Over the last week a team of negotiators from the International Monetary Fund (IMF) has been in Cairo to finalize the details for a new IMF loan for Egypt. Knowing how many Egyptians feel about previous IMF policies, Finance Minister Samir Radwan went out of his way to claim that Egypt would not accept any painful conditionality attached to the IMF loan, such as reductions in food and fuel subsidies. But the real problem with adopting another IMF loan program will be a continuation of its general monetary policy thrust at the Egyptian Central Bank that favors the financial interests of foreign creditors over the real needs of the Egyptian people to increase wages, employment and long-term public investment. Instead of taking a new IMF loan, Egypt should do as many Latin American and East Asian emerging market economies have done in recent years and purposefully avoid contracting another harmful loan program from the IMF. As several of these countries learned the hard way over many years, the IMF is not a friendly development institution, nor an objective fireman ready to help put out financial fires. Instead, it acts on behalf of its executive board whose members are directed by the U.S. Treasury and the finance ministries of other leading creditor economies, who in turn are each under immense lobbying pressure by their respective finance industry associations to shape the policies of IMF loans. The IMF's job is simply to ensure borrowing countries stay creditworthy and repay their foreign creditors on time, not to really assist countries in what is best for their actual long-term economic development. The IMF will require that Egypt adopt policies that keep wages low and undermine the needed increase in employment and public investment. Egypt would be continuing past mistakes and shooting itself in the foot by taking on a new IMF loan. Instead, Egypt should turn to countries like China, Korea, Brazil and Turkey for help in meeting immediate financing needs. Many of these countries have learned from experience how harmful IMF loan programs can be. IMF policies have supported a long-term global trend over the last 30 years in which a massive shift of financial resources has occurred from the real sector of national economies (where real jobs and goods and services are created) to the financial sector (or “casino” sector) under the rubric of “financial liberalization.” The IMF's priorities are to continue this trend and enforce reforms in borrowing countries that prioritize the short-term needs of foreign creditors, while subordinating the needs of those living in the real economy. Those who support the Egyptian revolution's call for greater social justice and who would instead prefer to prioritize job-creation should make no mistake about this core function of the institution. To be sure, the IMF has changed its rhetoric in the wake of the global financial crisis, and in Egypt's case, in the wake of the revolutionary forces sweeping the Arab world. For example, at a conference examining the pitfalls of IMF orthodoxy in the aftermath of the global economic crisis, held at its headquarters in early March, Olivier Blanchard, economic counselor and director of the Research Department at the IMF, acknowledged the need for central banks to be allowed a more flexible range of monetary policy options and the need for new regulatory policies to ensure “macro-prudential” financial regulations for increased global financial stability. And on 15 April, Egyptian Facebook activist Wael Ghonim got a high-profile concession out of then IMF Managing Director Dominique Strauss-Kahn at the IMF/World Bank meetings in Washington. Strauss-Kahn responded to claims of prior IMF misdeeds in Egypt by saying that the IMF indeed must do a better job of linking its abstract economic and financial indicators with “what is really important to the people in the street” and to address the problems of high unemployment and growing income inequality. But such talk has not been translated into actual policy changes for country loan programs. Despite such high-profile talk of changes, Egyptians should be aware that there is no evidence that the IMF has at all shifted from its core fundamental tenets guiding its economic philosophy, its macroeconomic framework and its financial programming model. This approach comes from a very conservative logic brought into ascendancy by U.S. President Ronald Reagan and U.K. Prime Minister Margaret Thatcher over 30 years ago, which is actually just a value judgment that believes that if there is a trade-off it is better to have lower GDP, lower employment, lower tax revenues and lower public spending than to have even moderate inflation or fiscal deficits. When this logic was introduced it had been widely understood as only one very conservative option among an array of other viable policy options. But over the years it has since come to be understood as the one and only “prudent” and “sound” option as taught by the best economics departments at the best universities for the last two or three generations, including to Gamal Mubarak's “technocrats”. However, as Nobel laureate Joseph Stiglitz recently summarized at the IMF conference in March, “The idea that low and stable inflation would lead to a stable real economy and to fast economic growth was never supported by economic theory or evidence and yet became a central tenet of central bank policy.” Today Egypt should reject this orthodoxy and instead turn away from the IMF in order to maintain its freedom to consider a wider range of alternative fiscal, monetary, financial and trade policies, many of which could proactively generate higher GDP growth, more employment, greater tax revenues, and increased public investment as a percentage of GDP —all of which will be essential for creating the millions of jobs needed and closing the huge gap between the rich and poor over the longer-term. Although Gamal Mubarak's team of “technocrats” put together in 2005 to step-up IMF reforms then claimed that the IMF macroeconomic policy would increase growth and create employment in Egypt, in fact the priorities of the program were not at all focused on economic growth or employment generation. Instead, the IMF program had the Egyptian Central Bank preparing to adopt a rigid “inflation targeting” policy designed to keep inflation in the low single digits as the exclusive target of monetary policy, and to subordinate fiscal policy goals to this objective. Under this monetary policy, other important goals —such as financial stability, more rapid economic growth and employment creation —have been seen as inappropriate direct targets of central bank policy. Rather, the orthodox approach views stability, growth and employment as the hoped for —even presumed —by-products of an inflation focused approach to monetary policy. To take on another new IMF loan now would threaten the goals of the Egyptian revolution. Under any such new loan, the goal of Egypt's monetary policy is likely to be only for “stabilization”, rather than for achieving higher growth, employment or public investment for development. The approach presumes that once “stabilization” is achieved, higher economic growth, employment, and poverty reduction will eventually follow spontaneously. But this is the same hollow promise Egyptians heard from Hosni Mubarak and Gamal for years. They should not be fooled again. Despite such claims by the previous government over the last 30 years, the track record has shown that higher growth and employment are not automatic by-products of the IMF's “stabilization focused” central bank policy. Instead, although the IMF has successfully driven down inflation to low levels and “stabilized” many countries, growth rates and employment rates have been markedly lower in these last 30 years than they had been under different approaches in the previous 30 year period, and as income inequality has worsened. Such was also the conclusion of the high-level 2008 Spence Commission on Growth and Development when it explained: “Very high inflation is clearly damaging to investment and growth. Bringing inflation down is also very costly in terms of lost output and employment. But how high is very high? Some countries have grown for long periods with persistent inflation of 15–30 per cent.” Commission member Montek Singh Ahluwalia added: “The international financial institutions, the IMF in particular, have tended to see public investment as a short-term stabilization issue, and failed to grasp its long-term growth consequences. If low-income countries are stuck in a low-level equilibrium, then putting constraints on their infrastructure spending may ensure they never take off.” As the United Nations Department of Economic and Social Affairs recently said of the IMF approach, “Focusing on inflation and fiscal deficits alone reflects too narrow a view of stabilization. Therefore, stabilization needs to be defined more broadly to include stability of the real economy, with smoothened business cycles and reduced fluctuations of output, investment, employment and incomes. Achieving such stability of the real economy may require larger fiscal deficits and higher rates of inflation than prescribed by the conventional macroeconomic policy mix, especially in the face of economic shocks or natural calamities.” However, despite such concerns, any new IMF loan for Egypt is not likely to allow anything of the kind. Even though the current level of inflation in Egypt is largely exogenous, coming from the outside due to increased fuel and food prices on global markets, the most recent previous IMF program for Egypt as approved just over a year ago had planned for Egypt to respond to this situation by raising interest rates as the main way of getting inflation down. This approach made needed commercial loans out of reach for domestic firms and undermined efforts to create more jobs in Egypt. Today Egypt should move beyond the IMF's narrow “inflation targeting approach” to monetary policy and adopt more flexible approaches that could increase the numbers of available monetary policy targets to include higher employment levels and higher growth rates while also keeping an eye on inflation. If the US Federal Reserve can be instructed by the Humphrey-Hawkins law to maintain both low inflation and high levels of employment as goals, then certainly Egypt should also be able to adopt similar changes to the Egyptian Central Bank's monetary policy goals and targets; but this will not be able to happen under a new IMF loan. Egypt should have the policy space to priorities scaling-up public investment and increasing employment to whatever degrees it deems necessary by a new and more representative government. The new democratic government that emerges from the upcoming elections should not be limited by IMF policies that reflect the short-term financial priorities of external creditors. Rather than continuing with Mubarak's approach to mindlessly following failed IMF and World Bank policies, Egypt should instead pursue the freedom and flexibility to choose from a wider array of essential industrial policies as part of a long-term development strategy to build the technological skills and capacities of its workforce and domestic companies. It should adopt institutions and policies to support the emergence of new industries with publicly-financed research and development (R&D), in acquiring new technologies, with subsidies, temporary trade protection, subsidized credit and other mechanisms that had long been part of mainstream development economics toolkit when the rich countries were industrializing. It should also design its trade and foreign direct investment policies in ways that will ensure its workforce and domestic companies acquire the skills, technology and financing they need to advance onto the next rung of the development ladder in terms of technological sophistication and international competitiveness. There is no doubt that Egypt needs emergency external financing to see it through the temporary economic side effects of the recent political transformation, but such financing does not need to come from the IMF. Instead, Egypt should look to others who have abandoned the IMF approach —such as Brazil, China and East Asia —to bridge together the financing it needs and thereby remain free to pursue serious development strategies and fulfil the goals of the revolution. Rick Rowden is a PhD student in economics at Jawaharlal Nehru University in New Delhi, India. He is the author of The Deadly Ideas of Neoliberalism: How the IMF has undermined public health and the fight against AIDS (Zed Books, 2009). He was recently in Cairo assisting on the forthcoming documentary, "We Are Egypt", about the history of political change underway in Egypt by Lillie Paquette.
