situation between client and patron was brought out by Abdel Meguid, deputy prime minister for economic affairs. He said Egypt’s policymakers were quite aware that in the relationship between Egypt and the United States the economic dialogue would be eclipsed by the political narrative. In any such relationship, the key decisions are always determined by political leaders, not economic technicians.
He maintained that Egyptian policymakers would argue that for political reasons they could not implement a number of the IMF’s conditions without risking the government’s fall. They would therefore indicate that they would have to withdraw from discussions with the IMF or to ignore some parts of an agreement with it. The United States had built up a solid relationship with Egypt in order to secure two of its principal policy goals in the Middle East—peace between Israel and the largest Arab country, and unhindered access to oil. The United States would be reluctant to risk the possibility of an unknown regime’s coming into power in Egypt and perhaps placing the foreign-policy gains in jeopardy. The Americans would therefore use their leverage as the largest shareholders to encourage the Fund to water down the conditions that Egypt found most unpalatable or to find a fudge around them—there were many ways of making the IMF’s precepts more accommodating. Egypt would not find it too difficult to slip the IMF’s fiscal leash.
Abdel Meguid highlighted the irony in the situation: if domestic politics pointed Egypt toward the exit from an IMF program, geopolitics would work to keep the country in a watered-down agreement. The United States would have to weigh the strategic cost of risking an Egyptian government collapse against the diplomatic cost of leaning on the IMF. According to Abdel Meguid, these issues had frequently been discussed in cabinet, which had concluded that the “dilemma” was a non-issue. The threat of political turmoil in Egypt would compel the Americans to find ways of getting the IMF to adjust its conditions. “Never underestimate the power of weakness,” said Abdel Meguid, adding that seven thousand years of survival had left the Egyptians well instructed in the art of turning weakness into an element of strength. Egypt was too big to be allowed to fail.
This situation highlights another political-economy conundrum, namely, the difference in objectives that can crop up between principal and agent, even though they may be working for a common goal. The tactics described by Abdel Meguid were so transparent that it would be astonishing if U.S. representatives did not see through them. Indeed, I asked a U.S. ambassador if he really believed that the apocalypse was around the corner and that the Middle East would hurtle toward it should an Egyptian government fall.
He replied that of course the United States was aware of the Egyptian strategy, but there was a danger, even if very small, that if an unfamiliar regime replaced a government with which the United States had built up a solid relationship, it just might cause the United States to lose the foreign-policy gains that it had so painstakingly assembled. No U.S. official was willing to jeopardize his career by being stigmatized for Egypt being “lost” on his watch. Officials were thus willing to go very far to avoid this possibility; if it required pressuring an IFI or putting the best face on policy lapses by Egypt (in the economic as well as the political field), then so be it.
An example of the extent to which the American card could be made to work was demonstrated by events relating to Egypt’s 1987 agreement for debt relief with the Paris club of creditors. Pressure on the IMF by the United States gave birth to an agreement that was described as “probably the feeblest in recent memory.” Moreover, the easy terms, said by Cairo diplomats to be “unprecedented” in their leniency, drove a senior IMF executive to resign in protest.25
Over the years, I have discussed aid issues relating to Egypt with a number of ambassadors from donor countries. The discussions naturally concentrated on assistance from the United States, because of the importance of the country in the total aid picture and its weight in the IFIs. Let me summarize some of the key points from the discussions.
In the ambassadors’ view, the basic problem was that the IMF and some countries were happy to propose drastic change, but shirked the burden of showing that it was safe for Egypt. Unless Egypt could be reassured on this point, it would fight very hard to maintain the status quo. Egyptian policymakers regarded the status quo as a lot better than many plausible alternatives—better the devil you know than one you don’t know.
However, the ambassadors were concerned that the foreign-policy stances of both Egypt and the United States concealed a substantial amount of impermanence that could lead to problems down the road. They described two major weaknesses in Egypt’s strategy to obtain external assistance. Let me summarize the substance of our discussions.
First, they said that the Egyptian negotiating strategy in dealing with the IMF was to concentrate on the center of gravity, the United States, and to let that country use its weight in the IMF Board to bring the other members around to its point of view, which was to “go a little bit easier” on the policy conditions applied to loans for Egypt. This was a very short-term view, and likely to be counterproductive:
(a) It encouraged Egypt to avoid adopting the policies that would enable it to stand on its own feet. It would not correct the distortions in the borrower’s economy, and was thus likely to set up a continued cycle of its recourse to the Fund’s resources.
(b) While the United States might for a while be able to prevail upon the IMF to soften its policy conditions, it could not do this unilaterally for the long term; it would have to shepherd other IMF board members along the same path. This would not be simple. The 1987 experience should not be seen as a precedent that could be repeated indefinitely. The conditionality for Egypt set down markers which would be used as precedents by other borrowers from the Fund. Repeatedly easing conditions for Egypt might require the Fund to offer similar dispensations to all borrowers. These concessions could make the whole point of IMF lending futile, because the watered-down conditions would not attain the objectives of restoring external and internal balance in the borrowing country.
Second, Egyptian politicians acted as if the narrative of apocalyptic peril had been hardwired into the United States’ DNA and that the United States would never rebut this storyline. This premise was wrong. A country’s foreign policy could not be taken as a constant. A foreign policy was only an instrument to further a country’s interests. These interests not only altered over time, but the methods by which they could be attained could also change. Unless Egypt took measures to strengthen its economy, its requirements for foreign assistance would keep increasing and a time would be reached when democracies that supported Egypt would find it impossible to persuade their taxpayers to continue to foot the bill. “Donor fatigue” was very real. Egypt could not act as if there were an unlimited treasury of donor grace. The United States’ strategy toward Egypt was not calcified, but could change with changing circumstances. Egypt’s long-term political-economy strategy thus might be built on sand, because it mistook political expediency for permanent truth. A review by donors of their aid budgets and their overall foreign-policy goals might well show that they could attain their objectives more efficiently by measures other than shoveling money into Egypt.
The ambassador highlighted another important reason why patience with foreign aid was running low in donor countries. Foreign aid was the transfer of incomes of taxpayers in donor countries to a recipient country. In the donor countries, citizens at most income levels had to pay taxes. On the other hand, in the recipient countries, including Egypt, the taxation systems contained huge loopholes, inefficiencies, and corruption whereby the higher-income groups avoided paying their fair share of taxes. However, they benefited fully from the assets and other advantages created by the foreign aid their country received. The decline in the ratio of taxes to Egypt’s GDP had not gone unnoticed in donor capitals. Taxpayers in the donor countries were getting increasingly weary of a situation in which their middle- and even lower-income citizens were having to transfer a part of their incomes to subsidize the lifestyles of the rich in recipient countries.
They warned that the day of reckoning
