Western Finance Bodies Face Challenges in Funding Arab Spring Countries
> MATTHEW SALTMARSH
Published: September 21, 2011
LONDON — As Arab Spring turns into autumn, Western lending institutions face highly sensitive issues in their quest to support economic and social development in countries struggling to emerge from decades of stagnation.
Governments and institutions like the <http://topics.nytimes.com/top/reference/timestopics/organizations/i/international_monetary_fund/index.html?inline=nyt-org
> International Monetary Fund and the European Investment Bank have been quick to offer financial help to Egypt, Tunisia and the other Middle Eastern countries making tentative steps toward democracy.
But whatever the motive behind the offers — benevolence, wanting to bolster Western-style governance or help Western businesses expand — the traditional model used by multilateral lenders looks increasingly unsuitable for the region and difficult to implement, analysts say.
“There is a potential contradiction in that the economic model that these countries need, and that is on offer, has been discredited,” said Mark Malloch Brown, former deputy United Nations secretary general. “The liberal economic programs that these countries tended to adopt in recent years were compromised by the regimes, which enriched themselves and their friends.”
Finding an economic model to replace crony capitalism is critical to addressing the region’s other pressing problems, which include high unemployment, budget shortfalls, high inflation, and a lack of investment.
The I.M.F. estimates that Egypt, Jordan, Lebanon, Morocco, Syria and Tunisia all have unemployment rates of about 11 percent, barely changed over the past two decades. Youth unemployment on average exceeds 40 percent.
Egypt, Yemen, Tunisia and Syria are likely to experience recession this year as economic activity contracts following the uprisings, the Institute of International Finance said recently.
An I.M.F report in May said the external financing needs of oil-importing Middle East and North African countries would exceed $160 billion over the next three years.
This month leaders of the Group of 8 industrialized nations pledged $38 billion in new aid to help underpin the transition to democracy amid complaints that little of a $20 billion aid package promised in May had materialized. Cash-rich Arab states like Qatar, Kuwait and Saudi Arabia have also offered billions, as well as increasing their own spending to try to head off domestic unrest.
In a research report this month, Jean-Michel Saliba of Bank of America Merrill Lynch estimated that the oil-rich Gulf nations would spend $150 billion to accommodate domestic social pressures and in intra-regional fiscal transfers.
The I.M.F. has said it could provide $35 billion in loans to the region, and the World Bank in May announced plans to lend $6 billion over two years to Egypt and Tunisia.
Alongside the Gulf States, Europe may have a central role: It accounts for more than three-quarters of Tunisia’s exports of goods, tourism receipts, workers’ remittances and investment.
One tool of support would be the European Investment Bank, which has a mission to support stability and nation-building in the Union’s partner countries. At the start of the summer, Union members agreed that the E.I.B. could increase lending to the Middle East in a process expected to be ratified soon. That would give the bank nearly €6 billion in financing available for the region until 2013.
Over the summer, the E.I.B signed a €163 million loan to support road upgrades in Tunisia and a €140 million loan to help the Tunisian Chemicals Group, a major phosphates producer, build a fertilizer plant.
Egypt is to receive about half of its funds for the region, followed by Morocco, Tunisia and Jordan. The European Union is also offering Libya access to E.I.B. loans, should a new government seek assistance.
Another vehicle will be the European Bank for Reconstruction and Development, established in 1991 to help countries in Eastern Europe and the former Soviet Union make the transition to market economies and multi-party rule following the collapse of communism.
In July, its board approved expanding into the Middle East, part of a process that could see it lend €2.5 billion in the region annually. An initial fund could start lending to Egypt next spring, focusing on agriculture, manufacturing, municipal services, urban transport and banks. The aim would be to draw in private investors to share risk.
In a similar way, the World Bank’s private-sector investment arm, the International Financial Corp., is also mobilizing.
It has worked in the region since the 1960s. Lars H. Thunell, its chief executive, estimates the I.F.C. will invest about $7 billion in the region over the next three years.
But despite these efforts, the response from the region has been mixed.
Much like South Africa in the aftermath of apartheid, Egypt appears wary of the motives behind the offers.
“Egypt has been allocated $17.5 billion by different pledges and commitments,” said Gouda Adbel-Khalek, the Egyptian minister for solidarity and social justice. “Very little has materialized and lots of it is propaganda. Everyone is jockeying for position and trying to promote their own interests.”
Part of the issue appears to be fear of being associated with lenders or policies linked to the West or the previous regimes. In Tunisia, for example, as late as September 2010, the I.M.F. was still lauding “sound macroeconomic management and structural reforms” of the regime of President Zine al-Abidine Ben Ali. And the fund called for unpopular policies of containing public spending on wages, food and fuel subsidies.
In June, Egypt’s transitional rulers on the Supreme Council of the Armed Forces canceled plans to borrow $3 billion from the I.M.F. as well as fresh loans from the World Bank, arguing that the government had already trimmed its budget deficit. The council indicated that the loan conditions would have violated sovereignty, and it may have feared an outcry against the potentially restrictive terms. There is also a fear of handing yet more debt to the next generation.
Europeans in particular will have to tread carefully with the new governments, having signed partnership deals with and courted the former dictators. Europe is also constrained by its fiscal crisis and is unwilling to win trust by opening its borders to North African immigrants. And unlike in the case of Eastern Europe, Brussels is unwilling to offer the Arab Spring countries the carrot of Union membership. That leaves little to offer but soft loans and market access.
Meanwhile, pressure groups have been warning about the potential negative side effects of multilateral lenders expanding in the region.
CEE BankWatch Network, a non-governmental organization that monitors international institutions in Central and Eastern Europe, argues that it is premature for the E.B.R.D. to finance North Africa “when it is by no means clear what kind of governments will follow the recently overthrown regimes.”
In July, it warned that the E.I.B. and E.B.R.D. “operate on vague political mandates” from the European Union, and that “E.U. political institutions exercise limited control over the actual banking activities.” It has also criticized past E.I.B. investments in the region for being narrow, for example focusing on fossil fuels.
In June, two other nongovernmental organizations, Counter Balance and Network for Development, raised concerns about the damage that Western aid could do to democratic transition. They argued that the outside institutions have been promoting the same unjust economic models against which the protests emerged.
Philippe de Fontaine Vive, E.I.B. vice president for the southern Mediterranean, said his bank’s commitments would be based on “solid foundations” and its “40 years of experience of working in the region, as well as the efforts we have made to meet and discuss with the governments concerned.”
“Our objective is to support more inclusive growth, notably small job-creating companies, transport links with less developed regions, social housing and urban development,” he said.
The E.B.R.D. said in a statement that its investments “would take into account political and economic reform steps undertaken.”
Sultan al-Qassemi, a fellow at the Dubai School of Government and prominent blogger based in the United Arab Emirates, said the money should be channeled into the region by a new Arab bank for development. “Without this a lot of the money will be lost” due to lack of corporate governance. Others argue that other institutions could take on this role, or that the recipient countries alone should monitor the funds.
Anoush Ehteshami, professor of international relations at Durham University, said foreign investment would be essential to creating jobs and lifting growth but a new approach would be required.
“Just carrying on with the old I.M.F.-type model is unlikely to be productive in the post-revolutionary environment, especially with the inherent need for state intervention,” he said. “The key for the West will be to work in partnership with these countries and other regional players like the Gulf states.”
The countries would be best served, he added, by a variant of the model employed successfully in other emerging economies like China or Russia, whereby multilateral support is combined with subsidies to inefficient state industries until they are able to compete.
Mr. Malloch Brown, now chairman of global affairs at F.T.I. Consulting, said similar transitions to democracy and market economies have typically taken a decade.
“There will almost certainly be some messy bits en route,” he said. “But with the generational shift, and after the events in places like Tahrir Square, I’m sure they’ll get there.”
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Received on Wed Sep 21 2011 - 10:39:06 EDT