Untangling the strings

The benefits of US economic assistance must be measured not only by the magnitude of resources given, but also by the strings attached, writes Gouda Abdel-Khalek*

Gouda Abdel-Khalek The year 2000 marked 25 years of heavy involvement by the United States Agency for International Development in Egypt. The occasion duly called for celebration. USAID, as part of the commemorative activities, published a pamphlet entitled: USAID 25 Years in Egypt, 1975-2000: Celebrating 25 Years of Partnership in Development Between the United States of America and the Arab Republic of Egypt. But perhaps no less important than the festivities, this should be an occasion for stock-taking, evaluation and reflection. In this give- and-take relationship, what did each party give and what did it take? What does the balance sheet reveal? What were the cost-benefit results of this unique swap of material resources for geostrategic and political support? To answer these questions is an exercise in strategic calculus par excellence, which is beyond the scope of this article. Our focus is on the crucial but almost totally neglected aspect of conditionality.

We start by asking, what did the US give Egypt? For an answer to this question, we have to rely totally on American sources; Egyptian authorities do not seem to have a full record of aid received. According to USAID, Egypt received about $24.3 billion in economic assistance from the US over the past quarter century.

The breakdown of this sum is as follows: $6.7 billion for commodity imports under the Commodities Import Program; $5.9 billion for physical infrastructure; $4.5 billion for basic services; $3.9 billion for food aid under public law 480 (up to 1990); and $3.3 billion in cash transfers and technical assistance to facilitate policy reform and structural adjustment.

Detailed analysis of various aspects of such economic assistance is naturally beyond the scope of the present article. However, a number of important issues require special attention. First, what is the real magnitude of aid that Egypt received? Unfortunately, there is no tally by the Egyptian side of the total amount and actual breakdown of such aid. Second, the practice of over-pricing the items delivered under the foreign aid package is well- known. So, a valid question is: how much of that aid represents real resource transfers to Egypt, and how much of it is actually rent accruing to American firms? Third, there is a real issue of conditionality upon which we will focus here.

We start with an important caveat: it is misleading to look at aid flows as a good thing solely on the basis that they avail the receiving country of additional funds of foreign exchange on concessional financial terms. American aid is no exception. In this context, it is incorrect to make the analysis on the basis of the idea that the more resources the better. Such an idea assumes that other things are equal. In actual fact, making assumptions is unwarranted, thanks to the strings attached to aid flows. Therefore, other things cannot be equal.

Authorities in aid-receiving countries and analysts of foreign aid usually focus on the financial terms. These are summarised by the grant element of aid flows, which depends on interest rates, maturity and grace periods. Of course, financial terms are important -- softer funds entail lighter financial burden on the economy of the aid-receiving country. But financial conditions are only part of the story and not the whole story. Non-financial conditions are no less important. The trouble is that they are often overlooked or neglected, with attention given exclusively to financial terms or conditions. This is a gross simplification, and it often leads to the wrong conclusion that the more resources through foreign aid, the better. At the root of such simplification is the tacit assumption of "other things being equal."

But it should be noted that it is in the very nature of the aid relationship that other things are never equal. Because of aid, many things change. Invariably, aid flows carry with them fundamental elements which impact on the socio-economic and political environment of the aid-receiving nation. Ultimately, the milieu within which development takes place changes fundamentally in a number of ways. For example, economists have long debated whether aid is complementary to or a substitute for domestic resources. It has often been suggested that heavy reliance on foreign aid flows may result in a lower savings rate.

It is argued here that American economic assistance to Egypt often entailed very strong conditionality. These may be financially concessional flows; but they involve very stringent non-financial conditions. Although Egypt obtained more resources for development through American aid, the country's ability to set its own priorities was sacrificed to a large extent. Specifically, over-reliance on American aid during 1975- 2000 imposed severe restrictions on Egypt's basic developmental choices. Two types of errors are committed here: one of commission, the other of omission. The first is to put too much faith in foreign aid to help the country by closing the foreign- exchange gap. The second is to ignore the strings attached -- that is, conditionality. We illustrate the latter by reference to the example of the loan agreement for the Qatamiya cement project.

This agreement (dated 28/9/1979), enabled the Government of Egypt (GOE) to obtain a loan of $95 million to finance a cement production project by the Suez Cement Company (SCC) in Qatamiya.

The main non-financial conditions were: (i) the GOE re-lends $58.5 million and grants the balance of $36.5 million to the SCC; (ii) SCC sells at least 20 per cent of its stock to the private sector; (iii) the GOE sells the equivalent of $4.6 million of public sector stock to investors; (iv) raising the prices of locally produced cement and holding periodic consultations with USAID regarding cement pricing in Egypt; and (v) the Egyptian Cement Marketing Bureau (ECMB) should submit the annual plan for nationwide distribution of cement to USAID for approval.

It is quite clear that the above conditions go far beyond the financial or even the economic aspects of the loan. First, they involve fundamental changes in the overall economic environment since cement may be characterised as an investment good. Raising the price of cement should affect both investment and the cost of providing housing services to the population. Second, it clearly involves broadening the scope of the private sector by infringing on the public sector. Here, we are not debating the relative merits of the public vs the private sector, but simply noting that the relative scope of each is a matter of national sovereignty. It is for the nation to decide for itself. Third, the conditions involve the redistribution of wealth in favour of the private sector (GOE borrows and then grants part of the loan to the private sector). Fourth, they involve surrendering authority to set strategic national priorities to a foreign agency. This is particularly so if we recognise that cement is a sensitive commodity -- one that is vital in both peace and war.

It is rather curious that the loan agreement commits the GOE and its relevant agencies (such as ECMB) to submit the plan for the distribution of cement, all cement, to USAID for approval. The donor in this case has a say in distributing all of the cement produced in Egypt in return for financing just one cement-producing project. That is no justifiable quid pro quo!

Now we turn to other strings attached to American aid to Egypt, such as limiting the choices open to the country regarding regional and international relations. Of course the peace treaty with Israel occupies centre stage. An excellent example of the front-loading of conditionality may be the weakening of Egypt's relations with the former Soviet Union. Another example is the ceiling put on Egypt's relations with certain countries such as Iran. Moreover, the support Egypt gave to the international alliance against Iraq provides yet further evidence of the non-financial conditionality associated with American aid.

In fact, in the light of all of this, it is hard to think of conditionality of American aid to Egypt as a quid pro quo. Officially, the two nations prefer to talk about partnership. Is it really so? We believe it is not, and Egypt has to realise this. The geostrategic benefits to the United States are numerous: ensuring political stability in a volatile region, securing energy supplies at reasonable prices, in addition to opening trade and military routes; keeping Russian influence at bay, etc. Add to this, the grand transformation of Egypt towards a market- based economy and private ownership. One cannot help but raise the question: quid pro quo, or wages of dependency. Is Egypt paying too much?

* The writer is professor of economics at the Faculty of Economics,Cairo University

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