IFI governance


From the Arab revolutions to global austerity trends

22 April 2013 | Minutes

Bhumika Muchhala, Third World Network
Isabel Ortiz, Director Social Justice Programme, Initiative for Policy Dialogue, Columbia University
Mahinour El Badrawi, Egyptian Centre for Economic and Social Rights
Kinda Mohamadieh, ANND Arab NGO Network for Development
Manuel Montes, South South Centre

Manuel Montes:

I want to discuss ‘Choiceless Democracies’, a term invented to describe the transition to democracy in sub-Saharan Africa. This reflects the democratic transition and the economic programme, two intimately related issues. In this mix, true in South Africa and now in Arab countries, the role of external donors and their geopolitical and commercial interests, in addition to debt claimants which are often and in this case also, significant.

There is a need for adjustment and recovery. I come from the Philippines, which also participated in debt crisis in the 1990s relating in part to debts undertaken under questionable terms by Ferdinand Marcos, and we sought to repudiate those debts which had been intimately engaged with by the IMF and World Bank.

The IMF and World Bank programme entailed removing government intervention they claimed that it would resolve corruption and achieve efficiency, predicated upon servicing debt inherited from Marcos- though we calculated that the debt could never be repaid. Subsequently Brady bonds were developed as a result, vindicating our position.

This word austerity – most people usually think it’s austerity for everybody, but the cutbacks that occur in factories, households and the public sector – yet financial institutions suffer no losses. In the developing countries austerity occurs not for efficiency, but for debt service to foreign creditors.

Let’s discuss cases relevant to the region, e.g. fuel subsidies. We know that removal of subsidies during transitions are ways of putting gasoline on the fire – and the question that should be asked is how will the savings from subsidies be used toward employment and growth as opposed to foreign creditors.

IMF programmes are based on a backward calculation – the financing gap is always calculated including the servicing on external debts. The question follows after how much can be used on supporting ‘affordable’ domestic growth. Alternatively we could calculate forward, understanding how many factories and people are idle or under employed.

Recall that the basis for discussions are always underpinned by geopolitical interests and creditors’ wants, rather than asking how we can avoid simply walking into another crisis later on.

One thing we could do is consider monetary easing, but for these crises you have to undertake some return on capital controls. To be clear a heterodox programme will require debt restructuring up front, which is preferable to orthodox programmes which simply kick the can down the road. We know this, and it is not the first time that it has happened.

Hence the choiceless democracy, if democracy has been won, to what extent can it be applied to shaping your economic future and negotiation with those who would impose orthodoxy, which recreate dependence on international community.

What arguments can transition economies make?
Firstly, the orthodox policy will require another crisis and another package, meanwhile private creditors book the profit while the can is kicked further down the road and choices are reduced.

Secondly, a change of regime argument is valid, like the fall of Marcos in 1986 – that much of the debt was illegitimately incurred and illegitimately lent.

What is the cost of heterodox policy – perhaps slower medium term growth, take for example Iceland. One can argue that Arab countries, much like perhaps Cyprus, the point is this: one can growth faster if one guarantees greater inequality, and transferring the risk to households and relying on private finance.

Yet the cost of the bust exceeds the benefit of the boom. Take SE Asian investment rates, which remain lower.

Isabel Ortiz:

Presentation on research: the Age of Austerity analysing 181 countries’ data.

The picture is two phases of the crisis, in relation to fiscal policy and public expenditures. In 2008-09 fiscal stimulus occurred, though some countries but a low number contracted.

Subsequently this changed away from coordinated fiscal expansion, a phase 2.

Currently, in a third phase, 119 countries are contracting and 89 of these are developing countries, a widely under-reported fact.

Since February 2010 we see the start of austerity all over. I wanted to show you that we are talking about really large fiscal contractions; according to IMF data a quarter of countries are reducing expenditures below pre-crisis levels. The question for many of us is what is going to happen to development goals, how are they going to be achieved in the face of excessive fiscal contraction.

The principal measure are limiting subsidies, wage bill cuts/caps, increasing consumption taxes, pension reforms, reducing social protection floors/safety nets

Let’s look at the most common in order

Reducing/eliminating subsidies

This measure is more prevalent in developing countries than in higher income  states, but also note that much of this on food, is done when international food prices are very high – and local food prices did not fall locally during periods such as in 2009 and 2010 when international food prices fell very strongly.

This is not restricted to IMF loan countries, but rather policy discussions in IMF documents.

In IMF reports we see the logic of reducing expenditures justified by compensating targeting efforts, but this works nevertheless as a de facto contraction. This formula seems to be in the minds of policy makers even in low income countries where a very large proportion of the population is below the poverty line -0 take Gambia, Haiti, Mali, Mauritania and others – what is going to be achieved by targeting the poorest of their poor? As Togo documents, doing so when 75 % is below the national poverty line, which is already very low, they found is very difficult. Also in Moldova, where the amount of the poor in Moldova is over 1 million, they identified a target of less than a fifth of those, so the rest are simply excluded. To make things worse, due to an enormous concern of leakages, it nevertheless took two years to achieve that group, and even after the programme began it failed to reach the vast majority of those who were considered eligible.

What Manuel Montes said about choiceless democracies is correct; decisions are done without consultation and without consideration of the distributional impacts that are consequences of them.

Policy shift in internal markets is required; ass has been done in a few Asian and Latin American countries in 20102-13 – thereby building internal markets (minimum wage policies, social protection, subsidies, social services, etc.)

Mahinour El Badrawi

To discuss the current work and policies of the Egyptian government, and how it goes against the wishes and hopes of the Egyptian people, who campaigned originally on a motto of bread, freedom, justice.

As early as the 26th of October until November 23rd in 2011 the IMF mission was already in Egypt seeking to provide a package just 8 months after the toppling of a thirty year dictatorship.

This was originally sought to be $3bn, which was then increased to $4.8bn after the ascension to Morsi to power. This negotiation led to widespread discontent and instability in the country.

What is being said by the government and the IMF is that there are no conditions to IMF loans, that these are always home-grown IMF policies, and that the IMF simply supports those reforms by giving money.

Let’s take this as if it is reality, as the Egyptian government has repeatedly asserted, e.g. that there are no conditions to the IMF loan. So how do we explain that the national plan of 2011 mirrored the exact recommendations of the IMF article 4 consultation to the Mubarak government of April 2010. Taking one example, it said “there is a need to increase the efficiency of public spending and resist pressure to increase … especially on cost subsidies” and suggesting a move to VAT.

Soon after the revolution, negotiations began and the secretive plan in November which was hidden from citizens and the parliament, in the absence of any national economic plan. We raised an information demand to know on what basis the loan was begin negotiated – and then the plan was released in November, with the exact same words from the 2010 article 4 in the 2011 ‘national’ economic plan.

The reform plans are not very home grown. If we actually look at May 2011, after the 37th meeting of the G8 in Deauville France, the G8 plus 10 development banks plus IFIs including the IMF, IFC, World Bank, EBRD, plus creditor states like Qatar, Saudi Arabia, Turkey as lenders to the five countries in ‘trasntion’ of Tunisia, Egypt, Yemen, Jordan, Morocco.

The ministerial meeting of the Deauville partnership in 2012 came out with recommendations, including for Egypt of cutting energy subsidies, raising revenue through broadening of the income tax, allowing the currency to move in line with market forces. We can see the divergence between the official exchange rate and the black market rate. Yet again the exact same plan. The IMF chaired the meeting and wrote the report.

We do need to reform the subsidies, there are subsidies being wasted – we need a reform of taxation also. Let’s consider it for a moment as the only way to raise revenue (which I will show later is not true.)

Nevertheless, let’s look at how these subsidies are occurring – the burden is falling immensely on the poor and the average Egyptian, not on those who could afford it. The national plan said that fuel and energy subsidies will be decreased on the household gas (butane) but it will increase for heavy industries, up by 30%. There is not a single application of this – however the price of butane gas has increased by 150% which official figures do not recognise somehow.

The loan agreement was set to be signed in December but led to discontent. There is a table of exemptions, which the law suggested that the exemptions will be abandoned.

The new negotiations in February revealed that an amendment occurred, but the capital gains tax reduction was maintained, because it was need to not scare off investors.

What to do now?

The people have the right to be upset, angry and unhappy. This is happening on the street, and the general Egyptian is not happy with the denial of the goals of the revolution, and they see its connection to the loan from the IMF.

If you speak to the government, they would claim there is already progressive taxation. In Egypt there re four brackets of the income tax, but the progressive increments falls only on the poorest.

This needs to change, with a top rate of just 25% for those earning over 1 million Egyptian pounds, additional brackets are needed.
Corporate taxation is fixed at 25% – this does not work.

We also have a very wide informal sector in Egypt, housing millions of Egyptians and it is marginalised and treated as if it were parasitic. Incorporating them, via social benefits and security would bring this sector into the taxable domain.

We need to unpack the investment climate discussion, we need to ask what kind of investor are we attracting or scaring away? Currently the investment framework reproduces the cycle of loss of wealth, looking at law 24 (2012) adopted by the supreme council of the armed forces provides total immunity to investors to administrative or court procedures and in any case of dispute a reconciliation committee inside ministries. What kind of investor would be attracted to an environment of irresponsibility and impunity? How can the IMF endorse this as a mechanism to attract capital? It will exacerbate the wave of Mubarak-era irresponsible privatisation for example.

We have seen a wave of activity to repudiate and repeal these laws. Take the Muhallah textile factory, sold corruptly to a foreign investor, and in late 2010 the contract was denounced. With this law the investor is reconciling with the state, and the idea of an economic crime against the people and the theft of their resources are being neglected. We are not only failing to stop the waste and the flight of state resources, but we are allowing this exact same pattern to be repeated. WE are pouring water into a bucket with a hole and what sort of development and investment are we really discussing?

We need to ensure that the legislative and policy framework for investments will be friendly, not investor friendly only but development and people friendly.

Kinda Mohamadieh

Structural policy advice advanced by the IMF in the region. – our concerns and perspectives on the role of macro policy.

The way that the IMF advances recommendations based on short-term objectives in addition to our concern that governments’’ policy space in the longer term is reduced especially in order to support a development track.

Specifically much of the advice that is reflected is often reflected via our governments’ signing bilateral and multilateral investment treaties under international law, which are very difficult to rescind.

If you examine the last few decades across the Arab countries, you can see a very clear trend in the reversal and decline of productive a manufacturing capacity. Additionally wages have depressed as a share of income, marginalising citizens as economic actors and contributors to economic growth.

We can see that this wage depression has been associated with a specific trend in terms of designing trade and investment policies toward export sectors, so that the burden of adjustment was borne only by workers via the wage depression cycle. We saw a very rapid concentration in low value added services and economic locked into this pattern.

This has been associated with a trend of the concentrating of investment into mining and real estate, sectors that contribute little to employment, to technical and technological advancement. Between 2003 and 2010 two thirds of FDI went to these two sectors, with support to short-term objectives, versus a long-term development oriented approach.

Our approach is now to advance these trends.

So what is the IMF narrative in this regard, and specifically before and after the revolutions? A few months before the revolution the Fund hailed Tunisia and Egypt for their policies and for their alignment with fund policies, including the ‘prudent’ macroeconomic situation in Egypt. They were calling for the restraint on public spending, while the same reports highlighted the significant increase in food price inflation. These institutions also sought to focus on investor confidence, rather than broader objectives of development and economic policy.

After the revolution a significant trend of repackaging all the old policy advice was the principal message that ‘we didn’t do enough’, and I quote from a report under the Deauville platform “the reforms were too partial… due to the lack of legitimacy of the stage… nepotism and corruption” so therefore the only change needed is to deal with nepotism and corruption yet maintaining liberalisation of investment, capital flows, public procurement and relaxation of labour regulation. They focused on improving the business climate, and creation of investment zones, repeated by the Fund MENA director recently to dismantle tariffs. He called for widening the scope of liberalisation and a deregulatory trend of investment, and he called for relaxing entry and exit requirements for the investor.

These recommendations prior the global crisis, revolutions and after and you can see a trend of repetition all over. I want to highlight here that specifically on trade policy advice advanced by IMF staff, the IEO deeply discussed the intervention of the IMF the 1990s there was an ‘uneven’ and ‘aggressive’ role of the Fund, despite no clear mandate nor clear criteria on which the macro implications of the trade policy recommendations were based, leading to no clear basis to consider the implications of plurilateral trade agreements, highlighting the recommendations on financial sector opening despite lack of assessment of the implications of policy advice. This is particularly troubling as investment treaties cannot be reversed under national law. This is significant in terms of understanding the policy space that our governments have been facing.

I wish to highlight the loan agreement with Morocco, a precautionary and liquidity loan, with the main objective of shocks from the European markets due to its exposure to Europe and to the oil price. This agreement advances              reduced minimum wages, opening up of trade. The main loan objective is to secure and safeguard a shock form over dependence on the EU while advancing recommendations that deepened the dependency and exposure. In 2009 IMF discouraged a plan to build growth built on domestic demand, and the Morocco discussion was widespread.

A major component of the denial of fiscal space includes the 6 ICSID cases brought after the revolution in Egypt that pertain to investment agreements found to be corrupt in national courts.