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Blogs, Crisis response (stimulus and austerity measures)

Austerity programs found sapping democracy, human rights in the Middle East

Participants at a recent event in Washington, D.C. addressed the impact of IMF-recommended economic policies, including austerity measures, on human rights in the Middle East.

The event, held on the occasion of the Spring meetings of the International Monetary Fund and the World Bank, at the World Bank Headquarters, was organized by Arab NGO Network on Development and Third World Network. It looked at the experience of Egypt and other countries in the region, in the light of global experiences and trends regarding austerity measures.

Austerity is the name popularly given to contractionary economic policy measures such as budget cuts, interest rate hikes, erosion of employment protection, and privatization of public companies. The human rights implications of these measures are increasingly queried. The International Monetary Fund has come under fire for advising several member countries to implement such policies while they are still suffering the after-shocks of the worst financial crisis of the last 75 years.

According to IMF data reviewed by Isabel Ortiz, a fellow at the Initiative for Policy Dialogue, and presented at the event, 119 countries are presently implementing or weighing implementation of some form of austerity measure. These include: (i) elimination or reduction of subsidies, including on fuel, agriculture and food products (in 100 countries); (ii) wage bill cuts/caps, including the salaries of education, health and other public sector workers (in 98 countries); (iii) rationalizing and further targeting safety nets (in 80 countries); (iv) pension reform (in 86 countries); (v) healthcare reform (in 37 countries); and (vi) labor flexibilization (in 32 countries).

“One of the most worrisome impacts is the elimination of food subsidies in a context where food prices continue to be historically high,” said Ortiz, also mentioning that “increased hunger and malnutrition has irreversible impacts on children.” The impact of food subsidies seems to acquire especial relevance in this region which has been scenario to frequent instances of food protests (Algeria, Egypt, Iraq, Jordan, Morocco, Syria, Tunisia, and Yemen to name but a few).

The ostensible rationale behind austerity measures is that private sector investment would increase in countries that reduce the size and influence of the public sector in the economy. However, studies have found that the projected impacts of such policies on growth and recovery tend to grossly undershoot expectations, often leading to the opposite results.

Indeed, the IMF itself recently recognized that in prescribing such policies for European countries currently undergoing crises, it underestimated the “fiscal multiplier” – that is, how much a given reduction in spending would trigger a reduction in growth in the economy. It did so, however, in the same study where it recommends that for developing countries austerity is still a good policy to follow due to “overheating” of such economies.

“The problem with the word austerity is that it implies that everyone’s spending is cut,” explained Manuel Montes, an official at South Centre. “However, the way austerity often plays out in reality is that households, factories and their workers (e.g. the real economy), and the public sector face spending cuts while creditors, donors and the financial sector receive payments owed to them at market interest rates that are contractually due.”

Montes was alluding to the fact that sovereign debt restructuring, which could actually reduce payments owed to private creditors and could have the same impact of reducing the government spending, is off the table.

In light of these and other distributional consequences austerity policies have on the lowest-income segments of the population, it is no surprise that they often can only be passed through non-transparent and unaccountable maneuvering. It is clear that the curtailment of economic and social rights could not pass without curtailing civil and political rights. In a recent report, the Special Rapporteur on Human Rights and Extreme Poverty said that:

“To allow the public to participate democratically in discussions and decision-making, information about proposed policy measures must be disseminated widely and in a way that is easily understood.  Participatory mechanisms should be established and the capacity of rights-holders to know their rights must be strengthened.”

Describing the program in Egypt, Mahinour El-Badrawi, of the Egyptian Center for Economic and Social Rights, said that an IMF team started negotiating the program with the government shortly after the toppling of the Mubarak regime. Yet, the national economic plan presented to the IMF was not made public until after civil society organizations brought forward a case in front of the national administrative court requesting transparency in the terms of negotiations.

Though the IMF would claim that this was a “home grown” plan, not only there was no public discussion of it, but the “home grown” policies looked suspiciously similar to those laid out in an IMF review of April 2010 (under Article IV of its Charter, the IMF performs periodic reviews of all member countries).

This program called for resisting pressures for additional spending, especially the “cost of subsidies” and increase state revenue especially through expanding the tax base and introducing a Value Added Tax. The emphasis on a Value Added Tax (regressive and bound to impact disproportionately the lowest income earners) is in spite of the fact that capital gains taxes contribute only 0.04 per cent of the budget. Corporate taxes, another potential source of revenue, are taxed at 25 %, a share that Egyptian Center argues is very small. Analyzing the recent reforms, Egyptian Center found that progressive increases in tax share are implemented on incomes up to 1,000,000 (Egyptian domestic currency), but progressivity of taxes ends there.

“Even as we hear about the need for belt-tightening, we find that every piece of legislation implementing the new economic plan is biased to protect large local and foreign capital-holders,“ stated El-Badrawi. “This is the exact reverse of recommendations by human rights bodies to ensure the most vulnerable and marginalized citizens are the ones protected in case of crisis response measures…”

In fact, one of the ways in which traditional austerity-oriented policies are supposed to advance investment is by attracting foreign investors. So the International Monetary Fund’s general advice to Arab countries also promotes reducing or dismantling tariffs, widening the scope of liberalization, and de-regulation under investment policy.

Kinda Mohammadieh, of the Arab NGO Network for Development, questioned whether economic progress could be achieved based on a blind pursuit of foreign investment. In the Arab region, Foreign Direct Investment (FDI) was concentrated in low job generating sectors, like mining and real estate. Overall, the role of macroeconomic policies in supporting a longer-term development-oriented strategy was neglected. “What Arab countries need,” she claimed, “is a reversal of these trends. Generating employment, redressing inequalities and wage depression, are not only more consistent with human rights, they are also the needed path to an economic recovery.”


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January 2017
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