IMF Loan Terms Attack the Democratic Legacy of the Arab Spring

With IMF officials visiting Egypt this week, negotiations have resumed on the terms of a bailout loan to address the Morsi government’s plummeting credit profile and foreign reserves. The IMF loan, if the agreement is successful, will come only with terms that demand reductions in social support spending following the classic lines of neoliberal economic policy demands. The IMF’s technical assistance to Egypt has repeatedly advised the government to trim energy subsidies and implement broader tax reforms, and investor tax reforms were also announced this week. Yet the investor-friendly policies and social support reductions are only part of the picture.

Egypt's subsidies are long-standing, many begun during the Nasser period but becoming essential when global commodity prices rose dramatically in the 1970s, and are now particularly urgent given Mubarak’s neoliberal policies and their impoverishment of a substantial portion of the population. Egypt spends close to 10 percent of its GDP on subsidies, and almost everyone agrees that the subsidies are not effective at reaching the poorest of the poor.

Energy subsidies make up as much as 30 percent of Egypt’s government spending, said Ragui Assaad, of the Economic Research Forum in Cairo. The country imports much of its fuel, and for the first time last year it was forced to import some of the natural gas used to generate electricity — the reason for the recent blackouts. Egypt also imports about 75 percent of its wheat, mixing the superior foreign wheat with lower-quality domestic supplies to improve its subsidized bread.

Recent news has emphasize the slashing of subsidies affecting the poor and the middle classes, such as a doubling of prices for cooking gas, an increase in rice prices 28 percent, and the elimination of bread subsidies, raising wheat prices by 150% for a staple food for the lower and middle classes. This has particular implications for the Muslim Brotherhood, President Morsi’s political base, since their supporters are overwhelmingly found not only in Cairo but also among the poor in the countryside. The backlash against the increased prices includes a lawsuit filed by Citizens Against Price Rise Association (CAPRA), arguing that the government’s new policy is not only based on incorrect statistics but will save  the government very little revenue.

Several sources confirmed during my recent visit to Cairo that the Muslim Brotherhood often trades staple goods for loyalties in the countryside, loyalties that have proven very rewarding when it comes to election season and constitutional referendums.  The Brotherhood can circumvent price increases through their donation system, so that bread and prices increases would not impact them in the same way that diesel fuel or other shortages might.  Certainly national policies will be managed in a way that does not impede the Muslim Brotherhood’s political tactics, even if they do display the Brotherhood’s loyalty to owners of large industrial enterprises at the expense of the poor.

For several months, Egyptians have been hit by shortages of diesel, the main fuel that truckers, bus drivers, farmers, bakers and a range of industries rely on to keep their engines running. In March, hundreds of drivers of trucks and of minibuses used as public transport blocked most of Cairo's vital roads and bridges, as well as highways across the country in an angry protest over the shortages, forcing some students and government employees to even resort to donkey carts to commute.

Yet the subsidies that benefit the rich have remained in place.  Moustafa Bassiouny, an economist at the Signet Institute in Egypt, has argued that other subsidies that benefit the well-off are left untouched. For example, the majority of fuel subsidies in terms of absolute cost go to diesel and energy-intensive industries like steel, cement, fertilizer, ceramics, and glass. These industries have been benefiting twice over because they receive their electricity and their fuel at subsidized prices. Many then export their products, keeping the profits.

If diesel is still scarce next month when the spring harvest begins, “There will be a revolution of the hungry,” said Adbel Moneim Abdel Hady, 40, another wheat farmer. Cooking fuel and diesel shortages would combine with bread price increases to produce a classic food and fuel riot, a typical response of the public to IMF and World Bank loans that load the burden of national debt on the backs of the poor.  Many in Egypt, including economists at the Egyptian Center for Economic and Social Rights, support an approach to the debt problem that will not cause further harm for the poor.

The response of many governments to this problem has been to subsidize fuel prices to redistribute the burden of global predatory pricing away from the poor. Analysts who support neoliberal policies have argued instead that subsidies that give the poor access to basic necessities should be phased in gradually during periods of economic resurgence to avoid the civil unrest that Egypt will surely face if subsidies are removed now.

The IMF is not the only international body hungering after loan agreements with vulnerable transitional countries like Egypt and Tunisia. Since the events of the Arab Spring began, the EU has offered expansions of bilateral trade agreements remaining from before the 2009 Lisbon Treaty into what are termed “Deep and Comprehensive Free Trade Agreements” or DCFTAs with the EU area. These IMF-approved proposed agreements would expand and strengthen the neoliberal policies that produced the very social inequities and declining standards of living and employment that contributed to the social upheavals of the last two years.

A recent report by Roeline Knttnerus of the Transnational Institute argued that transitional governments attempting to strengthen their democratic practices might follow the examples of Brazil, South Africa, Bolivia, and Ecuador, who have rejected the current terms of investment treaties to pursue alternative investment strategies. Other models have been proposed by the United Nations Conference for Trade and Development (in their new 2013 Guidelines for Investment Policy-making), the United Nations Special Rapporteur for the Right to Food, and the International Institute for Sustainable Development’s Model International Agreement.

How might the economic policies of Arab Spring transitional states support democratic practices? Rather than being forced into the same types of agreement with the IMF that produced the social turmoil of the Arab Spring, Egypt, Tunisia, and other countries moving towards democracy can adopt trade and investment policies that align with democratic principles. President Morsi and his Muslim Brotherhood cabinet ministers seem willing to democratize the debt burden through slashing subsidies for staple goods, but that is the limit of their democratizing impulses.

Democratizing debt burdens without democratizing the social benefits of foreign investment only produces more social inequalities. Such inequities are widely known social effects of neoliberal trade and investment policies, effects that support cronyism and the oligarchs that in the views of Jacques Rancière and Giorgio Agamben are the arch enemies of democracy. 

For the transitional governments of the Arab Spring to practice democracy, much more than elections are needed. Rethinking trade policies and foreign relations are important steps in finding ways to carry out democracy at home beyond the limits of the narrow realm of the political. Democratic revolutions transform entire societies, as the people mobilize in both hierarchical and non-hierarchical forms to remind the governing body who holds sovereignty. While the first steps of 2011 were difficult, the long haul ahead centers on the work of spreading democratic practices throughout the national polity. Democracy beyond elections has already begun to spread through the example of Egypt’s 18 days of January into everyday practices on the ground in society, into government practices, and into national relations with external bodies like the IMF and the EU that still have much to learn about democracy.