The Demise of the IMF Development Model
Posted on April 3rd, 2017

By  Garvin Karunaratne Ph.D. Michigan State University Former SLAS, Government Agent, Matara

In the Seventies, the IMF took on the new role of prescribing the  path to be taken by the Third World countries to run their economies. This was the Structural Adjustment Program the IMF  foised on  every country that sought financial help. In the Early Seventies  the Oil Sheiks increased the price of oil threefold and many countries had to flock to the IMF for help. The IMF was the institution established  by the United Nations to help and guide all countries in  financial matters.

Since gaining independence  the Third World Countries had to manage their finances. The incoming foreign exchange,  mainly from exports, was carefully handled and spent with great care, for essential goods and items that were required for national development. I speak through sheer experience. I was once in charge of allocating foreign exchange for small industrialists in Sri Lanka. We registered them after inspection where we carefully looked into what they produced, whether it was required for our country.  In case their production required any item imported- raw material or machinery, an allocation of foreign exchange was allowed. We were extremely strict and one SLAS officer was sacked for making  a fraudulent allocation.  Anyone could apply for foreign exchange for travel or imports. Each case was looked into in detail by the Controller of Exchange of the Central Bank. No allocation of foreign exchange was made for foreign studies, unless the study could not be done in the country or the study was required for national development. A budget deficit was not heard of. It was a strictly controlled situation because the country had to manage with the foreign exchange it had. We had no other option whatsoever.

Countries had  two budgets, a Foreign Exchange Budget and a Local Currency Budget. The foreign exchange  budget had to manage all our foreign expenditure, within the incoming foreign exchange while the Local Currency Budget was managed with tax collection supplemented by printed local currency

The IMF Model- the Structural Adjustment Programme, liberalized the use of foreign exchange. The IMF  prescribed that  the countries should  allow anyone any amount of foreign exchange  for everything-for luxury travel, for importing anything, for foreign studies and advised the countries to borrow foreign exchange if the country could not meet the demand. The IMF initially, gave loans at low interest and even gave periods of grace, when no repayment was charged. This helped the countries to meet the additional demand, and the leaders did not care about borrowing because they may  not be in charge when the loans have to be repaid.

Even a small commercial entrepreneur,  a sweets pedlar on the street, will know that this Model of extravagant spending, without matching the expenses to what is available is a guaranteed recipe for disaster, but the IMF bluffed its way through, by retaining the likes of erudite professionals like Stiglitz and Sachs, with whom no one could ever argue and win.

The IMF laid down various conditions that had to be followed.

The conditions laid down were carefully decided to help the Developed Countries. Paul Volker tells us of how the conditionality was decided.  As Chairman of the Federal Reserve ,  along with administrative colleagues, major foreign Central Banks and especially the IMF, could arrange stop gap  official financing and set out appropriate conditions  for the heavily indebted borrower countries (determined) out of our common concern about threats  to the American  and the global banking system”(From Banker to the World)(From my book:How the IMF Sabotaged Third World Development:Kindle)

The funds obtained on loan was actually used to pay the debts and because the debts were to the IMF and financial institutions of the Developed Countries the foreign exchange that came in was shunted back  with profits (the interest), back to the Developed Countries.  However the country’s books recorded the loan as a debt and this is the how the foreign debt has ballooned.

Imports were not to be controlled.

The incoming foreign exchange was to be collected by the banks and disbursed to applicants. The banks were to decide the exchange rate at which they would buy and sell the foreign exchange that came into the country. It was no longer to be controlled by the Government. It was supposed to be done by the process of supply and demand, but because the relaxed use of foreign exchange  caused a great demand and when the supply was short, the local currency was inevitably devalued. Devaluation meant that all exports were discounted to the amount of the devaluation. In 1978 Sri Lanka devalued the Rupee by 101%. (Rs. 15.70 to Rs. 31.50)  Devaluation also meant that the  Country  had to pay 101% more for imports.

A High interest rate was enforced. This meant that entrepreneurs in the country had to obtain loans at  high interest rates. In Sri Lanka, when this Neo Liberal- Free Trade Model was  enforced, the bank loan rate was raised to  25%. The local entrepreneurs could not compete with the imports that came in without paying tariffs or paying low tariffs. The result was that local entrepreneurs gave up  their businesses. Instead they found easy money by depositing the money in Fixed Deposits. Imports took the place of local production and this increased the debt of the country. This was advantageous to the Developed Countries because they found buyers for their manufactures.

The Private Sector was enthroned as the engine of growth and the Public Sector  activities were constrained. The problem is that the aim of the Private Sector is to gain the maximum profit while the aim of the Public Sector is the development of the Country.

Every country had built up a commercial infrastructure to enable development. This included  guaranteed prices for producers,  subsidies for producers,  loan schemes to spur production and these had to be abolished. In Sri Lanka this included the Marketing Department that offered high prices for vegetables and fruits and simultaneously conducted sales at fair prices to consumers through a network of small shops to avoid inflation. The aim of the Marketing Department was to break even and therefore kept a margin of around 15% to cover cost of transport and wastage, while the Private Sector traders kept a margin of 100%.  It also ran a Cannery that purchased stocks of fruits and produced jam, food preparations  and juice, making the country self sufficient thereby saving foreign exchange spent for imports.  There was the Cooperative Wholesale Establishment that purchased essential items abroad and sold keeping a low margin to avoid importers charging high prices. The Small Industries Department had a Textile Department that imported cotton yarn and guided handloomers to get into production. It also  provided expertise for cooperative powerlooms to make fabric. Thus Sri Lanka had a developed textile industry.  This entire commercial infrastructure necessary for national development was abolished at the instance of the IMF on the grounds that the Public Sector should not deal with commerce. This was inimical for development..

Foreign investment was to be obtained

Let us have a look at Foreign Investment.  Currently the Third World Countries  are bending backwards to entice foreigners to invest in Sri Lanka..  This is the method that the IMF recommends for the indebted Third World Countries to get foreign exchange. Investors come in search of profits. One area of Foreign Investment is Water. In Ghana, Opening up water services for investors mean that foreign companies come in  establish water storage and purification systems and sell water to the people. They(foreign companies) collect profits for ever. This is the process set up by the IMF  for capital(foreign exchange ) to flow back from the Third World  to the Developed Countries.  Water services and purification systems are simple well known devices that can be easily set up by local entrepreneurs, but the locals are not provided with inducements  like tax haven periods and loans at reasonable interest to get into business.” What has happened when foreign investors invest in water is that the local resource of water too has been converted to foreign exchange to flow from Sri Lanka to the Developed Countries.

Third World countries have enticed McDonalds,  Pizza Hut and such Multinationals to come in. They bring in a small sum of foreign exchange initially, get into local trading and take away the profits for ever without paying any taxes. Local entrepreneurs are not offered the tax free havens and at the moment bank interest is at high interest.

Overall all  the economies of the Third World got restructured and foreign exchange flowed from the Third World Countries to the Developed Countries.

Tremendous  funds  were sent out of the Third World countries to the Developed Countries. The debt service alone flowing from Developing Countries to the Developed Countries amounts to $ 600 billion annually. This amounts to five times the Aid budget. The WTO’s  Agreement on Intellectual Property (TRIPS)  collects $ 60 billion annually. (Jackson Hickel: ‘Aid in Reverse: How Poor Countries develop Rich Countries’, in Global Policy(

The IMF when confronted with the fact that following their Model of Development meant that the countries became indebted and could no longer continue to exist, came up with the Heavily Indebted Poor  Counties Initiative (HIPC), by which they wrote off some debt, but also compelled the countries to open their economies further for exploitation by investors. When the IMF forgave the foreign debt of Ghana the new conditionality enforced the privatization of water services and opening up of agriculture for foreign companies. Though Ghana was given a reprieve  of $ 4 billion in 2006,  the liberal economy without exchange controls  and free imports meant that by 2011 the foreign debt had ballooned  to $ 13.4 billion.”

Thus as far as Third World countries are concerned foreign investment bore a negative result.

On the whole every aspect of the IMF Model caused poverty in Third World countries  and created a situation where foreign exchange flowed from the Third World back to the IMF and the Developed Countries.

Effects of the IMF Model on Developed Countries

Despite the fact that the economies of the Third World Countries were restructured to contribute to the Developed Countries and annually billions of dollars flowed from the Third World countries to the Developed Countries, yet the Developed Countries could not maintain their high income levels, luxury pension benefits and high levels of free services.   The US unemployment level was 9.8% in 2010 and  5.5% in 2015. The incomes of Americans  has actually reduced – 1999- $ 57,000 while in 2015 it was only  $ 54,642. Local Councils and States too were bankrupt. In 2014 the USA had a negative trade balance of $ 764 billion. The Golden State of California  has a deficit of $ 40 billion. Since 2010 eight cities and towns have filed for bankruptcy

The  mismanagement of finances by the banks and other financial institutions in 2008 reduced the value of assets of the people  and sounded the death knell of home values. Even today (2017), the US has failed to restore the value of people’s assets- their homes. People are even uncertain of their own money deposited in banks. Only $ 250,000 of a bank deposit is guaranteed under the Federal Deposit Insurance Corporation(FDIC)and the bank may not pay you anything over that limit.  In the UK the guaranteed limit is only GBP 85,000 per person per financial institute.  In the case of a Life saving like the sale of a home, the guaranteed limit is one million pounds and that limited to a period of six months from the date of deposit. It looks a ridiculous situation for the funds of anyone held in a bank to be non guaranteed. But that insecurity is what is prevalent in Developed Countries.

The USA debt amounted to a staggering  $ 18.8 trillion. The USA is compelled to borrow as much- as  $ 1 billion daily from foreign lenders.

The  increase in poverty in the USA has even made President Trump have a rethink of its policies.  Instead of Free Trade, President Trump has decided that America is for the Americans and has decided to totally restructure its economy.

Similarly EU countries too face bankruptcy. Greece is totally bankrupt and lives on loans from the EU. The people have had Austerity poured down their throats from 2010 and the people today suffer from unemployment and low incomes.

Milton Friedman  of the Chicago School of Economics, the author of the Free Trade- Liberalization Model of the IMF died recently having taken all Third World countries and even some European countries to their graves.

All these countries have followed the Neo Liberal –Free Trade Model. In the case of the Developing Countries(Third World) this Model also brought riches in billions  from the Third World to the Developed Countries. Yet that transfer of riches was insufficient to sustain the economies of the developed countries like the US and European.

Yet the IMF holds on to this Neo liberal-Free Trade Model, like flogging a dead horse. It is upto the IMF to understand their mistake and provide a growth strategy. The single strategy used by the IMF is to impose Austerity, which only brings about a transfer of riches from the poor in that country to the rich. The rich are supported as their life style and mode of living- purchase of luxury cars and luxury items, travel, sending their offspring for foreign education and holidays all create a flow of foreign exchange from the Third World countries to the Developed Countries.

This is not a Model for Development; instead it is a Model designed to make the Third World countries indebted , create the flow of foreign exchange from the Third World  countries to the Developed Countries, in short to make the Third World countries ‘colonies’ of the Developed Countries.

Isn’t it sad that the IMF despite its failures over the past four decades has failed to find an algorithm to bring about growth and prosperity. My book: How the IMF Sabotaged Third World Development(Kindle) documents this story of how the Third World countries were gradually brought under the IMF  control. Their Model of Development actually enriched the Developed Countries at the cost of Third World Countries.

As far as economic development  is concerned, the IMF Model of Development is not functioning in the interests of the Third World countries. Already the ruler of Ecuador has decided not to pay up  the loans, because the loans were non developmental.

It is upto our leaders to ensure that loans are obtained for development purposes only and not used to provide for luxury living, the import of luxury cars and luxury travel all for  the rich.

Following the IMF Model of Development will soon takes Third World countries  to their grave. The Developed Countries can somehow or other survive because they can print hard currency.

The IMF has to admit that their Model of Development has totally failed. The IMF should actively search for a development paradigm that will bring about growth, incomes to the people and alleviate their poverty.

Garvin Karunaratne, Ph.D. Michigan State University

Former SLAS, Government Agent, Matara

4 th April 2017


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