The Gordian Knot of the IMF- the Structural Adjustment Programme. The IMF itself created it.
Posted on July 10th, 2013

 By Garvin Karunaratne, Ph.D.(Michigan State University)

It looks as if the IMF is unaware that it was the IMF itself that through its Structural Adjustment Programme stifled job creation and poverty alleviation. This is because the World Development Report 2013 stresses the creation of jobs. It states, “Creating opportunities for jobs are critical for reducing poverty”. Further, it states, “In Developing Countries jobs are a cornerstone of development with a pay off  far beyond income alone. They are critical for reducing poverty, making cities work and providing youth with alternatives to violence.” Thus it is clear that the IMF and the World Bank have forgotten what they did.

 Historically from the Fifties, when the newly independent sovereign countries were making progress in marshalling their economies to create production, alleviate poverty and create jobs, it was the IMF and the World Bank that created the process where that process would reverse. At that time ,the Developing Countries had developed systems to control and utilize the use of foreign exchange in the national interest, resorted to national planning and managed their budgets within their incomes controlling the foreign exchange they earned. There were no budget deficits and most countries were not overly indebted. They were producing their own requirements of industrial and agricultural products  and this led to a situation where the Developed Countries could not sell their manufactures. They suffered from stagflation- a mixture of inflation and high unemployment.

 The Developed Countries then set up their open market-liberalization policies, guided by Professor Milton Friedman of the Chicago School of Economics, pursued by President Regan and Prime Minister Thatcher. This was  aimed at aborting the development that was taking place in the Developing Countries, and making them indebted so that they could be reigned in.

 This was done in a very nefarious manner through the IMF and the WB in the guise of helping them.

 The first indications came from Robert McNamara the President of the World Bank, when he  at a speech at Columbia University in 1970 stated that “We plan a new and expanded program of Country Economic Missions”¦ The mandate will be to assist the member government to draw up an overall development strategy which will include every major sector of the economy. Once the Mission is completed we will promptly produce a thorough Country Economic Report”. Bruce Rich in “Mortgaging the Earth” rightly refers to this process as “a vision of global central planning” by World Bank executives. The sovereignty of the country goes out of the window and the World Bank executives take over!

 The strategy was simply to restructure the economies of the Developing Countries. This was done by enforcing the Structural Adjustment  Programme(SAP). This move is best expressed in the World Development Report of 1988:

” The all out approach attempts to replace central planning with the rudiments of a market economy in a single burst of reforms. These include rapid price and trade liberalization”¦  the immediate opening of markets to entry by new businesses.” This was the Structural Adjustment Programme and any country that faced financial difficulty and wanted funds had to agree to this. The oil price hike in 1973 when the prices tripled made the countries flock to the IMF for assistance and this assistance was available only when they agreed to the conditionality of the SAP.

 The SAP provisions include action to ” devalue and ultimately free float the currency. The foreign exchange that came into the country was taken out of the control of the country and allowed to be handled by the market forces- by traders, investors and the banks.  A high interest rate policy was followed. The other policies were: privatize State commercial undertakings, follow free trade, removal of tariffs, de regulate, accept the private sector as the engine of growth and limit the public sector”,

 In other words the economies were restructured to enable goods manufactured in the Developed Countries to find markets in the Developing Countries. This led to a situation where the industries already developed in the Developing Countries were forced to close down due to the fact that the Bank loan interest was increased to as much as 24%. When the foreign exchange available in the country was insufficient to meet this liberalization, the IMF advised that paying State ventures should be sold off to find funds and loans should be obtained. The countries inevitably became indebted in this process. The private sector was enthroned, central planning was disbanded. This led to the impoverishment of the masses and also to the creation of a small class of rich people who paid very low taxes, who could enjoy- travel abroad, go on cruises, enjoy luxury imports, send off their children for foreign education, all funded on borrowed funds. This method of handling foreign exchange  led to a process where  the funds obtained on loans somehow went back to the Donor Countries, while simultaneously leaving the country indebted.

The foreign exchange earnings of the countries were manipulated

The incoming foreign exchange itself was manipulated by the foreign banks to earn profits. A condition of the SAP was that the foreign exchange incomes of the country was taken out of the control of the country and handed over to the market forces. The banks accepted foreign currency deposited by people and fixed their own rates for sale. When the government had to pay a large bill in foreign currency and the public sector banks did not have sufficient foreign funds to meet it, they had to go to the foreign banks that had hoarded foreign currency. The foreign banks then increased the price of the foreign exchange they held. This did happen in Sri Lanka on 25/1/2001, when the US $ that was trading around Rs 82.00 was increased to Rs. 100.00 and Rs. 106.00. The profit goes to the foreign bank. The Central Bank of Sri Lanka was helpless. It said, “in a free floating regime the market forces determine the exchange rate. The Central Bank does not intervene in the process. The Central Bank has control over the domestic money supply.”(The Island17/2/2001, quoted in my book “How the IMF Ruined Sri Lanka’ page95). This is the policy even today. Thus even the foreign exchange earnings  of a sovereign country is a commodity exploited to make a profit! 

 Manipulation of currencies is  quite a common occurrence. “The Royal Bank of Scotland was among 20 banks punished by Singapore’s Central Bank for trying to manipulate benchmark borrowing and currency rates”¦.133 traders had tried to rig the Singapore Interbank Offered rates, and swap the offered rates in the latest scandal to rock the financial world. Other banks included Barclays and Standard Chartered.”(The Independent, UK:15/6/2013). 

 It has been established that premier banks manipulated interest rates(Libor rates) since 1991 to make profits and were fined. The Libor(London Interbank offered rate) Scandal resulted in Barclays being fined pounds 200 million by the Commodity Futures Trading Commission, $ 160 million by the  US Department of Justice and pounds 59.5 million by the  Financial Services Authority. It has been established that Barclays, “artificially lowered rate submissions to make their bank seem healthy.(Dept of Justice:27/6/2012), In December 2012, the UBS Investment Bank of the USA agreed to pay regulators $ 1.5 billion for its manipulation of Libor(BBC:19/12/2012) Other banks were also involved.

 Mahatir Muhhamed, the former Prime Minister of Malaysia, has said that any country that does not control its foreign exchange is not fit to rule. He was the only ruler who could steer his country out of the East Asia Financial Crisis without getting a handout from the IMF.

 Making the Developing Countries indebted was the new method of controlling them once again.  The IMF thus brought about not only the bankruptcy of the countries but also increased the poverty and deprivation in them, while creating a process where foreign exchange went from the Developing Countries back to the Developed Country- the “ƒ”¹…”donors’.

The effects of the Structural Adjustment Programme

The United Nations’ “Human Development Report: 1996“ stated:

“The stabilization measures of the IMF, aimed at reducing both budget deficits and usually involved  public spending and increasing interest rates. Although these policies reduced deficits in some countries they often did so at the cost of inducing recession. In short they often balanced budgets by unbalancing people’s lives,”

 Professor Jeffery Sachs, Professor of Sustainable Development at Columia University and Advisor to the United Nations’; Secretary General on Millennium Development Goals states how African countries were totally ruined due to the IMF & the WB:

“Western Governments enforced  draconian budget policies in Africa during the 1980s and 1990s. The IMF and the WB virtually ran the economic policies of the debt ridden continent recommending regimens of budgetary belt tightening known technically as Structural Adjustment Programmes. These Programmes had little scientific merit and produced even fewer results. By the start of the Twenty First Century  Africa was poorer than in the late 1960s when the IMF and the WB had first arrived on the scene.”(“The End of Poverty”: 2005)

 This process of creating poverty, creating unemployment in the Developing Countries has been the hall mark of the SAP imposed by the IMF and the World Bank and the statements made in the World Development Report of 2013 to the effect that job creation is essential to get rid of poverty perhaps implies that the IMF and the WB have at last realized their own folly of imposing the SAP.

 However, it is too late as the countries now stand totally impoverished, with a population steeped in poverty, countries  with massive budget deficits, overly indebted to such an extent that they can not even service the loans with their revenue. Loans are serviced by raising further loans. The countries are totally  bankrupt though this word is forbidden when referring to sovereign countries.

 In fact the Center for American Progress, of Washington has been critical of the World Development Report of 2013. It states that “the World Bank embraces jobs but not the institutions that support them.”

 This is very true. Take Sri Lanka  a country that had a negligible foreign debt of $ 750 million in 1977 and that too on projects, (not for consumption) became indebted. In my own words, “by the time the UNP was defeated in 1995, the foreign debt was at $ 9772 million which meant that in order to service that debt the country had to actually raise a further loan.”(From, Karunaratne: “Papers on the Economic Development of Sri Lanka“, Godages,2012)

 Further, the imposition of the SAP had eroded all the processes of  planning and implementation that had been in place for the creation of employment. The imposition of the high interest rate policy- as high as 24% on bank loans had killed all enterprises as the locals  found  it impossible to compete with imports coming in with no tariff charges and the manufacturers in those countries worked on loans with very low interest rates- even 2%, and the enterprises closed up.  The  necessary administrative infrastructure to enable production, the march of peasants to become commercial farmers which had been developed by these countries was abolished or privatized on  the grounds that the Government should not undertake commerce. The Developing Countries are now helpless, totally bankrupt, annually getting further into debt in order to service their loans, without the development infrastructure they once had to bring about development.

The IMF and the WB have to come up with a strategy that will bring about growth, instead of the SAP that stifled job creation. Such a strategy that will bring about growth and development has not yet been found.

Even IMF and World Bank lieutenants renege and desert them

The IMF failed to listen to the  Chief Economist of the World Bank, Professor Joseph Stiglitz who dared to object to the WB and IMF policy enforced on Indonesia,

“I suggested that the excessively contractionary monetary and fiscal program could lead to political and social turmoil in Indonesia. .. If the people we entrust to manage the global economy- in the IMF.. don’t begin a dialogue and take their criticisms to heart things will continue to go very wrong,”(“Stiglitz: “What I learned at the World Economic Crisis”: The  Insider)

Stiglitz was given a standing sack for his comments of wisdom.

 Professor Jeffery Sachs, the Director of the Earth Institute at Columbia University and Advisor to the UN Secretary General was once a proponent of free market economics and served as the Advisor to the Governments of Bolivia in 1985, to Poland in 1989 and to Russia in 1991. In all of these he was advising his “shock therapy”- how to be a success in following the market economy,  through open trade, privatization of state assets, elimination of price controls and subsidies. This was done through obtaining more loans- actually making the countries more indebted and as pointed out by me earlier, the liberal foreign exchange use directed the foreign exchange back to the donor Developed Countries leaving the country that borrowed indebted. His shock treatment was furthering the Structural Adjustment policies. Jeffery Sachs has been criticized for his “shock treatment” in that it had “produced misery and death for an untold number of working people”.(internationalist.org/jefferysachsachsows1110.html)

 Jeffery Sachs in the Eighties and the Nineties when working to further the SAP did not have the foresight to understand that the very policies he implemented would not only push the countries more towards bankruptcy and debt , but also leave the people impoverished and poorer. What happened to the Bolivian currency through the process he aided is  revealing. In my words,

“the drop in the value of the peso amounts to a reduction from 116 pesos to the GBPound(GBP) in 1983, to 15.1 Bolivianos in 2007, where a boliviano was equal to one million pesos in 1987 amounts to a drop in value of 13,000,000 % in the period 1983 to 2007.”(From, “:Success in Development“ Godages)

The “shock therapy of Jeffery Sachs  has aided this process. Bolivia is a leading copper exporter and the Developed Countries were able to get copper at a discount of 13 million percent- the extent to which the local currency had been devalued. Imagine the profits created for the multinationals!

 On Jeffery Sachs’ contribution to Poland and Russia, the Left Business Observer states    ” Poland looks like a success to some but with the transition come high unemployment, falling real wages”¦Russia though was a thorough disaster, one of the worst collapses in human history. Living standards fell and the population shrank an almost unprecedent event in a country not at war.”(The Long Strange Career of Jeffery Sachs, Left Business Observer 111, August 2005.)

 There is also John Perkins who once worked for a multinational furthering the SAP in Ecuador, where in his book, “Confessions of an Economic Hitman,” confesses that he drafted projects with fabricated statistics, designed in a manner where the funds obtained on  loans will be disbursed in a manner where in some form or other the funds will go back to the Donor Developed Countries , leaving Ecuador indebted to the extent of the loan.

 It is sad that these experts who are considered economic luminaries today had failed to understand what the IMF and the WB were doing to the Third World economies. They had insights into what was happening as they were insiders working for the SAP but they miserably failed to grasp the negative effects of their own action. 

 Jeffery Sachs later became very critical of the IMF and the World Bank. In “End of Poverty”(2005), he states that now  Africa is poorer than in the late 1960s when the IMF and the WB had first arrived on the scene.”

What he states of the African countries also happened to Bolivia, Poland and Russia, where Jeffery Sachs was one of the agents furthering the SAP  with his “shock therapy”.

In fact in his later publication, “The Price of Civilization“(2011) Jeffery Sachs  is highly critical of the free market economy which he once furthered. He now argues: “free markets by themselves are not able to ensure the efficiency of the economy.””¦ “free Markets also need Governments to help regulate the market”¦it is only the present day free market acolytes of Hayek and Friedman who neglect the key role of government in ensuring the efficiency”¦. Freemarkets do not guarantee fairness for the citizens of a generation, they do not guarantee sustainability for future generations”. In this book he devotes an entire chapter to detail “The Free market Fallacy” and he ultimately concludes, “the free market system must be complemented with government institutions  that accomplish three things: provide public goods such as infrastructure, scientific research and market regulation, ensure the basic fairness of income distribution and long term help for the poor to escape from poverty.”

It is interesting to note that Wisdom to understand that the IMF’s strategy did make  the countries poor has at last got into even the chief lieutenants of the IMF and the World Bank!

The SAP policies continue unchanged

Though the World Development Report 2013 calls for action in job creation, the IMF and the WB have not changed any of the  provisions of the SAP.

 Instead what the IMF and the World Bank has done is to grant some measure of relief to severely indebted countries.

In the East Asian Financial Crisis, the countries that went bankrupt were helped with further loans of $ 43 bn. to Indonesia, $ 17.2 bn. to Thailand(1998), $ 58 bn. to South Korea. In every case the debt was re scheduled with further conditionalities i.e. with more chances for funds to flow back to the Developed Countries.

 When poor countries became heavily indebted and had reached the end of their tether and were really helpless with a debt that they could not even service, the IMF came up with the HIPC(Highly Impoverished  Poor Countries Initiative). In 2005, the HIPC was supplemented with the MDRI( Multilateral Debt Relief Initiative) and given a 100% debt relief, provided the country implemented further reform. For instance,  Ghana was given a new lease of life by the cancellation of all debts in 2005, provided Ghana followed further conditions. This enabled Ghana to borrow again and  Ghana was again overly indebted to the extent of $ 28.4 bn, by  2011, and then  the debt servicing cost was over the total revenue of the country.  The HIPC has been criticized as “a program designed by creditors to protect creditor’s interests, leaving countries with unsustainable debt burdens”(Carrasco et al: “Foreign Debt Forgiveness & Repudiation”:University of Iowa, Center for International Finance & Debt:2007)

 What the IMF has done is to help the indebted countries to borrow again  provided they proceed on the same path to devalue their currencies further, and continue to further liberate the use of foreign exchange to their citizens. They also want the countries to open up for foreign  investment- corporations will come in, invest a pittance on condition that they can withdraw the investment at any stage and draw their profits away without paying any taxes.  McDonalds, KFC, Burger King and Pizza Hut are all in this category  and milk dry the countries for profits. They import even paper cups with the foreign exchange of the country. The profits earned in local currency is repatriated in foreign exchange. The country is the net loser! Take Noritaki in Sri lanka: “They come in search of assets that are available for exploitation. Noritake came to Sri Lanka on a tax holiday and used the clay deposits for making porcelineware. When the tax holiday period ended it was extended. It is now realized that the clay deposits are very low.  Further it is important to note that  though the investors do not pay any taxes to Sri Lanka, they are heavily taxed in their own countries. The Governments forget that the resources in the country are exploited  to find incomes for shareholders mostly foreigners and for foreign countries in the form of taxes levied( in the US when foreign goods are sold a Federal tax as well as a State tax is charged)(From “Karunaratne: Success in Development“, Godages).

 Foreign Investment is a ruse to exploit and get more earnings for the Developed Countries.  The earnings of US Multinationals in 2007 from overseas trade outlets amounted to $ 99.1 billion. From Africa the earnings netted $ 6.1 bn. while from Asia it was $ 22.2 bn.(Tax Foundation:26/4/2011). This is all collected from McDonalds, Starbucks etc. all from commercial activities that  can be done locally and then this income will stay within the country.  

 Another method used by the IMF is to classify countries by the GDP and upgrade them and any country that struggles to bring about any development that is possible under IMF policies and increases its GDP is classified as a country that is “advancing” and is denied Aid at concession rates. In other words the earth is dragged under its feet and the country slumps further as it has to find funds at high interest and the country has to find foreign funds somehow to finance its debt, even to stay afloat. Sri Lanka unfortunately is basking in this category. What is important to note is that GDP incomes are misleading because inflation and the purchasing power parity is not included in the calculation.

 The exploitation of the rest of the world to bring riches to the Developed Countries has been the hall mark of the Developed Countries. China was given membership of the WTO only after it opened its borders for exploitation by US multinationals. China had to agree to allow AIG the US insurance giant to enter China to sell its insurance policies. China has been again and again urged to free float its Yuan but this has been fiercely resisted.

 Countries like India have avoided becoming indebted and have been able to maintain their currencies without severe devaluation because they did not accept the Structural Adjustment Programme. The US has again and again tried to open up India to set  up retail sale units by US multinationals and US banks. These countries are being pushed to accept the SAP.

As the Wall Street Journal, the epitome of capitalist journals,  itself remarked, “Is this any way to run an international monetary system?”(22/2/2001)

  All the countries that followed the IMF’s teachings “”…” the SAP are now saddled with enormous debts that they cannot ever repay and the IMF and the World Bank now spurring them to create jobs is something that they do not have the resources to attend to. The development infrastructure that they had before the IMF came on the scene, the Marketing Department’s Cannery, its vegetable Purchasing and Sales Scheme, the Small Industries Programme, the Agricultural Programme with its seed farms and coordinated extension service etc. in Sri Lanka are all abolished or privatized  and can never be brought back overnight. In Indonesia BULOG, the infrastructure for paddy production was sacrificed at the instance of the IMF and thereafter paddy production is in the doldrums. This is true of every country that faced the IMF axe.

 Odious Debt

In this predicament, Raffael Correa the President of Equador stands out as the only ruler who has had the nerve to take the bull by the horns. It was his country that suffered from the machinations of “ƒ”¹…”Aid’, detailed by John Perkins in his “Confessions of an Economic Hitman”, where the Aid that came in was designed to get back to the donors leaving Equador indebted to that extent. President Correa appointed a commission to investigate all loans obtained by Equador from 1970 and it was found that traces of illegitimacy ran through much of the country’s  $ 10 billion debt. President Correa defaulted on the loan repayments claiming them as illegitimate and odious. In his words the “Debt was immoral and a betrayal of the country”.

 I am not surprised at this decision because most loans and “ƒ”¹…”Aid’ packages given to countries after they commenced the Structural Adjustment Programme, were purely meant to support the demand on foreign exchange created by liberalising the use of foreign exchange for use by the country’s rich for them to travel, go on cruises, enjoy luxury imports, send off their children for foreign education, the very process created by the policies enforced on the countries by the IMF itself. It is the IMF alone that has to take responsibility for this excessive use of foreign  exchange when the country’s incoming foreign exchange could not afford it. The IMF should have actually provided a growth strategy which could have made the country develop its production which would in turn enable the country to enjoy its earned riches. Advising the countries to borrow and spend extravagantly was the IMF’s method of making the Aid go back to the Donor Developed Countries while simultaneously making the Developing Countries indebted.  The IMF can never get over this charge.

 In the case of Sri Lanka, economic luminary Professor Indraratna urges that we should step up exports to meet our debt servicing. We are getting back to the colonial days when we were exporting raw materials Who created this debt is what is important in this regard.

Austerity Measures

The World Bank and the IMF press on austerity measures, which increase poverty and deprivation. The IMF fails to understand that Austerity does not create growth. Austerity only places the burden of debt on the entire population irrespective of incomes and increases poverty.  Marcus Miller and Robert Skidelsky, professors at the University of Warwick  have stated that, “Across Europe austerity policies have caused stagnation and despair. There is a more humane way to restore our fortunes”(New Statesman:27/6/2013) 

The IMF has miserably failed to provide a framework for the indebted countries to get cracking into production, creating jobs and alleviating poverty in the process.

Austerity measures can only help by reducing expenses, thereby reducing the budget deficit. However the path to growth lies in increasing production causing increases in the incomes of the people on the one hand  and thereby decreasing poverty. The production enables a country to reduce its imports. This is achieved through import substitution in agriculture and industry which  requires coordination in research, appropriate training, setting up enterprises through the private sector or cooperatives and effective marketing. It is interesting to note that this development infrastructure that had been built up by the Developing Countries was disbanded and privatized and thereby lost on the advice of the IMF itself.

 It is high time that the IMF understands that its own policies have caused poverty, deprivation and debt and comes forward with a growth strategy, instead of talking nonsense, leading the countries further astray.  

 Garvin Karunaratne, Ph.D. Michigan State University

Author of:

How the IMF Ruined Sri Lanka & Alternative Programmes of Success“, Godages,2006.

Success in Development“, Godages, 2010,

Papers on the Economic Development of Sri Lanka“. Godages ,2012

7/7/2013

2 Responses to “The Gordian Knot of the IMF- the Structural Adjustment Programme. The IMF itself created it.”

  1. Nalliah Thayabharan Says:

    The World Bank – IMF is owned and controlled by NM Rothschild and 30 to 40 of the wealthiest people in the world. For over 150 years they have planned to take the world over through money. The former chief economist of the World Bank, Joe Stiglitz, was fired recently. He pointed out to top executives that every country the IMF/World Bank got involved in ended up with a crashed economy, a destroyed government, and sometimes in flames with riots. Jim Wolfensen, the president of the World Bank would not comment on his dismissal.

    Before Joe Stiglitz was fired he took a large stack of secret documents out of the World Bank. These secret documents from the World Bank and the International Monetary Fund reveal that the IMF required nations:

    1. to sign secret agreements of 111 items
    2. in which they agreed to sell off their key assets – water, electric, gas, etc.
    3. in which they agreed to take economic steps which are really devastating to the nations involved
    4. in which they pay off the politicians billions of dollars to Swiss bank accounts to do this transfer of a countries fixed assets
    If they do not agree to these steps they are cut-off from all international borrowing. Today if can’t borrow money in the international marketplace, no one can survive, whether you are people or corporations or countries. If that does not work they overthrow the government and plant lies about the former government and/or even rewrite history.

    http://www.unitypublishing.com/Government/IMF.htm

    http://www.presstv.com/detail/2013/03/26/295322/new-brics-bank-to-rival-world-bank-imf/

    http://www.henrymakow.com/understanding_de_facto_illumin.html

    http://rense.com/general86/zelephant.htm

    http://northerntruthseeker.blogspot.ca/2010/08/imf-report-promotes-one-world-currency.html

    http://www.realjewnews.com/?p=666

    http://zionistjewfedreserve.com/custom4.html

    http://www.veteranstoday.com/2011/06/10/imf-sex-scandal-points-to-the-bigger-picture/world-bank-zionist-2/

    http://dissidentvoice.org/2011/02/greek-pm-zionism-and-the-imf%E2%80%99s-last-best-friend/

  2. Nalliah Thayabharan Says:

    http://www.youtube.com/watch?feature=player_embedded&v=UGCCOZaxZSQ

    http://www.youtube.com/watch?v=5hfEBupAeo4

    http://www.youtube.com/watch?v=GWBogcrFGx4

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