, thus blocking their capacity for economic development.

Egypt should pursue a wider array of essential industrial policies as part of a long-term development strategy to build the technological skills and capacities of its workforce and domestic companies. It should adopt institutions and policies to support the emergence of new industries with publicly-financed research and development (R&D), in acquiring new technologies, with subsidies, temporary trade protection, subsidised credit and other mechanisms that had long been part of the mainstream development economics toolkit when the rich countries were industrialising. It should also design its trade and foreign direct investment policies in ways that will ensure its workforce and domestic companies acquire the skills, technology and financing they need to advance onto the next rung of the development ladder in terms of technological sophistication and international competitiveness.

Meaningfully engaging in such a developmental approach would be forbidden under an IMF programme. Instead, if Egypt adopts a new IMF programme, it could well be in store for yet even more years of job-destroying privatisation, premature trade liberalisation and restrictive fiscal and monetary policies.

There is no doubt that Egypt needs emergency external financing to see it through the temporary economic side-effects of the recent political transformation, but such financing does not need to come from the IMF. Instead, Egypt should look to its regional neighbours and other emerging markets - such as Brazil, China and East Asia - to bridge together the financing it needs and thereby remain free to pursue serious development strategies.                                               

Rick Rowden is the author of The Deadly Ideas of Neoliberalism: How the IMF Has Undermined Public Health and the Fight Against AIDS (Zed Books, 2009). He has assistedonthe documentary We Are Egypt,directed by LilliePaquette, about the historyof political change underway in Egypt. This article is reproduced from the Ahram Online website (english.ahram.org.eg).

*Third World Resurgence No. 249, May 2011, pp 5-7