The price to pay

Depending on foreign aid means neglecting vital political, social and economic reforms, argues Galal Amin*

Galal Amin About 50 years ago, when "foreign aid" to underdeveloped countries was still a brand new topic in development rhetoric, economists were not quite clear on what should be regarded as "aid." Some preferred to include all kinds of capital flows from developed to underdeveloped countries, while others excluded private foreign investment and non-concessionary loans. After 50 years of Third World experience with foreign aid (which is also the length of the Egyptian experience), one must wonder whether any of the various types of capital inflows should be regarded as "aid" at all. In a few exceptional cases, a small developed country with modest political ambitions may extend some concessionary financial or technical assistance to a Third World country, and here the term "foreign aid" may indeed be appropriate. In the vast majority of cases, however, "foreign aid" by any name smells just as foul.

I am now inclined to see in this way even Egypt's early experience with US aid between 1958 and 1967, although such assistance was extended under the most concessionary of terms. American food aid, given under the famous Public Law 480 at exceedingly low interest rates, to be repaid in Egyptian currency and over a long period of time, together with Russian aid to build the High Dam and a variety of industrial projects, greatly facilitated the launching of Egypt's ambitious development programme in the late 1950s. But when the US suddenly declared, in 1965, that its aid agreement with Egypt would not be renewed because of the government's foreign policies (and especially its support to the revolutionaries in the Congo), Egypt's development programme was suddenly brought to a halt. The first Five-Year Plan of 1960-65 was also to be the last.

The whole development programme had been based on the assumption of continued foreign aid, but now American aid had dried up, and the Russians, for one reason or another, were reluctant to fill the gap. It may be idle to speculate what Egypt would have done in 1958 if it had been forced to draw up its economic policies on the assumption of no foreign aid at all, but if it had been allowed the luxury of following an independent path of development, I believe the result would have been far superior to what actually occurred, both in the economic sphere and with regard to income redistribution and other aspects of social policy. Relying on foreign aid allowed the Egyptian government to neglect some essential aspects of economic reform; it also implied a degree of laxity in reducing social injustice and political corruption.

This, however, was by no means the worst episode in the history of foreign aid to Egypt. While receiving aid was a principal cause for neglecting important economic and political reforms, the complete suspension of US aid in 1967 was one of the principal reasons for the drastic reorientation of Egypt's economic policies in the mid-1970s. The other reason was, of course, Israel's military attack, which took place (not coincidentally) the same year that US aid was suspended. Faced with the military occupation of Sinai and the almost complete suspension of all aid from the West (including the World Bank and other multilateral institutions), starting from 1974, Egypt was forced to adopt policies that it would not necessarily have chosen freely.

This is not exactly a matter of whether one is for or against "open-door policies." There are a hundred possible ways of opening up the economy, but Egypt was not allowed to choose which of these suited it best. Of course, there were also a variety of ways of dealing with the Israeli occupation of Sinai, other than accepting a series of humiliating agreements. But adopting that particular open-door policy and that particular version of "peace" with Israel was the necessary and almost sufficient condition for the resumption of US aid. Aid from the US, as well as from the World Bank, the IMF and other Western agencies was duly resumed in 1975.

Just at that time, a prominent and rather extraordinary minister of agriculture, Mustafa El- Gabali, drew up a plan for agricultural reform that would have allowed Egypt to become self- sufficient in all the major food products by the end of the century, but he was promptly dispensed with and his plan duly shelved.

Now, after 25 years of lavish and uninterrupted US aid to Egypt (which, in sheer volume, can be compared, ironically, only to that given by the US to Israel), what has been the net outcome? One should not deny that this aid must have lightened the burden Egypt would have had to bear to build this or that electrical power station, improve the transportation network or rehabilitate the urban sewage system. But at what cost? Politically, just think of the many possible stands Egypt did not take vis-à-vis Israel's attacks in the past 25 years, against Lebanon, Iraq, Tunisia and, of course, the Palestinians. Think of the positions not taken by Egypt (or, for that matter, other Arab countries) at Arab summit meetings, or on the US blockade of Iraq, Libya or Sudan. Economically, without the threatened suspension or reduction of US aid, Egypt would have adopted policies allowing greater self- reliance in food production, greater protection of promising industries, a stricter attitude towards private foreign investment, an emphasis on creating employment opportunities rather than raising the rate of GDP growth, better protection for the less privileged groups of the population, and less tolerance of growing income inequalities and corruption. Furthermore, Egypt has been forced, under the threat of the suspension of US aid, to sell to foreign buyers many economically successful enterprises built in the very short period of diminished external pressure between 1958 and '67. This is, of course, what is known as "privatisation."

Having fulfilled nearly all its targets, US aid is now said to be unnecessary, at least at its former rates. The justification given is that Egypt has grown up sufficiently to be able to rely on itself. The exact opposite is closer to the truth: Egypt was far more able to rely on itself 50 years ago than it is now, for it had then neither the same consumption habits nor the same degree of weakness of political will. Of course, in the regional balance of power, Egypt was much more favourably situated 50 years ago than it is today. Of course, "foreign aid" has not been the sole cause of these weaknesses; but it has been an important one.

* The writer is professor of economics at the American University in Cairo.

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		Al-Ahram Weekly Online 21 - 27 June 2001 Issue No.539
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