This thesis has been approved by The Honors Tutorial College and the Department of Business _____________________________ Dr. Ziad Abu-Rish Assistant Professor, History Thesis Adviser _____________________________ Dr. Raymond Frost Honors Tutorial College, Directory of Studies Business ______________________________ Cary Roberts Frith Interim Dean, Honors Tutorial College The Impact of International Monetary Fund and World Bank Involvement on the Economic Development of Egypt _______________________________________ A Thesis Presented to The Honors Tutorial College Ohio University _______________________________________ In Partial Fulfillment of the Requirements for Graduation from the Honors Tutorial College with the degree of Bachelor of Arts in Business _______________________________________ By: Mozika Maloba April 2019 ii Table of Contents Introduction………………………..………………………..………………………….1 Chapter 1: Development under Nasser & Sadat………………………..…………….9 Chapter 2: IMF & World Bank Fiscal Policy Involvement 1978-2011……………...40 Chapter 3: IMF & World Bank Involvement after the 2011 Revolution…………...65 Conclusion………………………..………………………..……………………………91 Bibliography………………………..………………………..………………………….96 iii Introduction Since their establishment in 1945 as part of the post-World War II international economic order, the World Bank and International Monetary Fund (IMF) have been funding development projects and programs around the world. The Middle East and North Africa (MENA) region has been one of the primary arenas of World Bank and IMF activity. Throughout this time, the content and nature of these programs have reflected norms about development. Much of these programs up to the 1970s supported state-led economic development, however, since then, the IMF and World Bank have emphasized macroeconomic structural adjustment as either the goal of their development assistance or as conditions for it.1 While some of this development assistance has taken the form of outright grants, the bulk of the amount when it comes to the MENA region has been in the form of loans. The structural adjustment loans (SALs) created by the World Bank and IMF are made to assist developing countries with their current account deficits and development projects by providing financing over a period of several years. All of these loans come with conditionalities vis-à-vis restructuring of tariffs, subsidies, public employment, and other state spending and budgeting matters.2 The professed goal of these projects and 1 Mokhlis Y. Zaki, “IMF-Supported Stabilization Programs and Their Critics: Evidence from the Recent Experience of Egypt,” World Development 29, no. 11 (2001): 1867-1883. 2 William Easterly, “What Did Structural Adjustment Adjust? The Association of Policies and Growth with Repeated IMF and World Bank Adjustment Loans,” Working Paper 11, Center for Global Development (2003): 3. 1 their conditionalities is to strengthen the receiving country’s balance of payments while encouraging economic growth and development. Over the past forty years or so, such programs have effectively encouraged the unraveling of state-centered economies with the objective of turning them into market-based ones, ultimately—according to their spokespersons—improving efficiency, encouraging growth, and advancing development. However, these programs have not been without their critics. Much of the criticism centers around the macroeconomic structural adjustment conditionalities that many argue sacrifice growth instead of encouraging it.3 The past plus-forty years of such policies offers ample empirical data to explore the legitimacy of those criticisms and assess the long-term effects of the IMF and World Bank-sponsored programs. As one of the most celebrated cases by both institutions, and one of the earliest and largest recipients of World Bank and IMF development assistance, Egypt offers an excellent case study through which to anchor such assessment and analysis. Under President Gamal Abdel Nasser (r. 1952-1970), Egypt featured a dramatic political, economic, and social transformation underpinned by the institutionalization of state-led economic development strategy. Key aspects of this transformation were the exponential expansion of the public sectors supported by large-scale nationalization, land redistribution, infrastructure investment, rapid industrialization, and the diversification of the economy.4 By the early 1960s, the Egyptian economy was transformed from an open 3 Hans Lofgren, “Economic Policy in Egypt: A Breakdown in Reform Resistance?” International Journal of Middle East Studies 25, no. 3 (1993): 407-421. 4 Dina Craissati, The Political Economy of Nasserism and Sadatism: The Nature of the State in Egypt and Its Impact on Economic Strategy (Montreal: McGill University, 1989), 42-75. 2 economy, based in agricultural export and heavily reliant on private and international capital, to an economy dominated by the Egyptian state. Accompanying this transformation was the introduction or expansion of various social provisions such as education, health care, and labor rights, which in turn facilitated an unprecedented expansion of the ranks of the middle class. However, this developmental trajectory confronted serious constraints in the form of capital shortages, inefficiencies, and politicization, rendering the economy (and with it the regime) vulnerable to multiple crises.5 After Nasser’s death in 1970, President Anwar Sadat came to power and brought with him an entirely new economic strategy underpinned by a much more open policy toward international capital and the domestic private sector.6 This new strategy was centered upon the idea of seeking out new sources of capital, which in turn necessitated a restructuring of the economy. It is in this context that the World Bank, IMF, and US government emerged as the major financial backers of the new development strategy through a complex series of grants, loans, and evening advisory relationships. Since then, Egypt has become an effective posterchild of both sides of the debate on the role of international financial institutions, structural adjustment programs, and economic development in the MENA region and beyond. 5 Ishac Diwan, Melani Cammett, Alan Richards, and John Waterbury. A Political Economy of the Middle East, 4th ed. (Boulder: Westview Press, 2015). 6 John Waterbury, The Egypt of Nasser and Sadat: The Political Economy of Two Regimes (Princeton: Princeton University Press, 1983), 123-128. 3 Scope and Aims To wholly analyze the subject of the World Bank and IMF’s impact on the on the economic development of Egypt, this thesis begins with the period prior to their involvement and narrates the introduction of that involvement, its trajectory, and the accompanying changes. This thesis therefore covers the period between 1952 and 2018, with a particular emphasis on the latter half of the period. This includes the successive regimes of Gamal Abdel Nasser, Anwar al-Sadat, Hosni Mubarak, and Abdel Fattah al- Sisi. The thesis culminates with a consideration of the most recent iteration of the relationship between international financial institutions and Egypt: the IMF’s approval of a $12B Extended Fund Facility (EFF) loan in November 2016 and its various manifestations during the subsequent two years.7 This thesis focuses primarily on Structural Adjustment Programs and loans with a fiscal policy component that were introduced after the 1970s by the IMF and World Bank. This is due to the fact that these programs had conditions attached to them such as tax increases, the lifting of business regulations, etc., that affected the development of Egypt’s economy. These programs included what the IMF and World Bank believed to be the best options for Egypt in order to decrease its overall deficit. Other development programs such as infrastructure funding projects, while important, do not have as much of a role in changes in fiscal policy. Fiscal policy changes inherently can affect all aspects 7 "IMF Executive Board Approves US$12 Billion Extended Arrangement Under the Extended Fund Facility for Egypt," IMF Press Release No. 16/501, 11 November 2016, https://www.imf.org/en/News/Articles/2016/11/11/PR16501-Egypt-Executive-Board-Approves-12-billion- Extended-Arrangement. 4 of economic development where as individual development projects have a much more limited effect. Additionally, this paper’s approach to the topic of economic development heavily involves the IMF, World Bank, Egyptian government’s role, and the roles of social actors, not just the role of the organizations themselves. There are four major research questions that guide this thesis’s investigation into the role of the IMF and World Bank: 1. How has the nature of development assistance offered by the World Bank and IMF to Egypt changed between the time that it began through 2018? In answering this question, the thesis identifies and analyzes the shifting role of the World Bank and IMF in Egypt’s economic development during the post-World War II era. 2. In what specific ways did the IMF and World Bank involve themselves with Egypt’s fiscal policies? In answering this question, the thesis pays particular attention to fiscal support and the conditionalities related to fiscal policy. 3. What has been the impact of the World Bank and IMF’s involvement in Egypt’s economic development? Most specifically, the thesis focuses on how successful this involvement has been in relation to its own terms and objectives, and what the effects have been more generally. Methodological