A Message for our Higher Education Institutes
Posted on October 10th, 2017

by Garvin Karunaratne( Ph.D. Michigan State University)

When my first book exposing the sinister actions of the IMF: Micro enterprise Development: A Strategy for Employment Creation and Poverty Alleviation in the Third World: The Way out of the IMF Stranglehold was published in 1997, a full half a decade before the Argentina Crisis of 2002, very few believed that the IMF was at fault. It was everyone’s contention that it was the corruption and the ineptitude of the leaders of the countries that had caused the disaster that befelled their economies. Then the IMF and the World Bank were held in high esteem and no one doubted any advice coming from these two institutions established by the United Nations to steer the countries towards financial stability and development. In the Fifties and Sixties I was neck deep involved in development activities as a senior member of the Administrative Service of Sri Lanka and in actuality, then, both the IMF and the World Bank played a developmental role. Then there was no doubt whatsoever of their sincerity of purpose.

It is sad that they changed course from being developmental to become the cause for the ruin of the Third World countries. They did this by imposing the Structural Adjustment Program on them.

In 1995, economists Walden Bello, Shea Cunningham and Bill Ram stated:

“Structural Adjustment has failed miserably in accomplishing what the World Bank and the IMF tech- nocrats said it would do: providing growth, stabilize the external accounts and reducing poverty…. The SAP policy was successful in making a net transfer of financial resources from the Third World to the commercial banks of the West, $178 billion between 1984 and 1990.” (Third World Opposing View Points)

The United Nations’ Human Development Report 1996 states:

“The stabilization measures of the IMF aimed at reducing both budget deficits and trade deficits and usually involved cutting public spending, reducing wages and increasing interest rates. Restoring growth, an objective on paper was rarely achieved in practice. 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 peoples’ lives” (Human Development Report, 1996)

Through the imposition of Structural Adjustment Policies, the IMF and the World Bank succeeded in limiting the role of Governments to administer development programs. It policies of Free Trade, Free Import, liberalize foreign exchange, etc., actually restructured the economies to the benefit of the Superpowers. David Korten says of how the Superpowers snatched the debt crisis of 1982 to restructure the economies of the countries.

The US dominated World Bank and the IMF moved to restructure the economies of debt burdened Southern countries to open them for penetration by foreign corporations. The Structural Adjustment policies imposed, rolled back government involvement in economic life in support of domestic entrepreneurs, eliminated barriers to imports from the North, lifted restrictions on foreign investment and integrated southern economies more tightly into the northern dominated World Economy.”( Korten: When Corporations Rule the World, Berett Koheler, 2015

What we are seeing today is the full force of neocolonialism. In the words of Kwame Nukrumah, a great leader who had the foresight to sense what was happening: The essence of neocolonialism is that the State which is subject to it is in theory independent and has all the outward trappings of international sovereignty. In reality its economic system and thus its political policy is directed from outside.” (Neocolonialism) This book was published in 1965 and shortly afterwards in February 1966, Nukrumah was deposed. Nukrumah’s statement has come true because as stated by Jeffery Sachs:

By the start of the Twenty First Century Africa was poorer than in the late 1960s when the IMF and the World Bank had first arrived on the scene, with disease, population growth and environmental degradation spiraling out of control… IMF led austerity has frequently led to riots, coups and the collapse of pub- lic services.”(Sachs: End of Poverty)

Most of the Third World countries are today under the indirect control of the IMF. In fact the Minister of Finance in Ghana had admitted that they “we’re running the country but the budget is controlled by the donors.

What we are seeing today is that the sovereign countries of the Third World have been brought under the thumb of international institutions that are entirely directed by the Superpowers. As Jeremy Becher and Tim Costello have pointed out,

“International Economic Institutions like the IMF, and the World Bank, EU and GATT have developed powers formerly reserved for nation states. Conversely national governments have become less and less able to control their own economies.”

It has to be pointed out that critiques of the Structural Adjustment Program have dealt with particular aspects, but there has been no attempt to find a definite and complete solution. Even savants, specialists and Noble laureates like Joseph Stiglist and Jeffery Sachs offer no definite ideas as to how countries can get on their feet. They are good critiques, who fail to offer an alternative path. It is an easy task to critique but a forbidding task to offer a solution. Jeffery Sachs in working on the Structural Adjustment Programs in countries like Russia, Bolivia and Poland has only provided more loans to help the Governments to tide over difficulties. His “shock therapy” was to provide more loans that managed to halt the staggering inflation and the shortage of imported goods. Though on humanitarian grounds providing goods and arresting inflation is commendable, the countries had to face increasing debt and in facing the repayments they got into greater debt. This was no solution to the poverty, deprivation and the bankruptcy caused. It is ironical that both Stiglitz and Sachs once were on the payroll of the IMF, WB, and allied institutions to implement the dubious policies including the Structural Adjustment Program.

Many countries have tried hard to pay up the dues. As they were already indebted they had to seek further loans and raise foreign exchange on bonds, etc., to service the existing loans. They invariably fell further and further into debt.  This is the case of many African countries. In the case of Governments that have accepted liability and are attempting to comply with all the specifications of the SAP, agreeing to open up their economies more and more for foreign investment, the IMF has come up with the HIPC (Highly Impoverished Poor Countries Initiative) and MDRI(Multilateral  Debt Relief Initiative) by which the IMF treated their debt as cancelled. However this was done on the specific condition that the countries would open up their economies further for foreign investment as well as strictly following all the provisions of the SAP, which meant that although they started on a new sheet they inevitably fell into debt in a few years. For instance, Ghana which had its debt totally cancelled in 2005 became indebted to the extent of $28.5 billion by 2011. By 2015 Ghana was totally bankrupt. In short, both the HIPC as well as the MDRI does not offer any solution to the ills caused by the SAP.

What is important to realize is that though a small reprieve was given by the cancellation of debt the continuation of following the same policies of the SAP invariably led to the debt being built up again.

What is also of prime importance is to note that somehow the loans that are drawn are designed in a manner where the funds reaching the country on loan gets shunted back to the Donor Nations in the form of payments for consultancies, inspections, for expertise, liberal luxury imports, luxury travel, foreign education, etc. The funds thus get back to the Donor Community in a variety of ways and actually helps the economies of the Donor Countries. In fact John Perkins, working for a multinational that handled projects in collusion with the IMF and the World Bank has admitted to drafting Plans and Projects with fabricated and manipulated statistics which when implemented with loaned funds as aid, results in the funds being shunted back with profits to the Donor Countries in some form or other but leaving the country indebted to the extent of the loan. (Confessions of an Economic Hitman)

It is found necessary to take the bull by the horns and try to find an algorithm of policies that when adopted will enable the countries to get on their feet. In the annals of development history, there is only a single instance where a country emerged out of a financial crisis. In my words, “Malaysia was the first country to emerge out of  bankruptcy after the East Asia Financial Crisis of 1997 and this was achieved by following policies directly opposed to Structural Adjustment. This was done by strictly controlling the utilization of foreign exchange, relying more on the Public Sector and effectively controlling finances till development was achieved.” (Karunaratne; Success in Development). Malaysia effectively controlled foreign exchange. They even stopped foreign exchange allocations to students in foreign countries who had received allocations. This caused untold hardship and some students had to do menial work to subsist and some went back to Malaysia. However through strict controls the economy was brought back to stability.

An attempt has already been made by President Rafael Correa of Ecuador to stop servicing loans that were odious given for non-developmental purposes.

“Rafael Correa the President of Ecuador decided to default on its loans by claiming the loans as illegiti- mate and odious. He announced that his country would not be paying $30.6 million interest due on its 2012 global bonds after the Commission, appointed by him to look into odious loans, claimed that the debt had been illegally acquired by past administrations. The Commission revealed that traces of illegitimacy ran throughout much of the country’s $109 billion foreign debt load. In his words, ‘I could not permit continued payment of a debt that in any light is immoral and illegitimate.’”

In this case the method adopted by President Correa was to inquire into the basis of each loan, its purpose and to decide whether it was developmental or odious. It was found that the loans were odious and he declined payment. He was starting afresh, strictly controlling the economy and foreign exchange, leaving the old debt as odious and did not need to get paid.

The IMF has to admit that it sold a flawed economic system to the Third World countries in its Structural Adjustment Program (SAP). This has been proven again and again in respect of every country that has followed the SAP. The Research Papers in this compendium have proven beyond doubt the ridiculousness of the SAP which made the countries to live beyond their means, spending foreign exchange that they did not have and to meet the deficit with loans. The IMF also cannot refute the charge that in order to induce and encourage these countries to implement the SAP, the IMF gave loans with grace periods and low interest. This enticed the leaders in charge of the countries to accept the loans as they would not be burdened with the repayment, as they will not be in office by then. As shown repeatedly in this Compendium, the SAP contains the elements of an economic system that would lead the countries to become indebted in the process of servicing the loans as the loans were non developmental. This fact has been proved again and again in the writings of the United Nations and by the writings of researchers including Noble Laureates Professors Joseph Stiglitz and Jeffery Sachs.

The IMF has to admit defeat and has to agree to cancel all Third World debt in the manner in which the IMF has cancelled debt under the Heavily Indebted Poor Countries Initiative (HIPC) and similar measures. Simultaneously the IMF should actively build up an algorithm of policies that will if implemented get the Third World countries back on their feet to become self-reliant economies.

Many suggestions have been made in the Research Papers in this Compendium and the following is a summary. They are:

Countries should control their incoming foreign exchange. (According to the SAP, foreign exchange that comes in has been taken out of the control of the Countries)

The incoming foreign exchange is collected by the banks but its disposal has to be strictly controlled by the Central Bank of the Country on the following basis: allowing for essential imports and restricting the use for non essential tasks like foreign travel, foreign education, etc. Allocations for non essential items has to be allowed only when foreign exchange funds are available, and not supplemented by borrowing.

“Any country has to manage with its own resources. Foreign resources may be low but they have to be managed well to be spent on essentials and for investment purposes, not to be spent on unnecessary luxury imports and free foreign exchange allocations to the rich.” (Karunaratne: How the IMF Ruined SriLanka)

Countries should decide the exchange rate. Under the SAP and the concept of the Free Float, which is followed, the country has no right to fix the exchange rates. Instead, the exchange rate is supposed to be arrived at by the working of the law of supply and demand. However in actual practice it has been found that the banks that collect the foreign exchange hoard the currency they have collected and create a demand by not releasing it to the market, then they increased the price of the foreign exchange. As stated by Professor Steve Hanke when the Turkish Lira fell after its free float: “The only way is to abandon floating and install an orthodox curren cy board with a fixed exchange rate.”

Countries should not allow the devaluation of their currencies. This has to be avoided by development planning with effective Exchange Controls and ensuring that the foreign exchange intake can meet the demand. For this purpose exchange control is essential to ensure that the available foreign exchange is spent to get down essential goods and essential purposes as opposed to imports of luxury goods and allowing luxury travel, etc.

Countries should have two budgets, a foreign exchange budget dealing with the disposal of the incoming foreign exchange and a Separate Local Currency Budget to enable people to attend to local tasks that do not require foreign exchange. This dual budget system is nothing new. This was the method of national budgeting that was done in every Third World country since achieving independence till the IMF took over in the 1970s. This is very important when one considers the fact that in any development program, the foreign exchange requirement is only a small percentage of the total budget, which means that local currency can be used for most of the budgetary expenses. In many development programs, there is no foreign exchange requirement. On the contrary when a country does not have two separate budgets (foreign exchange budget and a local currency budget), no development work can be done because of the dearth of foreign funds.

Countries should commence development planning. Development Planning has to take into account the resources available and its potential for development. Development requires long term planning as well as short term planning. The Private Sector is not interested in long term planning because it takes long to recoup the investment and find a profit. The Private Sector always concentrates on short term investment like opening a Supermarket where a profit can be reached quickly even within six months. A country’s development requires long term planning, say for irrigation construction where the profit takes years to come in. In the case of crop development generally tree crops takes five years to come into bearing and some eight years to come to full bearing.

Countries should build up the commercial infrastructure of subsidies to enable producers to attend to commercial production as opposed to subsistence farming. Most countries of the Third World have populations that do not have the resources to invest. For instance, peasants have to be provided with agricultural loans to finance the cost of using high yielding varieties, fertilizer, irrigation pumps, etc. Premium prices have to be offered for their produce as otherwise they will not farm for an increased production. The countries have to develop agricultural loans, plans to buy the produce and establish cold stores to store and canneries to process the production. This commercial infrastructure to stimulate production has to be done by the Public Sector.

Countries should get away from the high interest policy. (The enforcement of high interest rates has killed the production base.) The SAP insists on a high interest rate. The interest should be at a reasonable level to enable entrepreneurs to get into production.

Countries should impose high tariffs on all goods that can be produced locally. This enables local production. Simultaneously there should be plans laid out to produce items locally: both in agriculture and industry. Follow import substitution as a policy and develop factories to make imported items locally. The concept followed is to get people working on manufacturing. Development to be on a dual basis by the Private Sector as well as the Public Sector. The SAP treats the Private Sector as the Engine of Growth. Even Professor Jeffery Sachs in his recent writings advocates action by the Public Sector to control and encourage activity by the Private Sector (The Price of Civilization). National Development is based on the principle of Service, while the Private Sector aim is to make a profit.

Cooperatives should be developed in competition with the Private Sector. The cooperatives will determine the cost of manufacture, keeping a small margin of profit. This will act as a deterrent to the Private Sector manufacturers keeping fantastic profits.

In developing industries, it is advisable to develop Community Cooperatives where the industries will be run by a combination of workers and community leaders because then the cooperative industry will remain within the community location. This will also enable stable development because the Private Sector as well as worker cooperatives can close down when their profits fail or are reduced. They can also move leaving their habitat for affluent pastures.

Countries should offer floor prices for all produce that is in demand and which is in short supply. This may amount to a subsidy. Countries should attend to have a direct or a cooperative mechanism to purchase vegetables and fruits in short supply and purchase around 10% of the production and offer the goods at reasonable prices in urban areas. This will effectively control inflation by ensuring that the Private Sector cannot keep a high margin of profit.

Countries should have Canneries in the producer areas to can produce. Canneries should also be established in towns to enable the produce that is not sold to be canned.

Countries should attend to imports of essential goods in competition with the Private Sector and sell the goods in Sales Outlets, keeping a low margin of profit, working in competition with the Private Sector to ensure that the Private Sector does not keep a high profit.

Countries should develop local industries.

Countries should attend to have development projects to offer employment to the people.

Imports have to be restricted.

Countries have to ensure that there is no poverty and deprivation among the people. This has to be done by enlisting the services of the people in industries and agricultural projects and not done by offering welfare payments for the unemployed. Countries should ensure that all essential goods are available at a reasonable rate to people.

Countries should ensure that there is work for all its citizens, in short there should be no unemployment.

In Vocational Training the concept of Training cum Creation of Enterprises has to be adopted. Vocational Training has been concentrated on in every country and the vast majority of the trained fail to find employment or to develop enterprises of their own. By fusing Vocational Training and Creation of Enterprises, any person who goes through vocational training can get guidance from the Vocational Training Center to establish an enterprise whilst in training. This was the criteria used in the Youth Self Employment Program of Bangladesh, designed and established by the author. This Program is the only successful employment program today, where beginning in 1982, by 2011 as much as two million youths were guided to establish commercially viable employment. It is a development program that has left its imprint on the sands of time.

In bringing about development specially in countries with large populations it is necessary to develop local institutions managed by the people where the people can discuss and debate the pros and cons of the tasks that have to be achieved and develop their abilities to attend to such tasks. This is in sharp contrast with the World Bank’s Training and Visit System of Agricultural Extension, enforced on the Third World countries since the Seventies which advises that Agricultural Officers should contact farmers direct and do not use the local institutions like cooperatives and rural development societies. The concept of extension officers contacting farmers direct is suitable for countries where there are few farmers and they have the wherewithal to work without institutional support. It is not suitable for countries where the number of farmers is legion. Working according to this dictate of the World Bank agricultural extension has effectively broken down simply because the officers do not use community groupings, like cooperatives and societies to contact the farmers. In the Comilla Program of Rural and reach full employment. This has also been the experience of the author when he implemented the Paddy Lands Act and attended to agricultural development in Sri Lanka before the World Bank Scheme was implemented. The development of peoples institutions like cooperatives is essential for development in any country where there are a large number of farmers. The provision of measures like agricultural loans to stimulate cultivation has to be organized through people’s institutions. There is no other way ahead.

In attending to extension work, concepts of Community Development and Non Formal Education have to be used to enable people to develop their abilities and capacities. In my words:

“To enable people to become partners in development it is necessary for community development and non formal education processes to be used in the planning and implementation of development pro- grams. This enabled the people to develop their abilities and capacities. As Professor Murray Ross said, ‘community development is the process by which the community identifies its needs and objectives, develop the will to work at the needs and objectives, finds the resources to deal with these needs and objectives, takes action to get them done and in doing so develop cooperative and collaborative attitudes and practices in the community’ (Ross 1967). It is through the use of Community Development techniques and Non Formal Education processes that people can develop their abilities and capacities and become self reliant.” (From Karunaratne: Success in Development)

It is necessary to get away from thinking that Foreign Investment is the key to development. Today foreign investment is being advocated by the IMF and the World Bank as the method by which the Third World countries can find foreign exchange. The countries are advised to open their resources for development by foreign investors who bring in their foreign investment and develop local resources. They work on tax havens and do not pay any taxes to the countries. In fact after their initial investment the investors get to a position where they sell water, power etc to local people and take away the profits forever. This is exploitation and not any form of investment that will enable a country to get on its feet. Foreign investment should be limited to areas where foreign expertise is needed for development and local expertise is not available. In respect of areas where local entrepreneurs can develop, locals should be offered tax havens and other subsidies for development. When local people bring about development their profits remain within the country, while foreign investors suck dry the countries and repatriate their incomes. They even curtail their ventures when they feel like and move to other countries where they find better returns.

It is sad to realize that though the Milton Friedman model of economics underlying the Structural Adjustment Program of the IMF has already brought about total economic disaster to most Third World countries, there is not a single seat of higher education- a university  that concentrates on the study of Friedman Economics. The universities in the Developed Countries greatly benefit from the Structural Adjustment Program in terms of enriching the Developed World at the expense of the Third World and also benefit from the droves of university students that come from the Third World. Though it is a drain on the foreign exchange of the Third World countries, this transfer of wealth happens to be the life line  that support the finances of  many universities in the Developed World. Some reputed universities in the UK  have been found to even reduce  the criteria requirements for admission of foreign students in an attempt to boost their income.  It is only a few individual professors like  Stiglitz, Sachs  and William Easterly  that attend to critique and that too in a disconnected manner  as perhaps they too do not want to topple the applecart that brings goodies to the Developed Countries.. The universities in the Third World  merely follow the universities of the Developed World. In the meantime  the Friedman Economics of Structural Adjustment  continues to decimate the Third World countries to the depths of indebtedness confining their billions of people to poverty and deprivation. It is time that a few universities of the Third World undertake  research and teaching the Friedman economics  and make a sincere attempt  to grapple with the problem  and find a solution. This is a sacred task that lies ahead.

( An extract from my book: How the IMF Sabotaged Third World Development( Kindle & Godages)

2 Responses to “A Message for our Higher Education Institutes”

  1. aloy Says:

    As the South American leader correctly identifies this is the crux of the matter:

    In this case the method adopted by President Correa was to inquire into the basis of each loan, its purpose and to decide whether it was developmental or odious. It was found that the loans were odious and he declined payment. He was starting afresh, strictly controlling the economy and foreign exchange, leaving the old debt as odious and did not need to get paid.”

    Lots of loans are being given by World Bank, ADB etc. for countries just to get them indebted. They give loans for purposes such as Capacity Building, Consulting Work and various other activities that does not bring tangible results. They only bring so called foreign expert who only enjoy holidays with their families in countries like SL while staying in luxury hotels and our foreign exchange earned mostly by our poor housemaids has to be used for repayment. These loans or aid runs into $25- 50 million range., like the one that has been recently approved by ADB. These are completely useless and should not be paid back. When I was working in RCDC (under RDA) in late 80s I have seen one expert who sat in my office and was dabbling with the computer all the time without doing any useful work.

  2. aloy Says:

    World Bank is doing some thing akin to pithy Sinhala saying “Horage Ammagen pena ahanawa wage” by issuing statement from their head office regarding the SMEC case, saying they have referred the matter to Sri Lanka government.
    World Bank has all sorts of laudable objectives, but in reality they do not follow any of them. Some time ago there was a tender for the consultancy work for the design of pump stations for Colombo area flood prevention project known as MCDUP. It was only a pre-qualification exercise. The objective was to divert the flood waters coming from Kotte area without allowing it to come to Colombo. Having worked in Similar projects overseas and also considering the fact that one of the objectives of World Bank is to allow local participation I teamed up with a New Zealand company with such experience and tendered for it. They did not even acknowledged the receipt of our tender. I had spent a lot of money and time on it and left the country disgusted. I know they have bungled that project with diverting a big chunk of the loan on unnecessary work like roads, renovating old building and perhaps even garbage collection done by Gota.
    World Bank should explain how they spent the funds and the role played by the Danish consultant. They should blacklist them if they did not perform up to expectation.

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