By Garvin Karunaratne, Ph.D. Michigan State University.
Professor Ricardo Hausmann of Harvard, Sri Lanka’s Economic Advisor, has come up with a remedy to boost economic development.
Sri Lanka can fast-track growth, diversify exports and create new jobs by reforming immigration laws to permit know-how and skills to enter the country:…To get there, Sri Lanka will need to open up for more inflow of foreign know-how the way all prosperous countries have done already. This means more FDI, more return diaspora and higher inflow of foreign workers.”(EconomyNext)
If by streamlining immigration laws growth can be brought about it will be a simple solution. We have seen what Singaporean experts enlisted to our Central Bank caused- they pilfered billions of funds not from a small commercial enterprise but from our Central Bank, the one economic authority that was charged with running the entire economy.. They greased the palms of Ministers and many others including Members of Parliament to enable them to pilfer billions from the Treasury and also to silence them. The chief is now on the run being chased by Interpol.
Enticing expertise from abroad has enhanced corruption. Sri lanka has had its own administrators who can easily handle all affairs if they are put in charge. Sri Lanka was the first country to find and use high yielding varieties of paddy. That was in 1954, well before 1960 when the IRRI ( International Rice Research Institute) was established. Sri Lanka managed its economy since reaching independence in 1948 till 1977 without falling into debt. The Gal Oya Development Project, involving building a very large reservoir and developing thousands of acres was entirely done with funds belonging to Sri Lanka.
The history of development since gaining independence is revealing:
The Third World countries that achieved independence in the Twentieth Century did muster their resources and commence development activities in agriculture and industry aimed at self sufficiency mainly through import substitution and fairly succeeded. The Western Developed Economies felt the pinch of this because they could not sell their manufactures. The Superpowers had also lost the wealth they got when these countries were colonies. The Superpowers came to face stagflation, a combination of unemployment and inflation and manufactured products piled up due to lack of buyers.
To face this situation the Developed Countries came up with the neo liberal economic policies propounded by Professor Milton Friedman where they developed the Structural Adjustment Programme by which the Third World countries were opened up for the manufactured products of the Developed Countries. People were to obtain foreign exchange very freely for foreign travel, sending their children for foreign studies etc. Import Controls were lifted and foreign exchange was freely allowed. The money was used for luxury living and debts piled up. The deficits of foreign exchange were met with loans from the IMF. All loans were given with conditions. These conditions were determined to enhance the economies of the Developed Imperial countries as admitted by Paul Volker, the Chairman of the Federal Reserve of the USA. In his words, As Chairman of the Federal Reserve I along with administrative colleagues, major foreign Central Banks and especially the IMF could arrange stop gap official financing and set out appropriate conditions ….. growing out of our common concern about threats to the American and the global banking system” This is quoted from the Introduction Paul Volker wrote for Banker to the World by W.R.Rhodes.” Thus the conditions underlying the IMF’s Structural Adjustment programme was actually to look after the Imperial Economies. It was to structure our Third World economies to contribute to bolster the Imperial Countries…..These loans at first came with generous low interest terms and the leaders were not that concerned as loans came with grace periods of no payment. Further the policies imposed by the Structural Adjustment Programme included a high interest rate policy to locals which made local entrepreneurs give up manufacturing, leading to increased imports from Developed Countries. The local currencies were taken out of the control of the countries and free floated. This meant that the Markets and Banks took control over the foreign exchange that came in. Instead of the Government fixing the exchange rates, the banks fixed their own exchange rate. In actual fact it has been proved that in Sri Lanka the foreign banks did hoard the foreign exchange they had collected and thereby increased the value of the dollar. This did happen on 21/1/2001 when the two State Banks had to pay a large oil bill and they did not have sufficient foreign exchange to meet it. They went hat in hand to foreign banks when the foreign banks increased the value of the dollar from Rs 85 to the dollar to Rs. 115 to the dollar forcing the State banks to buy at the higher rate. In this case actually the foreign banks caused a devaluation of the local rupee. The Central Bank issued a statement that they controlled only the local currency. It is important to note that even the legitimate hard earned foreign exchange that comes in to a country is made a commodity that can be exploited to make profits.”
Let us look at Tanzania. In Cheryl Payer’s words, Tanzania was advised to abolish the foreign exchange budgeting system… lift controls on imports and consequently by the end of 1978 Tanzania had only reserves for ten days worth of imports. Then the IMF imposed its Structural Adjustment reforms. Tanzania which had a stable elf reliant economy was broken down and brought to its knees”(From Payer: Lent and Lost)
This is the record of failure caused by the IMF and the World Bank that is revealed in the case of every Third World country.
. When countries were made bankrupt in the East Asian Financial Crisis of 1997-1998, the countries were provided with further loans- $ 43 billion to Indonesia, $ 7.2 billion to Thailand, $ 58 billion to South Korea. In every case the debt was rescheduled with additional conditions on the loans. The only country that came out without a hand out from the IMF was Malaysia, where Prime Minister Mahatir Muhammed brought in currency controls, import controls and saw to it that the economy became stable. He followed the opposite of the IMF’s teachings.
Unfortunately the IMF does not have any remedy to the countries that have become bankrupt. ” The IMF’s solution for the indebted countries was a new strategy called HIPC-(Heavily Indebted Poor Countries’ Initiative). by which they wrote off some debt, but in actual fact in writing off the debt the IMF compelled the countries to open their economies further, for more exploitation by investors. When the IMF forgave the debt of Ghana the new conditionality included forced privatization of water services and opening up agriculture for foreign companies..Though Ghana was given a reprieve of $ 4 billion in 2006, with additional conditionality by 2011 the foreign debt ballooned to $ 13.4 billion.”
Diversifying exports will need a long term plan to increase production, something that the IMF has more or less banned since activity in the economy by the State is taboo and classified as interference in the economic affairs according to the Structural Adjustment Programme of the IMF
Professor Hausmann advocates FDI- Foreign Direct Investment as the key to bring about development.
Perhaps it is my task to educate the learned professor about how FDI operates in the Third World. FDI though held as developmental to the Third World, in actuality, it is a method by which some foreign multinational brings in funds and establishes a commercial venture. Countries like Sri Lanka are full of ventures like McDonalds, Pizza Hut, Subway etc. They bring in some funds which is coveted by the country because it comes as foreign exchange, a boon the country’s coffers. This is invested in buildings etc. When the venture gets going it is trading in the local currency, importing most ingredients including paper cups, paper plates etc. with the country’s foreign exchange, trading and repatriating the profits again in foreign exchange. When the entire commercial venture is looked into it is found that with the influx of a modicum of foreign exchange at the initial stage, a commercial venture is established which will annually suck out profits, in foreign exchange. .
Another type of FDI is to bring in funds to establish a hydro electricity plant or a water purification plant, lease out land, get involved in construction and then sell the power or water to customers, collecting profits for ever. This has happened specially, in Bolivia and is happening again and again in Sri Lanka claiming foreign exchange annually, all created with a small investment.
This how the USA in 2007 earned as much as $ 99.1 billion from enterprises established overseas. All these ventures –eateries, water power and water distribution schemes are very simple devices that can be done by local entrepreneurs, but the Governments do not offer them the tax exemptions and facilities that are allowed to the FDI.
The IMF demanded that all activity by the Public Sector to enable development should cease and that the Private Sector should be adopted as the Engine of Growth. Let me briefly illustrate how the infrastructure for development that had been built up by the countries since gaining independence was closed down under the advice of the IMF.
What was really happening in the Third World was that countries were developing systems and ordering development, creating production both in agriculture as well as industry, creating employment for people, alleviating their poverty. The Governments controlled the process of development, created organizations that enabled development. In Indonesia, the Government created Bulog, an organization that helped paddy production and marketing. In Sri Lanka The Department for Development of Agricultural Marketing(Marketing Department) was created. The Marketing Department implemented a Guaranteed Price Scheme for cereals in short supply, which offered a premium price for paddy and cereals in short supply aimed at enabling producers to be assured of a reasonable price. The Department also established a Cannery, canning local fruits achieving self sufficiency in all fruit produce like fruit juice, jam etc. The local producers of fruit got a bountiful income alleviating their poverty on one hand while the country saved foreign exchange incurred on imports. The Marketing Department also had a Vegetable Purchasing Scheme, purchasing from the producer and selling to the consumer keeping a very low margin of fifteen percent to cover transport costs and wastage. This was an attempt to keep inflation in check as this Scheme competed with traders who normally kept a margin of 100%.
The Bulog of Indonesia as well as the Marketing Department had to be abolished under IMF advice.
(The author worked as an Assistant Commissioner for Marketing Development and the facts above are from sheer experience and not hearsay)
It would behove of Harvard and of Professor Hausmann to apply their knowledge and resources to bring an end to the ills that have befallen the American economy. The American economy is run with a massive debt of $ 18.8 trillion and the US economy is compelled to borrow $ 1 billion daily from foreign lenders.. It is a well known fact that in 2008, the American economy went into a tail spin due to the Sub Prime Mortgage Crisis, caused due to mismanagement of loans by banks- giving loans at 125% of value resulting in a total crash of the housing market in the USA. Homes were the bulwark investment of all Americans- they slaved and invested their incomes in their plush luxury homes equipped with swimming pools etc.,all to be decimated in values- the values dropped to very low levels even lower than the loans raised on them. This has yet defied a solution and the reasonable owners keep on paying their instalments supporting their loans while the homes are not worth half the loan. The brigands and ruffians have walked off the loans declaring themselves bankrupt. Foreclosures is the order of the day bringing homelessness to the Middle Classes. People now dispossessed of their homes, now live in cars.(The Hidden Homeless: Families forced to live in cars: NewsHub:13/05/2016) It would behove of Professor Hausmann and Harvard to try to find a solution to this economic fall out that has caused untold poverty to citizens of the USA. The USA has not been able to solve this crisis created by its own bankers even in a decade..
In the case of the Third World it is a man made disaster, caused by the IMF and its protégé the World Bank by imposing a system of neoliberal economics which was intended to bring about a flow of foreign exchange from the Third World countries to the affluent countries, mostly to the USA. The IMF succeeded in this task by milking dry the Third World countries and bringing them into debt. Debt is now the wonder armament that has created a colony of Third World countries where all their resources are sucked dry by the Imperial Countries. Now all countries have to dance to the tune of the IMF.
Professor Hausmann is requested to read Confessions of an Economic Hitman, by John Perkins where he admits that he, working for a US Multinational drafted plans for projects for countries like Equador, with fudged statistics, projects designed to fail and where the incoming funds (loans) were shunted back to the donors, mostly in the USA, leaving the country indebted to the extent of the loan. This book documents how the development effort of sovereign countries were sabotaged.
Today the ceding control over the incoming foreign exchange, a hall mark of the Structural Adjustment Programme of the Seventies whereby the foreign exchange that came into the country was taken out of the control oif the Government and handed over to the Banks and the Market Forces, has taken a further turn by the development of the internet. Multinationals have commenced controlling other resources of the Third World countries like Tourism. It is held by everyone that Tourism is a foreign exchange earner. No more. Tourists bring in some foreign funds that get changed at Money Changers who do not follow the procedures followed by banks. Money collected by Money Changers do not get into the coffers of the Government. Money Changers gain high profits by trading the funds that are collected. In addition, the hotel trade has been totally taken over by foreign Multinationals using the internet. They handle publicity, control hotel rates and charge a commission of some 15%. The modus operandi is for the payment to be collected by the hotel in local currency but the commission of 15% has to be paid to the internet Multinationals in foreign exchange. Here the commission paid in foreign currency takes place in a situation where not a penny has come in. It is actually controlling the foreign exchange that comes in, and causing a loss of foreign exchange to the country… It seems fairly likely that this inroad to control the resources of Third World countries will soon include other areas like the Sale of property. The Central Banks of the countries are at a total loss and the foreign debt of the country increases in ldeaps and bounds. It is my opinion that the only remedy left to the countries is to completely take over control of the foreign exchange that comes in, adopt strict currency controls and manage the economy.
It is an accepted fact that the economies of all Third World countries are bankrupt and are deep in debt, resulting in that they have to borrow to repay the debts. This scenario tends to increase the debts. By following in the footsteps lof the IMF- increasing FDI and opening up further as suggested by Professor Hausmann will only lead to aggravate the economic bankruptcy faced by the countries. Already Equador has refused to pay outstanding debts on the ground that they were odious- given for non developmental purposes.
The record of making all Third World countries bankrupt and become saddled with a massive foreign debt convinces anyone that the countries are on the wrong path.
The Third World countries have no alternative other than to stop following the IMF’s Structural Adjustment Programme and instead follow a different path of controlling the foreign exchange that comes in, develop systems of controlling the use of incoming foreign exchange in the interests of the country, have import controls and develop the infrastructure they one had to enable development. The interests of the country comes first in the manner of President Trump imposing a 25% surcharge on steel imports and a tax of 25% o all imports from China.
The Third World countries do have the ability and capability to achieve development, alleviate poverty and create production. This is nothing new. This was the manner in which all Third World countries were managing their economies till the IMF took over their countries in the Seventies. It is also nothing but getting back to Keynesian doctrine. Keynes advocated the use of fiscal and monetary policies to create development. In the pre Seventies Period when the countries followed Keynes, there have been major successes in achieving development- increases in production and alleviating poverty and following that path will bring about growth and all round development. For this they have to abandon FDI and instead embark on a massive programme of import substitution, creating jobs for the people, creating production in the process and also alleviating poverty. The Indonesian Bulog and the Marketing Department activity of Sri Lanka have to be re established along with other systems designed to increase production create employment and alleviate poverty.
In this connection the Comilla Programme of Rural Development, an attempt by the Government of Pakistan(then included Bangladesh) and the USA springs into importance. . In the annals of development history, the only successful attempt of the West to enable development in the Third World was the Comilla Rural Development Programme of Bangladesh. The Government of Pakistan wanted to find out the best and quickest method of bringing about economic development. Pakistan(Then Bangladesh was within Pakistan) handed over this task on a platter to the United States of America in the Sixties. The USA handed this task to its foremost Land Grant University, the Michigan State University, one of the Universities that did accomplish the yeoman task of bringing about the development of the Michigan State under the Land Grant University Programme. Half a dozen elite professors resided in the snake infested Kotwali Thana of the Comilla District for almost a decade, well funded by the Ford Foundation and fanned out daily aided by Dr Akhter Hameed Khan to find out how development can be brought about. They identified cooperatives as the modus operandi, not cooperatives run on involving the members once a year(as done today everywhere), but cooperatives where all members had to meet every week when the professors and officials met them, discussed and decided how production can be brought about. This was the base to plan development. The Cooperative system was bolstered with a Divisional Union of Cooperatives and all government offices were a part of it. They did away with village level workers and instead selected a farmer to function as a catalyst. The development was achieved by people’s participation- enhancing their abilities and capacities in handling development tasks, adopting new techniques of cultivation, handling creameries, tractor stations etc. This was done by following Community Development and Non Formal Education techniques. The achievement was phenomenal- doubling the production of rice, the staple crop, full employment and it created an oasis of prosperity in a country of poverty that lasts to this day seven decades later..It is necessary to state that though this record of development was achieved under the aegis of the USA by its Ford Foundation and a leading US University, the methods adopted successfully- cooperative development, work by the public sector was ignored by the IMF.
There are many successful development projects to talk of. Take Sri Lanka where I was a practitioner. In the Fifties and Sixties there was a Programme of Handloom and PowerLoom Textiles which enabled Sri lanka to become self sufficient in textile manufacture. The PowerLooms were run on cooperative lines and managed by the Divisional Secretaries. Some PowerLoom Textiles were coveted purchases even in London. In the Divisional Development Programme of Sri Lanka 1970-1977 there were many successful development projects. The Paper Making Project at Kotmale was a grest success. In Matara District under my direction a Mechanized Cooperative Boatyard making seaworthy fishing boats was established within three months. This was the first cooperative boatmaking industry which was an acclaimed success. We also established a Crayon Factory . My Planning Officer, a chemistry honours graduate unearthed the art of making fine crayons after three months’ experiments at a school laboratory. Thereafter the crayon manufacturing was commenced as a cooperative within three weeks and crayons were sold islandwide. This was a great success and this project became the flagship industry of the Programme.
I can also quote success from Bangladesh where as a Consultant I succeeded in obtaining approval to establish a Youth Self Employment Programme, in the teeth of opposition because the ILO had tried and failed to establish a similar programme. The self employment activities were established by youths who were being trained in various vocations. The Vocational training institutes that came under the Ministry of Youth were also charged with guiding the youths who wished to become self employed. The Lecturers of the Training Institutes and Deputy Directors of Youth were trained in the art of establishing enterprises and youths were guided intensively till they were commercially viable. Youth Workers became more economists and today ninety percent of the work of the Department of Youth Development is in guiding youths to be self employed. Beginning in 1983, by 2011, two million youths were self employed. It is an on going programme today, easily the largest and most successful employment programme the world has known. It is a programme that has stood the test of time. In the first five years, this programme was denied any funding because the Treasury thought the programme would fail with a loss. We found savings within training budgets to implement this programme.
This record of achievement convinces anyone that development can be achieved.
Over to Professor Hausmann, it is hoped that all the king’s horses and all the kings men at Harvard can at least help the citizens of the USA in their struggle to maintain their homes, their lifetime investment.
As far as the ailing economies of the Third World are concerned it would be great if the Professor could at least understand and stop the shrewd methods used to make the Thirds World yet contribute their legitimately owned foreign exchange, to bolster the
economies of the USA and the Developed World
It is upto an august body like Harvard to come to grips with why every country including the USA are facing bankruptcy. . A new paradigm for development has to be evolved. This is a sacred task and I feel priviledged to write calling for this to emerge to end world poverty.
(All quotes are from my book: How the IMF Sabotaged Third World Development; (Kindle/Godages) 2017
Garvin Karunaratne,
Ph.D. Michigan State University 17 th June 2018
Author of: How the IMF Sabotaged Third World Development, 2017, Kindle/Godages & How the IMF Ruined Sri Lanka & Alternative Programmes of Success, 2006, Godages
