Neoliberal threats to North Africa

The spark ignited by the death of Mohammed Bouazizi has irretrievably changed the future course of the countries in the Middle East and North Africa (MENA). But each country will change in its own way and at its own speed. Nor will they necessarily have a common political or economic model when they reach their destination.

Five years of reforms and prudent macroeconomic policies created the space needed to respond to the global financial crisis, and the supportive fiscal and monetary policies of the past year have been in line with staff's advice. The authorities remain committed to resuming fiscal consolidation broadly in keeping with past advice to address fiscal vulnerabilities … Such adjustment will be crucial to maintain investor confidence, preserve macroeconomic stability, and create scope for future countercyclical fiscal policy. (IMF 2010b, pp. 1, 4)

Decisive action to continue the earlier reform momentum should focus on addressing the remaining structural weaknesses. In addition to sound macroeconomic policies, efforts should focus on: Resuming privatization and increasing the role of carefully structured and appropriately priced PPPs should assist fiscal adjustment and mobilize private resources for infrastructure investment.

The January revolution has raised the aspirations of Egypt's population at a time when the economy is taking a hit from domestic unrest in the short term, the ensuing uncertainty, and large global and regional shocks (e.g. the rise in commodity prices and the violence in Libya). The political shock triggered substantial capital outflows, which in addition to the decline in tourism revenue, remittances, and exports, have led to a loss of foreign exchange reserves of about US$15 billion in the four months to end-April.

The plethora of aid and investment initiatives advanced by the leading powers in recent days represents a conscious attempt to consolidate and reinforce the power of Egypt's dominant class in the face of the ongoing popular mobilizations. They are part of, in other words, a sustained effort to restrain the revolution within the bounds of an ‘orderly transition’ – to borrow the perspicacious phrase that the US government repeatedly used following the ousting of Mubarak.At the core of this financial intervention in Egypt is an attempt to accelerate the neoliberal program that was pursued by the Mubarak regime … If successful, the likely outcome of this – particularly in the face of heightened political mobilization and the unfulfilled expectations of the Egyptian people – is a society that at a superficial level takes some limited appearances of the form of liberal democracy but, in actuality, remains a highly authoritarian neoliberal state dominated by an alliance of the military and business elites.

An ambitious programme to privatize banks and develop the nascent financial sector is underway … Structural reforms in other areas have progressed. The passing in early 2010 of a number of far-reaching laws bodes well for fostering private sector development and attracting foreign direct investment … Executive Directors agreed with the thrust of the staff appraisal. They welcomed Libya's strong macroeconomic performance and the progress on enhancing the role of the private sector and supporting growth in the non-oil economy. The fiscal and external balances remain in substantial surplus and are expected to strengthen further over the medium term, and the outlook for Libya's economy remains favourable. [emphasis added]

Less than two weeks ago, the IMF's executive board, its highest authority, assessed a North African country's economy and commended its government for its ‘ambitious reform agenda’. The IMF also welcomed its ‘strong macroeconomic performance and the progress on enhancing the role of the private sector’, and ‘encouraged’ the authorities to continue on that promising path. By unfortunate timing, that country was Libya. The fund's mission to Tripoli had somehow omitted to check whether the ‘ambitious’ reform agenda was based on any kind of popular support. Libya is not an isolated case. And the IMF doesn't look good after it gave glowing reviews to many of the countries shaken by popular revolts in recent weeks.

Must, first and foremost, boost their competitiveness. Sound macroeconomic policies – in particular, fiscal consolidation – will help, but governments will also need to make greater efforts to improve the business climate. Unfortunately, many of these countries are still characterized by burdensome regulatory systems, weak institutions, and a dominating public sector. Countries must also enhance labor market functioning by improving education (to better match the supply of, and demand for, certain skill sets) and ensuring that wages better reflect market conditions. Finally, trade tariffs need to come down. While they have been streamlined and lowered – mainly under the auspices of trade agreements with the European Union and the United States – they remain high, averaging over 12 percent in 2009. Most importantly, with the region's traditional advanced-economy trading partners now growing more slowly, MENA countries should seek new export markets.

As governments want to reduce unemployment and ease the burden of high commodity prices, social protection has expanded rapidly in the region. While some measures are desirable, especially those targeted at protecting the most vulnerable, there is a risk that many of these policies are broad and will be very costly. In particular, expansion of public sector employment is costly and difficult to reverse. More effective employment policies are likely to involve short-term employment in public works. In addition, raising minimum wages, public sector wages, and/or unemployment benefits, as has been done in a few countries, will likely reduce equilibrium employment in the absence of other changes. To the extent that fuel is subsidized this creates a distortion and steers resources towards fuel-intensive industries, which tend to be capital intensive. These policies may have the undesirable consequence of reducing employment prospects for those outside the public sector.

In MENA, prolonged instability, resulting from unmet political and social targets or spillover effects and lack of clarity about the future political transition, is the most serious risk to the short-term regional economic outlook. Prolonged tensions would amplify the negative impact on capital inflows and domestic financial exchanges, tourism receipts and remittances, and in turn on investment, output, and employment. Construction, manufacturing, tourism and financial institutions are most likely to suffer losses with further deterioration of the situation. A renewed loss of investors' confidence would translate into increased cost of capital further dampening growth prospects. Prolonged unrest would also threaten MENA's social policy design and fiscal health, as revenues would remain weak and expenditure would be elevated, especially if commodity prices remain strong. Already, as governments want to reduce unemployment and ease the burden of high commodity prices, social protection has expanded rapidly in the region. While some measures are desirable, especially those targeted at protecting the most vulnerable, there is a risk that many of these policies are broad and will be very costly. In particular, expansion of public sector employment is costly and difficult to reverse. More effective employment policies are likely to involve short-term employment in public works. In addition, raising minimum wages, public sector wages, and/or unemployment benefits, as has been done in a few countries, will likely reduce equilibrium employment in the absence of other changes. To the extent that fuel is subsidized this creates a distortion and steers resources towards fuel-intensive industries, which tend to be capital intensive. These policies may have the undesirable consequence of reducing employment prospects for those outside the public sector. Moreover, it is important they are used to complement and support government reforms, and not as a substitute.

Economic reforms had started in several countries during the last decade. But in the context of declining state legitimacy, low levels of political participation, nepotism, perceptions of corruption and predation, and little accountability, reforms were too partial to take real hold or to transform sclerotic intuitions. Often they were perceived to increase inequality, and benefit the politically-connected elite.

Economic austerity was imposed by the IMF and Bank starting in several countries during the 1970s, and was amplified subsequently across the lower income MENA countries. Political corollaries to Washington's support for the ruling regimes included their declining state legitimacy, low levels of political participation, nepotism, perceptions of corruption and predation, and little accountability. Austerity was implemented by the societies' sclerotic ruling intuitions, so as to increase inequality and benefit the politically-connected elite.

Citizens are challenging authorities across MENA with the unifying refrain for ‘Dignity, Respect and Freedom’ and an end to the Arab exceptionalism which has denied rights enjoyed elsewhere.However, the political nature of the change should not underestimate the role played by economic factors. Countries have been unable to sustain shared economic growth at levels necessary to generate the quantity and quality of jobs expected by a rapidly expanding labor force, notably young men and women.Economic reforms had started in several countries during the last decade. But in the context of limited accountability, reforms were perceived to increase inequality and benefit the politically-connected elite.The public engagement emerging today in several MENA countries opens an opportunity for the people of the region to carry out the kind of reforms needed to overhaul the development paradigm. Greater government accountability and public participation will be essential elements.As government legitimacy deepens, there is also likely to be more effective regional cooperation in the Arab world, based on solidarity among peoples, and a desire for greater inclusiveness, both regionally and globally.The Arab Spring creates significant opportunities for the MENA Region and for the world, but there are also challenges and risks. Food and energy price shocks, and in general the global economic environment, could challenge the economic and political reform process. In some countries, there are risks that governments will be driven by populist demands or that necessary reforms stall due to popular backlash. Political risk perceptions may rise, deterring the domestic and foreign private investment needed to create employment, and government budgets may shift away from investment towards consumption to cool popular discontent. Timely external support for countries to address their peoples' aspirations may fall short of needs.A crucial issue in the sustainability of the governance transition will be the availability of adequate public and private funding for short-term financing needs, and for the medium-to-long-term investments which will generate the bulk of much-needed jobs, particularly in the private sector.Innovative financing and risk mitigating mechanisms to support private investment and access international financial markets will be critical to the transition… In the same vein the opening of external markets – for goods, services and labor – will be fundamental to the success or failure of the transition. Ultimately this will matter more than external financial support. The G8 countries have a major role to play in this regard.

The wave of self-confidence and self-assertion now sweeping the Arab world, and the refutation of any notion of Arab ‘exceptionalism’, could lay the foundation for an even deeper partnership between the Arab countries, the World Bank Group, and other partners in the Arab World Initiative. The time could be ripe for Arab regional cooperation, and for the more vigorous pursuit of inclusive globalization.

Close to 60 percent of MENA exports are directed to Europe – reflecting proximity and long-standing linkages – which implies that MENA has not inserted itself into the global economy and has not been benefiting from the high growth rates achieved in other emerging markets.

With mostly limited fiscal space, MENA oil importers confront the immediate challenge of preserving macroeconomic stability while building social cohesion. Additional spending in the short term is understandable and necessary to ensure social cohesion. Nonetheless, oil importers cannot afford to strain public finances, in order not to derail – over the medium term – the pursuit of the new inclusive growth agenda. To this end, they will need to partially offset some of the additional cost of higher subsidies and other support measures through cuts elsewhere. In the same vein, they will also need to avoid introducing measures that would raise spending on a permanent basis. To preserve market confidence and prevent further escalation of the cost of funding, governments should detail credible plans for unwinding emergency measures.

The success of such a partnership will require the international community to draw lessons from the shortcomings of previous approaches that generated weak country ownership and resulted in scepticism amongst many stakeholders in the region. For the IMF, this means addressing important socio-economic dimensions that thus far have not been sufficiently brought to the fore in its policy advice, and to work with other stakeholders to build broader support within the region.

In MENA, prolonged instability, resulting from unmet political and social targets or spillover effects and lack of clarity about the future political transition, is the most serious risk to the short-term regional economic outlook. Prolonged tensions would amplify the negative impact on capital inflows and domestic financial exchanges, tourism receipts and remittances, and in turn on investment, output, and employment. Construction, manufacturing, tourism and financial institutions are most likely to suffer losses with further deterioration of the situation. A renewed loss of investors' confidence would translate into increased cost of capital further dampening growth prospects. Prolonged unrest would also threaten MENA's social policy design and fiscal health, as revenues would remain weak and expenditure would be elevated, especially if commodity prices remain strong.

As Egyptian protesters gathered in their thousands demanding the departure of President Hosni Mubarak, Strauss-Kahn said: ‘The IMF is ready to help in defining the kind of economic policy that could be put in place.’ In a speech in Singapore, he said rampant unemployment and a growing income gap was a ‘strong undercurrent of the political turmoil in Tunisia and of rising social strains in other countries’. Nationwide demonstrations last month led to the ouster of Tunisian strongman Zine El Abidine Ben Ali, and massive street protests are raging in Egypt seeking an end to Mubarak's more than 30-year rule. ‘As tensions between countries increase, we could see rising protectionism – of trade and of finance’, Strauss-Kahn said. ‘And as tensions within countries increase, we could see rising social and political instability within nations – even war.’

The new loans being negotiated for Egypt and Tunisia will lock both countries into long-term economic strategies even before the first post-revolution elections have been held. Given the IMF's history, we should expect these to have devastating consequences on the Egyptian and Tunisian people. You wouldn't guess it though, from the scant and largely fawning coverage the negotiations have so far received.The pattern is to depict the IMF like a rich uncle showing up to save the day for some wayward child. This Dickensian scene is completed with the IMF adding the sage words that this time it hopes to see growth on the ‘streets’ not just the ‘spreadsheets’. It's almost as if the problem had been caused by these regimes failing to follow the IMF's teachings …Beginning in the 1990s, IMF-led structural adjustment programmes saw the privatisation of the bulk of the Egyptian textile industry and the slashing of its workforce from half a million to a quarter-million. What's more, the workers who were left faced – like the rest of Egypt – stagnant wages as the price of living rocketed. Though you wouldn't know it from western coverage, the long and gallant struggle of these workers, particularly the strike of textile workers of Mahalla el-Kubra, is credited by many Egyptian activists as a crucial step on the Egyptian people's path towards revolution.This failure to appreciate the revolutions as a rebellion not just against local dictators, but against the global neoliberal programme they were implementing with such gusto in their countries, is largely a product of how we on the western left have been unwitting orientalists, and allowed the racist ‘clash of civilisations’ narrative to define our perceptions of the Middle East. We have failed to see the people of the region as natural allies in a common struggle.It is this blindness that makes the revolutions appear as instantaneous explosions, like switches suddenly flicked, rather than as events in a continuum. A good place to start the story, if you want it to make sense, would be the Egyptian bread riots of 1977, which came following an initial round of economic liberalisation (which was as much a part of Sadat's change of cold war allegiances as his salute to the Israeli flag in Jerusalem). It should not have surprised us that as people's struggle to survive grew more and more grinding following the IMF-led reforms of the subsequent decades they would rise up once more.Nor should we surprised at the moneyed fightback, which will no doubt be attempted. During this transition period, forces like the IMF will seek to lock in and enlarge the neoliberal project before there is an accountable government to complain about it …These new loans from the IMF threaten to bind the newly democratic Egypt and Tunisia in much the same way. Once more, local elites could collaborate with the institutions at the helm of global capitalism to screw the broader population. If this occurs, these revolutions will be robbed of much of their meaning, and a terrible blow will be dealt to the broader Arab spring.

At a series of working sessions that lasted until the early morning hours Friday, representatives of the Group of 8 expressed concern that the democracy movement in the Arab world could be ‘hijacked’ by Islamic radicals if the West did not help stabilize the economies of the two countries that touched off the Arab Spring …How much aid the Western powers would ultimately provide, and how effective any aid would be during volatile political transitions in the two countries, remained uncertain. The group's official communiqué promised $20 billion, which would be a major infusion of funds … Democracy, the leaders said, could be rooted only in economic reforms that created open markets, equal opportunities and jobs to lower staggeringly high unemployment rates, especially among restless youths … Officials cautioned that the projected $20 billion in aid from international financial institutions would come in phases and be contingent on democratic and economic reforms. The pledge, an aide to President Obama said, was ‘not a blank check’ but ‘an envelope that could be achieved in the context of suitable reform efforts’.

the military establishment has generally proceeded in harmony with general US policy vis-à-vis the Arab Revolution, and their main objective has been to prevent (or abort when possible) any radicalization of the revolution … It was the US that decided to remove the military in both these countries from an all-out confrontation with the millions-strong masses of people, and to keep them intact (as institutions), to be preserved as levers for controlling the situation in the subsequent stages of the revolution. Of course, we must not forget that the start of the revolution and its escalation in Tunisia and Egypt were so sudden and accelerated that they caught Obama's administration completely by surprise. Due to reasons I have already explained, American leaders knew that an all-out confrontation with the millions of rebellious people who have had enough would be hugely costly, and would jeopardize American long-term interests in this very sensitive region. Consequently, while pressing these dictatorships behind closed curtains to avoid blood baths on a mass scale, in the final analysis, they decided that in order to preserve the ruling regimes, they would sacrifice the dictators themselves.

Anger at Egypt's privatisation programme, involving the transfer of billions of dollars worth of public assets to private hands, aided the Egyptian revolution that elbowed the Western-backed Hosni Mubarak out of office in February, a top army general said. Major General Mohammed al-Assar, a leading member of the Supreme Council of the Armed Forces, a group of top military generals who are running the country until a civilian leadership is elected, said the military brass were deeply opposed to the privatisation programme. That in turn eased their decision to side with the Egyptian public against the 30-year autocratic rule of Mubarak. Al-Assar told state television on Wednesday that the army has been against the ‘plans to sell Egypt’ and viewed them as a threat to social peace. He said that Field Marshal Mohammed Tantawi, the council's President and Minister of Defence, had repeatedly raised objections to the privatisation programme, as shown in the minutes of several cabinet meetings he attended. His opinion was often over-ruled by Mubarak and other top officials who had favoured following economic prescriptions from Western countries. Many of those officials stood to gain from the sale of public enterprises. Prodded by the Washington-based trio – the United States Agency for International Development (USAID), World Bank, and International Monetary Fund (IMF) – Egypt under Mubarak adopted an aggressive programme to sell public companies to both local and foreign investors since the early 1990s. The programme peaked between 1996 and 1999 with the sale of at least some 30 profitable public companies a year.

Moves to limit economic protests and labour strikes are ongoing in Egypt and Tunisia. Once elections are held to bring about a new class of servants of the new order, we will hear that all economic demands should be considered ‘counterrevolutionary’ and should be prosecuted for attempting to ‘weaken’ if not ‘destroy’ the new ‘democracy’. If, as is becoming more apparent, the US strikes alliances with local Islamist parties, we might even hear that economic protests and opposition to neoliberal imperial economic policies are ‘against Islam’. The US-imposed ‘democracy’ to come, assuming even a semblance of it will be instituted, is precisely engineered to keep the poor down and to delegitimise all their economic demands. The exchange that the US hopes to achieve by imposing some form of liberal political order on Egypt and Tunisia is indeed more, not less, imperial pillage of their economies and of the livelihoods of their poor classes, who are the large majority of the population. The ultimate US aim then is to hijack the successful uprisings against the existing regimes under the cover of democracy for the benefit of the very same local and international business elites in power under Mubarak and Ben Ali.

The workers' strikes in 2007 (the strongest strikes on the African continent in the past fifty years), the stubborn resistance of small farmers threatened with expropriation by agrarian capital, and the formation of democratic protest groups among the middle classes (like the ‘Kefaya’ and ‘April 6′ movements) foretold the inevitable explosion – expected by Egyptians but startling to ‘foreign observers’. … The youth and the radical left sought in common three objectives: restoration of democracy (ending the police/military regime), the undertaking of a new economic and social policy favorable to the popular masses (breaking with the submission to demands of globalized liberalism), and an independent foreign policy (breaking with the submission to the requirements of U.S. hegemony and the extension of U.S. military control over the whole planet). The democratic revolution for which they call is a democratic social and anti-imperialist revolution. Although the youth movement is diversified in its social composition and in its political and ideological expressions, it places itself as a whole ‘on the left.’ Its strong and spontaneous expressions of sympathy with the radical left testify to that.

Among the leftist activists who helped organize and drive the Egyptian revolution, there were howls of fury over the IMF loan when it was first agreed (and over ongoing contacts between Egypt and the World Bank). These folks view both organizations as tools of economic imperialism, and any ties with the institutions as threats to Egyptian sovereignty.It's unclear how popular the left will be at the ballot box. But the growing importance of labor unions in Egypt in recent years, the fact that some of the most effective protest organizers around Tahrir Square during the revolution were from the left, and the general drift of Egyptian society indicates they'll have a much bigger voice than they've had in decades. If I had to guess, I would say Egypt's ruling military junta decided it wasn't worth it to have a confrontation over the IMF loan.