This article is part of ourEconomy's 'Decolonising the economy' series.
Who does economic policy work for?
The IMF, World Bank, Bloomberg, and Financial Times, alongside big investment banks such as Morgan Stanley, are celebrating Egypt’s economic success. As the Chief Global Strategist at Morgan Stanley declared last August, Egypt witnessed “the best reform story in the Middle East, perhaps in any emerging market”. No wonder the Governor of the Central Bank of Egypt (CBE) and the Minister of Finance were confident to announce the IMF program in Egypt as “the most successful in [its] history”.
The IMF three-year agreement with Egypt is a $12 billion loan ‘to restore macroeconomic stability’. The agreement was signed in November 2016, when Egypt was facing a rapid increase in the government deficit and public debt, decreasing foreign exchange reserves, low economic growth rates, and a widening gap between official and unofficial currency markets.
So ‘successful’ has the program been that the CBE’s Governor and the Minister of Finance are now even hinting towards the possibility of a new agreement with the IMF. We may wonder, then, what economic success means to a Global South economy in the eyes of the IMF and western media. Who does economic policy work for? And do the same measurements of success apply to all economies, South and North alike?
It is quite interesting how the recent economic success in Egypt is associated with a substantial increase in people living under the national poverty line. According to the latest official Household Income, Expenditure, and Consumption Survey (HIECS), the poverty headcount ratio jumped from 27.8% in 2015 to 32.5% in 2017, compared to 26.3% in 2012 as well. Now, almost one third of the population is below the national poverty line. Egypt’s ‘success’ story coincides with remarkable, yet unsurprising, economic phenomena. We have an economy that grew by an average annual growth rate of 4.2 percent (GDP growth rate) and per capita income grew by 2 percent (GDP per capita) during 2014-2018, the same period in which more than six million people fell into poverty.
We also have an unemployment rate declining from 13.1% in 2014 to 8.1% in the first quarter of 2019, all of which doubtlessly indicates that millions of working Egyptians are receiving less than the living wage, probably including those who recently entered the labour market. For any resident in Egypt, these are not surprising figures, as the recent growth is mainly driven by tourism, oil, remittances, and construction. Both the major sectors of construction and tourism are known to offer very low wages with precarious working conditions.
Social media comments on the Minister of Finance’s insightful remarks (translated from an interview with Bloomberg) showed there is no need for an in-depth analysis to understand the success of Egyptian economic reforms. The minister noted that the “obstacle is that fruits of the economic reform were not captured by ordinary people”. Commentators were sarcastically wondering why they could not benefit from the economic gains. Some people felt that maybe they were not around to ‘catch’ them, while others suggested we should shake the tree to allow the fruits to fall.
Can we celebrate the rise of poverty in Europe?
The IMF’s praise comes from stabilising macroeconomic measurements, namely: reducing budget deficit, adjusting balance of payments, and ensuring exchange rate stability, together with decreasing the official unemployment rate and increasing overall economic growth. Meanwhile, the majority of Egyptians are struggling to cope with inflationary prices and deteriorating public services, caused by the IMF program itself that pushed for currency flotation, reducing energy subsidies and a decrease in real public expenditure on health and education. In fact, for the last five years, public expenditure on health and education did not meet constitutional requirements.
We have not seen such praise for austerity policies in Greece or Spain with the economic and social hardship that followed, especially the massive rise in youth unemployment rates. The Greek and Spanish austerity measures may have been portrayed as ‘inevitable’ (even if that is highly debatable), but economic hardship was not and would never be celebrated in Global North economies. Imagine five million EU citizens falling into poverty in less than two years; will it be portrayed as an economic success? The lived realities of Greeks and Spaniards were constantly under the lens of the media and political analyses, whereas Egyptians and their experience of austerity and social hardship is at best dismissed, or even deemed mere collateral damage. Although austerity measures are not always blamed, poverty and rising inequality in the west are now at the forefront of academic debate and under the lens of mainstream Western media, political parties, and even international organizations including the IMF.
The IMF claims that its intervention aims to adjust fiscal imbalances and promote inclusive economic growth led by the private sector. Inclusivity, just like sustainability, is a vague and overused term by the IMF and World Bank group, as well as many international development agencies (IDAs). While the IMF delayed the fifth installment of the loan to Egypt last January until Egypt’s government approved the complete removal of energy subsidies, there was no action from the International Fund to ‘advise’ or ensure that the policies of the government are promoting ‘inclusive growth’.
The IMF’s pressure to cut energy subsidies could have also worked to persuade the government to adopt transparent and accountable public finance policy, as well as direct some of the massive public investments in controversial megaprojects towards increasing social investments ‘in people’s education, health and social protection’, as the World Bank already recommends.
But the Global South gets no concrete advice from the IMF or World Bank to ensure inclusive growth coupled with raising the prosperity of people, based on policies that have already worked in the North. Imagine if the IMF, the World Bank group and IDAs were advising governments to support the creation of cooperative banks which are widely successful in Europe and the US in financing micro and small businesses and farmers? Or if they were advocating for transparent bidding on public projects, and free or affordable functioning healthcare and education systems? Or a just tax system and strengthening of tax authorities? Or land reforms or mutually-owned businesses, or maybe independent labour unions? What about at least drawing a line at a minimum living wage?
There would be no harm to focus on all these economic policies, alongside fiscal and monetary adjustments. But these concrete social dimensions of economic policy would not benefit capital market investors who bought Egyptian government bonds at excessively high returns in the last two years. The high yield on Egyptian government bonds - promoted by the IMF and investment banks’ praise for the Egyptian economy - was a direct result of the aforementioned inflation and currency flotation.
Fueling dissatisfaction and the ‘surprise’ of instability
Praising the latest ‘economic reforms’ just fuels growing public dissatisfaction, and we are witnessing global protests in different parts of the Global South. The IMF program, as normally is the case, is one of the major sources of instability in Egypt, though not the only source. Just to recall, Egypt had an annual average GDP growth of 6.2 percent, 4.3 percent GDP per capita growth, a low unemployment rate falling from 11.2 to 8.8 percent, and, most of the time, a positive balance of payments in the five years before the political upheaval that ousted Mubarak in 2011. At the same time, the poverty headcount rate of those under the national poverty line jumped from 16.7% in 2000 to 25.2% in 2010.
Yet the World Bank had the courage to argue in a bold study published in 2013 that “income inequality in Egypt is confirmed to be low” suggesting that the uprising of 2011 and “the increased frustration with income inequality voiced by Egyptians and measured by the World Values Surveys is driven by factors other than income inequality”. Like most economies that have weak tax systems and unreliable income tax records, Egypt’s inequality measurement is absurdly low because it depends on HIECS where top incomes are either unreported or underestimated. It looks like the IMF and the predominant neoclassical economic thought suggest that repeating the same policies in a more aggravating way can somehow produce a better result. What is more frustrating is the absurd surprise of Western media and governments, and international organisations, when instability bursts in the region after supporting such hardships on peoples’ lives.
More important than just focusing on fiscal adjustment and stability, is to think if people’s struggles are a concern for the IMF and economic policy or not, and if measurements of economic success differ in the South and the North. After all, aren't economic performance and social stability for the benefit of the people and improving their lives?