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New IMF chief good news for Arab world

July 7, 2011

New International Monetary Fund chief Christine Lagarde has promised to give emerging markets a greater role in the macroeconomic monitoring and emergency lending organization, a move that should be a positive for Arab countries.

The IMF lends money to ailing nations — mostly poor — based on a “Washington Consensus” of structural adjustment policies. The idea is that these SAPs will integrate nations into the global economy, which will boost employment, make goods cheaper and provide stability for those nations.

For nations with a poor regard for human rights, IMF’s conditions could possibly increase the income gap between the wealthy and poor. IMF conditions such as spending cuts in social services, massive public sector layoffs, wage freezes to attract foreign investment, weaken public sector rights, devaluing local currencies, abolish price controls on basic foodstuffs and promotion of export-oriented production all put pressure on nations’ poor.

In nations where human rights and democracy are not respected — like many in the Arab world — IMF loans have been widely abused. For example, since dictators ran many borrowing countries between 1972 and 1981, IMF loans were used to boost military spending from $2.5 billion to $29 billion. Developing nations turned to rapid industrialization, building airports and dams, rather than small-scale development projects to assist local economies.

The IMF, headquartered in Washington, D.C., has a “Western” economic philosophy of open trade, but open trade does not suit every nation. And given the recent financial troubles of interconnected, open economies in Europe and the United States, the timing could not be better for emerging market input.

The IMF applies its Washington Consensus because it believes that cocktail of macroeconomic reform will allow debtor nations to repay IMF loans faster. But I would argue this is a quick fix that provides a cosmetic spurt to GDP without actually creating a sustainable improvement of quality of life.

Many Arab nations — even a majority of those still engaged in the Arab Spring revolutions — are largely run by authoritarian figures that spend little on social services because there’s no political pressure, such as elections, to do so; rely on public sector employment because those figures build loyalty through those jobs; rely on military employment for loyalty; have undiversified economies; and institutionally-created income gaps through shoddy welfare systems and lack of homegrown business.

At the root of this problem is the lack of accountability for Arab leaders as a result of weak or nonexistent human rights. Without the threat of being voted out of office and with the military, business elite and public sector dependent on those rulers staying in power, there are few ways to force leaders to cycle the money they earn and keep for themselves back into the economy. As a result, most people remain poor, education becomes less attainable, those nations become less attractive for foreign investment to mine the talent living there and people do not have enough money to do things like become an entrepreneur.

India and China still have rampant income inequality and the latter has a suspect human rights record, but their economies are growing faster than anyone. They will undoubtedly have an increased influence in the Lagarde-led IMF. India built its economy through harnessing the loads of young talent it had at home, making it an attractive place for investment. China closed its economy, has manipulated currency and relied on its 2 billion residents to be its market.

Neither India or China should be a model for macroeconomic policies. Their input, however, could help craft a better model than what we have today.

 

 

 

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