The IMF and the Egyptian Revolution

Christina Lagarde, head of the IMF, was in Egypt today to negotiate with the Egyptian government the terms of a new $4.8 billion loan.  Predictably, many Egyptians are suspicious.  An Egyptian economist, Wael Gamal, who has solid revolutionary credentials and is economically progressive, writes on Egypt’s economic affairs for al-Shuruq, a leading independent Egyptian newspaper.  He has come out strongly against the proposed loan, first, in a piece in the Shuruq, and again on his blog.Gamal certainly raises many legitimate points, but I don’t really see what choice Egypt has at this point in time.  While I agree with many of his proposals, I don’t think they can be practically implemented in the short-term, given the political uncertainty Egypt continues to suffer from, especially the absence of a parliament and a constitution.  The current Egyptian government, because of the drawn out and uncertain nature of this transition, is simply incapable of implementing bold economic reforms; many thanks to SCAF and the Supreme Constitutional Court!

I certainly agree with Gamal that Egyptians should be suspicious of US aid, either because of its political strings, or because its primary beneficiary is not Egypt but American firms that are the ultimate recipient of non-military aid (which itself is substantially less than the military aid Egypt receives annually from the US).  I think that Gamal is mistaken in his assumption that the IMF acts simply to further US interests.  If the Egyptian government can make the right structural reforms, including some of those mentioned by the author of this blog, there is no reason that Egypt could not benefit from an IMF loan, like Indonesia, Turkey and Brazil.  And while it is true that Malaysia was able to recover from the 1998 Asian financial crisis without applying to the IMF for assistance, its government enjoyed a much greater degree of domestic political legitimacy and international credibility with investors compared to today’s Egypt.  Accordingly, it is hard to compare the ability of Egypt to recover without IMF assistance based on the singular experience of Malaysia. I am also suspicious that the doctrine of “odious debt” is applicable to Egypt’s external indebtedness, and in any case, Egypt’s foreign debt is only 30% of its GDP.  Most of Egyptian government debt is, in fact, internal debt.

One way Egypt might approach its mountain of internal debt, which has only increased since the revolution, is to encourage its domestic bond holders to exchange their government for equity in a portfolio of privatized, state-owned companies.  Again, it seems to me that Egypt has no choice but to continue privatization, if only because it will free up resources for the much more urgent task of making social investments.  If the government can successfully reinvigorate public education and the public health system, for example, that in itself would represent result in substantial increases in the incomes of ordinary Egyptians since they would no longer be required to spend outsized proportions of their income on education and health care.

Finally, we need a little more precision on social justice: is it to be defined in terms of per capita consumption, or something else?  I prefer to think of social justice in connection with social efficiency: we should focus on transfers that improve the productive capacity of Egyptians generally, i.e., health, education, and improved sanitation and basic infrastructure.  Social investments of this kind will improve the welfare of the average Egyptian without necessarily increasing their ability to consume, at least not in the short-term (although it frees up private resources that would have been otherwise used for health, education and sanitation); more crucially, such investments will improve the productive capacity of Egyptians which, in the medium and long term will result in greater consumption opportunities for ordinary Egyptians.

We must stop thinking that growth and social justice are at odds.  We will not be able to achieve social justice in Egypt without substantial economic growth. Otherwise, we would only be redistributing poverty.  The basic problem facing Egypt is that the kinds of structural changes which the economy so desperately needs cannot be accomplished without a legitimate government that has the backing of the people.  The “people” have hardly even begun to debate what kinds of economic reforms must be made so that Egypt can experience equitable growth.  Gamal’s columns and posts certainly represent a good place for Egyptians to begin discussing these issues.