The Recovery of the Ailing Global Economy: The Predicament of Sri Lanka
Posted on July 1st, 2009
By Garvin Karunaratne Ph.D..Michigan State University Formerly of the SLAS, Government Agent, Matara District
A few months have passed since the global economic system crashed and action taken to date has failed to arrest the problem. Justin Lee, the Chief Economist and the Vice President for Development Economics at the World Bank has voiced himself as to what has to be done to put the global economy on the right track:
We need bold policy measures including restoration of domestic lending and global capital flows (Daily News, Sri Lanka, 25/06/09)
The International Labour Organization(ILO) advocates the open market system and denounces any form of protectionismƒÆ’-¡ƒ”š‚ that impedes the sustainability of any enterprise.(ILO: Global Jobs Pack: Daily News, Sri Lanka, 25/06/09)
ƒÆ’-¡ƒ”š‚ Many attempts have been made to arrest the tide of failures in the economies of the Superpowers.ƒÆ’-¡ƒ”š‚ . Financial institutions of repute that were provided with massive tranches of funds to restore their lost finances haveƒÆ’-¡ƒ”š‚ acted in a hilarious manner byƒÆ’-¡ƒ”š‚ financing give away packagesƒÆ’-¡ƒ”š‚ to their staff- the very staff whose negligence caused the economic crash.. Some institutions have even spent funds to buy foreign banks.ƒÆ’-¡ƒ”š‚ The money was intended to restore domestic lending, which did not happen. This is a malaise in many Developed Countries like the USA and the UKƒÆ’-¡ƒ”š‚ ƒÆ’-¡ƒ”š‚ We have seen the automobile giant General Motors filing for bankruptcy, with a loss of jobs. Lee has hit the nail on the head in stating that domestic lending has to be restored at all costs. That is all to bring the financial system in the Superpower countries to order.ƒÆ’-¡ƒ”š‚ Already the USA has gone ahead with measures of protectionism with the aim of boosting production.
Though the ILO states that protectionism has to be avoided,ƒÆ’-¡ƒ”š‚ unless protectionism is allowed at country level- i.e. at the level where national planning and national budgetingƒÆ’-¡ƒ”š‚ is done, an economy cannot be developed. President Bush clampedƒÆ’-¡ƒ”š‚ a massive tariff of 30% onƒÆ’-¡ƒ”š‚ all steel imports to save the Steel Industry in the USA. Imposing restrictions on imports is the strategy that has to be used by any country to develop its assets, to find employment for its people and to bring about development. The poverty and deprivation so characteristic of manyƒÆ’-¡ƒ”š‚ countries is because the countries were not allowed by the IMF, the ILO and the World Trade Organization to take measures of protectionism to save their industries. It is good for the USA to clamp tariffs to save their industries and maintain people in employment, but Third World countries have to agree to allow free imports and desist from charging tariffs to save industries and jobs!
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As far as the Third World countries are concerned the IMF wasƒÆ’-¡ƒ”š‚ expected to put things right.ƒÆ’-¡ƒ”š‚ A few months ago over a trillion dollars were voted for the Third WorldƒÆ’-¡ƒ”š‚ by the G 20 Powers-$ 500 bn. for lending to theƒÆ’-¡ƒ”š‚ struggling economies, $ 250 bn. to boost world trade. $ 250 bn. for providing overdraft facilitiesƒÆ’-¡ƒ”š‚ for countries in dire straits andƒÆ’-¡ƒ”š‚ another $ 100 bn. to be provided to banks to lend to the WorldƒÆ’‚¢ƒ¢-¡‚¬ƒ¢-¾‚¢s poorest countries.ƒÆ’-¡ƒ”š‚ In the words of the G 20:the aim is to support growth in emerging market and developing countries by helping to financeƒÆ’-¡ƒ”š‚ counter cyclical spending, bank recapitalization, infrastructure, trade finance, balance of payments support, debt rollover and social support.
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A Reform of the IMF was also on the cards:
In addition to reformingƒÆ’-¡ƒ”š‚ our international financing institutions for the new challenges of globalization we agreed on the desireability of a new global consensus on the key values and principl es that will promote sustainableƒÆ’-¡ƒ”š‚ economic activity with a view to further discussion at our next meeting.
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There is no mention of the Structural Adjustment Programme of the IMF being changed. In factƒÆ’-¡ƒ”š‚ the recommendation of JustinƒÆ’-¡ƒ”š‚ Lee to bolster global capital flows pertain toƒÆ’-¡ƒ”š‚ investors moving their money to various countries of the world for investment- developing the assets of the Third World countries, making money on tax havens, which mean not paying any taxes to the countries concerned and taking away the profits back to the Developed Donor countries. The Third World asset is exploited and the riches taken away! The Third World country is the net loser. This is one ploy of the Donor Developed Countries to aggrandize wealth from operations in the Third World.
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In the craze for finding easy financeƒÆ’-¡ƒ”š‚ to meet the budget deficits Governments have had to increasingly depend on investors who bring in money to invest. It has been found that these investorsƒÆ’-¡ƒ”š‚ in keeping with their avowed aim of obtaining high profits, keep moving the money in ways that will increase profits. Moving their money at short notice has had a devastating effect. TheƒÆ’-¡ƒ”š‚ 1997 East Asian Economic Crisis was created by the ƒÆ’-¡ƒ”š‚ ƒÆ’-¡ƒ”š‚ sudden withdrawal of short termƒÆ’-¡ƒ”š‚ speculative foreign capital amounting to as much as $ 230 billion in a few weeks. Countries come to depend on the free flow of capital because they like to use that money to meet their commitments. The investors have different intensions- theirs is to make a quick profit- they move the money from market to marketƒÆ’-¡ƒ”š‚ depending on their own thinking as to where they can get a better return. When large sums of money that is invested in a country is moved- withdrawn from an economy, the economy of that country gets into a tail spin of bankruptcy and the value of its currency drops. The moved money is then brought back and re invested and it gains better value. In this system the net gain is to the foreign investor and the net loser is the country and its economy.(From Garvin Karunaratne: How the IMF Ruined sri LankaƒÆ’‚¢ƒ¢-¡‚¬ƒ”š‚¦ , Godages)
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Sri Lanka whichƒÆ’-¡ƒ”š‚ is at the advice of the IMF begging investors to come in should beware of the dangers involved.
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Though a strengthening of the IMF is on the cards, what is more important to realize is that the necessity today as far as the Third World countries is concerned is a thorough reform of the IMF policies enforced on the Third World countries.ƒÆ’-¡ƒ”š‚ In this I refer to the Structural Adjustment Program which was initiated in the early Seventies. The negative effect of this ProgrammeƒÆ’-¡ƒ”š‚ is most aptly summed up in the words of no less a personage than ProfessorƒÆ’-¡ƒ”š‚ Jeffery Sachs:
Western Government enforced draconialƒÆ’-¡ƒ”š‚ budget policies in Africa during the 1980sƒÆ’-¡ƒ”š‚ and 1990s. The IMF and the World Bank virtually ran the economic policies of the debt written continent recommending regimes 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 World Bank had first arrived on the scene with disease, population growth and environmental degradation spiralling out of control. IMF led austerity has frequentlyƒÆ’-¡ƒ”š‚ led to riots, coups and the collapse of public services.(From The End of Poverty)
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This is also supported by stalwart Professor Joseph Stiglitz, the former chief economist of the World Bank who states that ƒÆ’-¡ƒ”š‚ the World Bank chose modelsƒÆ’-¡ƒ”š‚ that led to wrong predictions, wrong policies and reall negative consequences.(From Stiglitz:ƒÆ’‚¢ƒ¢-¡‚¬ƒ¢-¾‚¢The Hospital that makes ou sickerƒÆ’‚¢ƒ¢-¡‚¬ƒ”š‚ New Internationalist March 2003)
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Even, The Wall Street Journal had thought it fit to comment:
The IMF drill is as follows:A Third World poor countr with a pegged currenc is working towardsƒÆ’-¡ƒ”š‚ taming its inflation. Instead of a growth formulae it gets the IMFƒÆ’‚¢ƒ¢-¡‚¬ƒ¢-¾‚¢s old austerity dosage which slows down the economy. The Banks begin to falter in paying their old debts.. The IMF recommends yet more medicine- evaluation making the Bank predicament and capital flight worse. The currency slumps and the banks are now in real trouble. Is this anyway to run an international monetary system?(22/02/2001)
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Today we areƒÆ’-¡ƒ”š‚ yet following the Structural Adjustment policiesƒÆ’-¡ƒ”š‚ dictatedƒÆ’-¡ƒ”š‚ to us by the IMF.ƒÆ’-¡ƒ”š‚ We have followedƒÆ’-¡ƒ”š‚ it since 1977 leading our country to a situation of high foreign debt, a slump in currency value, a failed production, high inflation and an import and sell economy which has ruined our economy. This was the legacy that the United National Party administrations left for us which binds and gags our countryƒÆ’-¡ƒ”š‚ to follow the IMF for ever.ƒÆ’-¡ƒ”š‚ India has come to our rescue today and has said that it will finance the $ 1.9 billion if the IMF refuses. India did not follow the IMF dictate of the Structural Adjustment Programme. Before we started following the IMF in 1977 Sri Lanka did not have a foreign debt, our currency was stronger than IndiaƒÆ’‚¢ƒ¢-¡‚¬ƒ¢-¾‚¢s .
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Let us get away from following the IMF Structural Adjustment Programme policies before it is too late.
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Let us see definite instances of what has happened to countries that had followedƒÆ’-¡ƒ”š‚ the IMF dictates and had got into high debt, with high inflation and loss of production which was met with imports- the predicamentƒÆ’-¡ƒ”š‚ to which the United National Party got our country in the period 1977 to 1995.
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Bolivia ƒÆ’-¡ƒ”š‚ was buried in debt by following the IMFƒÆ’‚¢ƒ¢-¡‚¬ƒ¢-¾‚¢sƒÆ’-¡ƒ”š‚ ƒÆ’-¡ƒ”š‚ Structural Adjustment provisions. In 1983, 116 pesos equaled a pound sterling. What happened in the words of Professor Jeffery Sachs:
50,000 pesos per dollar byƒÆ’-¡ƒ”š‚ June 1984,ƒÆ’-¡ƒ”š‚ about 250,000 poesos per dollar by December 1984 and 2 million pesos per dollar byƒÆ’-¡ƒ”š‚ July 1985ƒÆ’‚¢ƒ¢-¡‚¬ƒ”š‚¦ In the single year between July 1984 and July 1985 prices had risen by more than 3000%- thirty times(From The End of Poverty)
In my own words: ƒÆ’-¡ƒ”š‚ On an overall basis the drop in the value of the peso from 116 pesos to the pound in 1983 to 15.1 bolivianos in 2007, where a boliviano wasƒÆ’-¡ƒ”š‚ equal to a million pesos in conversion in 1987 amounts to a drop in value of 13,000,000 %.
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In the case of Turkey, the drop in the value of the Lira from 336 Lira to the pound in 1983 to 2,640,000 Lira to the pound in 2007 amounts to a drop ofƒÆ’-¡ƒ”š‚ 787,000 %.
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Both Turkey and Bolivia had free floated their currencies, had become indebted due to following the IMFƒÆ’‚¢ƒ¢-¡‚¬ƒ¢-¾‚¢s Structural Adjustment Programme, hadƒÆ’-¡ƒ”š‚ followed the freemarket economics of deregulation andƒÆ’-¡ƒ”š‚ free importsƒÆ’-¡ƒ”š‚ and were also dependent on investors.
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Sri Lanka can really learn a lesson from what has happened to other countries like Bolivia and Turkey. Now that Sri Lanka is in the dog house- with the IMFƒÆ’‚¢ƒ¢-¡‚¬ƒ¢-¾‚¢s stricture of no loans- a situation that has been there from 2005, if the investors pull out and destabilize us, we can see a deep gorge, a chasm that we cannot surmount.
Beware Sri Lanka. The only method open to Sri Lanka is to depart from the IMFƒÆ’‚¢ƒ¢-¡‚¬ƒ¢-¾‚¢s policiesƒÆ’-¡ƒ”š‚ of high interest, deregulation and freeƒÆ’-¡ƒ”š‚ imports. We have to get away from free floating our Rupee, commence fixing the exchange rate ourselves andƒÆ’-¡ƒ”š‚ not allow the foreign banks to control our foreign exchange. We have to get back the lost production base, control imports in the national interest and find employment for our people.
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We have little time to tarry on aimlessly hoping and praying for investors to come to our rescue. Remember the investors are really exploitors and they suck our assets dry. It is time thatƒÆ’-¡ƒ”š‚ we heed the Writing on the Wall andƒÆ’-¡ƒ”š‚ take charge of our economy.
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ƒÆ’-¡ƒ”š‚ Garvin Karunaratne, Ph.D.(Michigan State University
Formerly of the SLAS, Government Agent, Matara District
30 th June 2009
July 2nd, 2009 at 2:38 am
Very well said. Mr President should put his foot down and curb waste. There is no point in having a patriotic leadert when all around him are playing out the SL economy. He needs to say enough is enough and put the country on a war footing. People in the cabinet should not waste away the precious foreign exchange and expect the expat Sri Lankans to make contributions. They have other problems of their own and when they see the waste and mismanagement within SL, soon the offers will dry up.
There is no point in NGO bashing if nothing is done about it. If they are only helping the LTTE cause, they need to be exposed and got rid of. If waste can be curtailed, more money could be saved to do lots of things.
You cannot ask everybody to chip in when people close to the power are carrying on as if there is no tomorrow. There are news items about huge cut-outs put out by people of the calibre of Mervyn Silva. Who pays for them. I bet it is not coming out of his own account. It is the public purse that they are using. Unless this stops, SL will need the help of all gods. You can sell the success of the war up to a point. After that everyone will be fed up. What happens then?