IMF as an accountant

Head of the IMF Christine Lagarde said at the “Building the future: jobs, growth, and fairness in the Arab world” conference that was held last week in Amman while addressing the removal of the subsidies: “You are only credible if you are transparent and accountable for what you do with public money. That is the best road towards sovereignty and economic independence.”

A quick review of the history of the region shows that such a measure (the removal of subsidies), transparent or not, was almost always accompanied by violence and that most governments could not be transparent about adopting it.

Successful structural reforms require that government spending be reduced, a shift from urban to rural spending and from public to private spending, a move away from a planned, to a market economy, and an emphasis on efficiency.

Because such reforms may lead to reduced overall demand, increased unemployment and deepened economic contraction in the short run, many leaders in MENA countries acted differently over the years, the reason being, of course, that they did not want turmoil and upheaval to destroy the economy and their political command.

Almost all leaders in the region were aware that implementing measures such as the removal of subsidies would lead to riots and provoke violence. It is the most painful component of structural reforms because unlike most other measures, the removal of subsidies leads immediately to an increase in the cost of living.

Hence, many shied away from total reforms.

Turkey in the 1970s could not espouse a policy of belt, tightening; however, after the military takeover in 1980, it was able to introduce some reforms as domestically grown policies.

Austerity led to tripling the unemployment rate as wages also dropped by 25 per cent. 

Of course, the military used facts and figures and sounded objective as any government operating in a dictatorship would, and the consequences may have helped weaken its grip on the government.

Egypt under Anwar Sadat and Hosni Mubarak, while seeming to reject some aspects of reform, pursued it quietly but not without difficulty.

Cost-of-living violence usually would break out initially in urban centres, possibly because the cost of living is higher than in rural areas.

Morocco witnessed such outbreaks in 1965, 1982 and 1984. Riots broke out in Tunisia in 1978, 1984 and most recently before the start of the Arab Spring, as the cost of living was rising as unemployment soared.

Egypt witnessed cost-of-living riots in 1977 and again before the Arab Spring. Jordan had its lesson in 1989 in the Maan riots. Yemen came to face them full force in 2005. In Sudan, riots in 1985 led to the ouster of Jaafar Numeiri.

Jordan adopted severe measures over last two years: The government increased the prices of energy, fuel and water.

The upshot was muted murmurings and not a major outbreak of violence.

The response, which many feared would be an outcome, did not happen. The general acceptance of the removal of the “subsidies” was due to fear of a Syria-like situation and nothing else.

Hence, when the prime minister told Lagarde last week that the IMF was naught but an accountant disguised as a development organisation, he was right.

And yes, he was right to criticise the whole title of the conference. For, how could such austerity budgets produce growth, jobs and greater fairness?

They all require behavioural sets that are different (even the opposite) from those prescribed by the IMF, which focuses only on how much the government cuts its budget — purely an accounting exercise, as the prime minister said.

A government that is in dire financial straits cannot dictate to the IMF. Quite the contrary, so I believe it was unfair of Lagarde to counter that the harsh measures were adopted upon consultation with the government.

The IMF had lots of experience in the field of cost-of-living adjustments and the resultant violence.

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