The transition to neo-liberalism
‘Most observers agree that import substitution industrialisation in a large number of developing countries... has for the most part been unsuccessful' (Todaro, 1989, 439). Colman and Nixon (1989, 292) explained why:
Perhaps the most crucial problem of the ISI process is its apparent inability in the long run to continue to reduce the import ratio and thus to sustain a growth rate of GNP in excess of the growth in the capacity to import.
In other words, ISI generates a high rate of growth in its initial stages but such growth is short lived... And the economy experiences stagnation at a low level of development once ISI opportunities appear to have been exhausted and the foreign exchange constraint once again becomes dominant.ISI in NA was no exception. All NA states came to face similar challenges associated with the internal contradictions of ISI. By the late 1970s, almost all NA countries were suffering major macroeconomic instabilities, including large trade and current account deficits, large fiscal deficits, a high volume of foreign debt, low level of foreign reserves, high unemployment, and high inflation (Harrigan and El-Said, 2009a, 2009b).
The call for reform, consistent with a tradition of centralized decision-making processes in the region, came from the leadership itself. North African leaders began publicly acknowledging the flaws of state-led development strategies. Egypt, the first Arab state to embark on state-led development, was also the first to begin dismantling its socialist policies. This came from Nasser himself, who began openly criticising his government's social policies by the mid-1960s. Nasser started a programme of economic liberalisation based on encouraging private and foreign investment. Following Nasser's death in 1970, his successor, Sadat, continued to open up the Egyptian economy and pioneered the infitah (open door) policy in 1974.
Infitah continued Nasser's focus on reducing the role of the public sector and promoting the role of the private sector in the economy.Similarly, Bourguiba in Tunisia began doubting his state-led development strategy as early as 1969. Similar processes also began in both Algeria and Morocco in the late 1970s, when the leadership embarked on similar reforms to Egypt, aimed at reducing the size of the public sector and boosting the private sector (Ayubi, 1999). Even Libya, despite the country's oil reserves, faced a balance of payments crisis in the early 1980s, emanating from both economic mismanagement coupled with a slump in the oil market. Nowhere, however, did reforms in NA go far enough, or were even sustainable to restore macroeconomic balance and obviate the need for resorting to the kind of conditionality associated with neo-liberal reforms promoted by the IFIs, particularly the International Monetary Fund (IMF) and the World Bank.
Criticism of state-led development came not only from the North African leadership, but from several economists too. One such Egyptian economist was Galal Amin, a Professor of Economics at the American University in Cairo. Amin received an undergraduate degree in economics from the Cairo University (1955) and an MSc (1961) and PhD (1964) from the London School of Economics. He is the author of many books in Arabic and English on economic developments in Egypt and the Arab world, including Egypt’s Economic Predicament (London, 1995). While urging Arab regimes to carry out badly needed economic reforms, Amin was very critical of neo-liberal reforms promoted by IFIs, warning against the implementation ‘of the Structural Adjustment programme of reform, which constitutes modern conventional wisdom' (Amin, 1995). Amin argued:
A liberalization policy is valid at a time of growing world economy, high flow of foreign investment, and relatively stable political climate. On the other hand, a higher degree of protection would make much more sense...
when the country is faced with a depressed world economy, a sluggish flow of foreign investment, and highly volatile political climate.(El-Naggar, 1987, 16)
Amin neither adhered to unfettered free market economics nor to an autarkic intervention. His views were closer to Keynesianism, namely to guide an economy out of depression through careful government intervention.
Another prominent North African economist is the Moroccan Bachir Hamdouch, Professor of Economics at the Faculty of Law and Economics (Universite Mohamed V Agdal, Raba). Like Amin, Hamdouch has also been very critical of neo-liberal free market reforms in the context of developing countries. Hamdouch completed his Diplome in Economics and Finance in 1969 (de l'Institut d'Etudes Politiques de Paris), Master in Economics (1969, University of Paris I Pantheon — Sorbonne), and Doctorat d'Etat in Economics (1974). His best known work was ‘The Open Door and Underdevelopment of Morocco' (University of Paris I Pantheon — Sorbonne). Hamdouch criticised the neglect of the social aspect of reform under IMF and World Bank lending, and the implementation of economic policies that failed to take into account the level of development and institutional capacity in reforming countries. He argued that reforms promoted by IFIs:
suffer from certain limitations both with respect to design and implementation... excessive importance attached to external balance at the expense of growth and development. The economic and social cost involved cannot be underestimated... [IFIs'] policy has coincided with zero development, which means that there has been hardly any progression in the average standard of living... the lowest income groups have suffered in particular.
(El-Naggar, 1987, 22-3)
Hamdouch wondered how long a developing country like Morocco could sustain adjustment without development.
However, and as The Economist (2011) once stated, ‘being famous is not the same as being influential. Neither means that you are worthy'.
The point is that, although some North African economists acquired the status of ‘Prominent economist[s] and author[s]' in their respective countries, this does not mean that they were influential in shaping their countries' economic ideas (Saleh, 2013). As argued earlier, the kind, timing, pace and quality of reforms in NA were determined by the leaders of the region. These leaders, by the early∕mid-1980s, found themselves with little choice but to resort to IMF/World Bank financial assistance, or policy-based lending. They could no longer postpone reforms as their foreign debt, fiscal and trade deficits, as well as inflationary pressures, all reached alarming levels. North African leaders were also alarmed by the overthrow in 1984 of the Numeri regime in Sudan, following a period of instability caused by the avoidance of reform.Morocco was the first North African state to sign a Stabilisation Agreement (SBA) and Structural Adjustment Lending Programme (SAL) with the IMF and World Bank in 1981 and 1990, followed by Sudan. Tunisia followed suit in 1984, as well as Algeria. Since 1987, Egypt has also had four economic programmes that were supported financially by the IMF, totalling SDR1.1558 billion ($1.850 billion) (Harrigan and El-Said, 2009a, 2009b). The IMF SBA is a sub-set of IMF and World Bank programmes aimed at assisting countries facing economic crises to respond to their balance of payments problems and external financial needs, and initiate structural change in the economy in favour of external markets and globalization (Mosely et al. 1991). SBA and SALs are the IMF's and World Bank's ‘workhorse lending instrument' through which they are able to influence reforms and economic policies in ‘emerging and advanced market countries'. SBA and SALs are thus financial and technical assistance in return for reforms; assistance is conditional upon reforms.
In the 1980s, the IMF and World Bank lending reforms were reorganized as a ‘set of ideas' evolving around the so-called ‘Washington Consensus', which is ‘both the political Washington of Congress...
and the technocratic Washington of the international financial institutions' (Williamson, 2004, 2). The Washington Consensus became a framework that the US government and the IFIs ‘believed were necessary elements of first stage policy reform that all countries should adopt to increase economic growth. At its heart is an emphasis on macroeconomic stability and integration into the international economy — in other words a neo-liberal view of globalization' (WHO, 2014).Williamson, who coined the term ‘Washington Consensus' in 1989, listed ten key policies that were accepted by the ‘Consensus' as necessary to solve developing countries' macroeconomic imbalances. They included: austerity and fiscal discipline aimed at controlling the money supply to reduce the fiscal deficit and rein in inflation; tax reform that combines a broader tax base with marginally higher tax rates to speed up reduction in fiscal deficit; reordering public expenditure through provision of a more targeted subsidy system and switching expenditure in a more pro-growth and pro-poor way; financial liberalization, particularly interest rates; reforming the exchange rate, meaning devaluations to boost exports; trade liberalization to increase domestic competition and opening up markets for foreign investors; privatization aimed at shifting the structure of ownership; and deregulation, which ‘focused specifically on easing barriers to entry and exit, not on abolishing regulations designed for safety or environmental reasons' (Williamson, 2004, 3-4).
The performance of North African economies during the transition to neo-liberal policies since 1980 has arguably been disappointing. El-Said and Harrigan (2014) have recently shown how the social and economic performances of the socialist era outperformed the transition to neo-liberal policies after 1980. Not only did economic growth and per capita income during the socialist era outperform those achieved after 1980, but poverty reduction improved much faster than it did after 1980.
In 2006 the World Bank acknowledged these shortcomings:By 2000, the region's average per capita output had... not fully recovered to its 1985 level... Very little progress was made on the poverty front. The region's average poverty rate fluctuated between 20 and 25 percent during the entire decade of the 1990s. By 2001, approximately 52 million people were poor, an increase in absolute numbers of approximately 11.5 million people, compared with the situation in 1987.
(Iqbal, 2006, xix)
Pressure for neo-liberal reform in NA should be seen in light of the failure of ISI to achieve its original objectives. Neo-liberal policies did not come from the emergence of new regimes committed to a free market economy, or as a result of a newly found conviction in the superiority of neo-liberal approaches to economic growth. This led Richards and Waterbury (1996, 231) to interpret the reforms as a ‘classic case of survival strategy', one aimed at restoring the legitimacy of the incumbent regimes by improving economic performance, and reducing the debt burden and the fiscal deficit. Jane Harrigan (2011, 11—12) has also explained these reforms in NA in a similar fashion: ‘Despite the nuanced differences, a common assessment is that the reforms actually undertaken can be seen as a process whereby the state, rather than retreating from economic activity, simply repositions itself to safeguard the positions of its major interest groups'.