system could bring down wrath from the highest levels in the land. Sadowski quotes some comments of President Mubarak in 1988 regarding the IMF’s prescriptions. He compared the Fund to a quack doctor, and went on to say:
A patient, for example, needs a treatment for one month. Instead of this doctor telling the patient to take the medicine daily for one month, he tells him to take all the medicine today and tomorrow and that he will recover the day after. Of course, he will take the medicine to go to sleep at night and will not wake up in the morning. He dies. This is the IMF. It writes a prescription for those who require prolonged treatment, just as for those who require short treatment. . . . I tell the IMF that economic reform should proceed according to the social and economic situation in the state and according to the people’s standard of living. One should not come and say increase the price by 40 per cent. Surely, no one will be able to live. This will not be an IMF process: it will be a slaughter. (Sadowski 1991, 252–53)
Another reason for Egyptian policymakers’ antipathy to conditionality was skepticism regarding whether the policy conditions would in fact achieve their aims. Many studies showed that conditionality frequently worked very poorly; see, for example, Spraos 1986; Cornia, Jolly, and Stewart 1987, 1988; Harrigan and Mosley 1991; Mosley, Harrigan, and Toye 1997; Collier 1997; Dollar and Svensson 1998; Easterly 2003, 2006; Easterly et al. 1993; Boone 2006; and some from the World Bank itself, such as World Bank 1990a; Corbo, Fischer, and Webb 1992.
These studies showed that conditionality was liable to fail because of two principal factors. First, it targeted instruments rather than outcomes, and the designated instruments might not be sufficiently effective to produce the desired results. Second, in the case of aid provided for strategic purposes (most frequently by bilateral donors), recipients seldom believed that it would be cut off. Terminating this type of aid would lose the donor all the strategic capital that had been built up; therefore, aid cutoff as an instrument for enforcing conditionality was rarely credible and hence seldom feared.
The aid relationship became more complicated as the Egyptian economy expanded and its financing requirements increased. The net transfer of concessional resources steadily decreased as a percent of Egypt’s GDP, and with it the donors’ leverage to impose conditions also eroded. At the same time, donors’ budgets came under increasing strain, especially when the West was hit by a series of financial crises, and raising aid allocations to Egypt became unlikely. Egypt therefore began looking toward the Arab capital-surplus countries to provide assistance that was significant in amount and burdened with few, if any, conditions. Of course, Egyptian policymakers were aware that there is no free lunch, and that Egypt would have to repay the Arab aid in political, if not economic, currency. Such conditions are more implicit than explicit, but they are no less real for being invisible. Moreover, aid from Arab countries could be very generous, but also could be very volatile—for example, in 2014 Egypt received $20 billion from the Gulf countries as budget and balance-of-payments support, amounting to some 5 percent of GDP; the following year it dropped to 1 percent of GDP (Government of Egypt 2015a, 11). However, given the state of the Egyptian economy in the 2008–2015 period, the country’s policymakers considered this route, despite the volatility, the least bad option.
The fourth issue, which became especially important after Egypt’s debt crises of the late 1980s and early 1990s, concerned the terms of aid. In the early years of the aid relationship with the West, the Egyptian authorities did not define explicit criteria for discriminating between loans in order to decide which to accept and which to reject. The criteria evolved over a number of years and ultimately comprised three elements: (1) the currency in which the loan was denominated; (2) the phasing of the debt service; and (3) the concessionality of the loan.
1. Concern with the currency in which the loan was denominated came to the fore when the Japanese yen appreciated by about 70 percent against the U.S. dollar (which was the currency in which much of Egypt’s foreign-exchange earnings were denominated). Until that time, loans from Japan had appeared attractive because of their low interest rates. However, the appreciation of the yen sharply increased the value of these loans and the cost of servicing them in terms of Egyptian pounds. Resource inflows that had been regarded with much favor began to be looked at askance. The cabinet demanded a more careful analysis of the prospects of the currency in which the loan was issued.
2. Egypt had previously suffered a “bunching” of its debt service payments; a temporary problem of liquidity faced with such a spike in servicing obligations might seriously damage perceptions of the country’s solvency. Zaafer al-Bishry, the minister of planning and of international cooperation, initiated an examination of the time profile of external debt service so that loans that would worsen this profile could be rejected or renegotiated.
3. The next minister of international cooperation, Ahmed al-Dersh, established rules for comparing the concessionality of loans and set a minimum hurdle that the terms of a loan would have to clear before it could be accepted. The bar was set at a grant element of at least 40 percent with the stream of repayments discounted at 10 percent a year.30
Fifth, a Marshall Plan for Egypt? On a number of occasions, Egyptian policymakers raised the argument that what Egypt required from donors was a “Marshall Plan” for the country; indeed, variants of this idea were formally put forward in 1979 and 1986 for consideration to the G-7 (the group of the biggest industrialized countries). The notion continues to resurface from time to time, perhaps because its proponents have not paid due regard to the underlying premise of the Marshall Plan. Let me elaborate.
After the Second World War, the economies of the European countries had been destroyed and it was imperative, for humanitarian and political reasons, to rebuild them as quickly as possible. The United States was the only country that possessed the necessary resources, and it prepared a plan for the rebuilding of Europe.
As assistance under the European Recovery Program (which came to be called the Marshall Plan), the Europeans asked for $22 billion over four years; the U.S. Congress agreed to consider $17 billion over that period. From April 1948, when the Marshall Plan began, until December 31, 1951, when it ended, the United States provided about $11.8 billion in grants and $1.14 billion in loans to the sixteen countries covered by the plan. This amount in late-1940s dollars was estimated to be equivalent to about $108 billion in 2006 dollars31 and to about $125 billion in 2015.
At the start of the Marshall Plan period the combined population of the eligible countries amounted to roughly 280 million. If Egypt’s 90 million were to receive the same per capita amounts in 2015 dollars as disbursed under the Marshall Plan, it would require Western countries (assuming that, unlike the Marshall Plan, the United States would not be the sole donor) to transfer about $40 billion over four years. Given the state of the European and Japanese economies—which have undergone several years of recession and run up mountains of debt—would their taxpayers be willing to support the implied levels of external charity? One might note that the United States’ allocation of economic aid to Egypt in 2015 was $250 million(!), that is, a mere 2.5 percent of the $10 billion that would have to be transferred under the presumed Marshall Plan.
Equally to the point, could Egypt productively absorb the targeted annual amount? The crucial assumption underlying the Marshall Plan does not hold in Egypt. The plan was predicated on the basis that while the capital assets of the Western European countries had been destroyed in the war, their human capital and fundamental institutions remained largely intact. Thus, if the United States replaced the destroyed physical capital, economic growth in these countries would proceed rapidly. This, in fact, is what occurred.
In Egypt, however, the human capital base is much smaller, of generally lower quality than in Western Europe, and a substantial part of it continues to be lost through emigration. Moreover, many key institutions remain weak or dysfunctional (see, for example, the discussion in Ikram, 2006, 287–308, el-Mikawy and Handoussa, 2002). This does
