{"id":97663,"date":"2020-01-12T15:12:40","date_gmt":"2020-01-12T22:12:40","guid":{"rendered":"http:\/\/www.lankaweb.com\/news\/items\/?p=97663"},"modified":"2020-01-12T15:12:40","modified_gmt":"2020-01-12T22:12:40","slug":"playing-poodle-to-the-imf-is-not-the-way-ahead","status":"publish","type":"post","link":"https:\/\/www.lankaweb.com\/news\/items\/2020\/01\/12\/playing-poodle-to-the-imf-is-not-the-way-ahead\/","title":{"rendered":"Playing poodle to the IMF is not the way ahead"},"content":{"rendered":"

By Garvin Karunaratne<\/em><\/span><\/h2>\n\n\n

It is heartening to note\nthat our new Governor of the Central Bank had understood that the IMF\u2019s\nneoliberal economics that we have closely  followed from 1978, has\nmiserably failed.(Sri Lanka\u2019s new chief flays Neo Liberalism”: Economy\nNext 28\/12\/19) <\/p>\n\n\n\n

Following the IMF since\n1978- for over four decades, has made us become a heavily indebted country, a\nsituation from which there is no return. My two books, How the IMF Ruined\nSri Lanka and Alternative Programmes of Success(2006: Godages) and \nHow the IMF Sabotaged Third World Development(Godages & Kindle:2017) \nwhich happen to be the only books that are critical of the IMF\u2019s\nteachings that also provide details of how salvation can be reached may be of\nservice. In fact my guru, Professor George Axinn, Professor of International\nDevelopment at Michigan State University  in his introduction to my\n2006 book: How the IMF Ruined Sri Lanka wrote: “It is hoped that this\ntimely book  will enable international organizations \nto arrest the trend of failures.\u201d<\/p>\n\n\n\n

In detail, in the late\nSeventies, the IMF took on the new role of prescribing the  path to be\ntaken by the Third World countries to run their economies. This was the\nStructural Adjustment Program the IMF  imposed on  every country that\nsought financial help. In the Early Seventies  the Oil Sheiks increased\nthe price of oil threefold and many countries had to flock to the IMF for help.\nThe IMF laid down conditions that the countries had to follow if they are to\nget financial assistance and following the neoliberal policies was insisted on.<\/p>\n\n\n\n

. The IMF was the\ninstitution established  by the United Nations to help and guide all\ncountries in  financial matters and no one questioned what the IMF did.<\/p>\n\n\n\n

Since gaining\nindependence  the Third World Countries had to manage their finances. The\nincoming foreign exchange,  mainly from exports, was carefully\nhandled and spent with great care, for essential goods and items that were\nrequired for national development. I speak through sheer experience. I was once\nin charge of allocating foreign exchange for small industrialists in Sri Lanka.\nWe registered them after inspection where we carefully looked into what they\nproduced, whether it was required for our country.  In case their\nproduction required any item imported- raw material or machinery, an allocation\nof foreign exchange was allowed. Anyone could apply for foreign exchange for\ntravel or imports. Each case was looked into in detail by the Controller of\nExchange of the Central Bank. No allocation of foreign exchange was made for foreign\nstudies, unless the study could not be done in the country or the study was\nrequired for national development. A budget deficit was not heard of. A small\ndeficit in any year had to be covered in the next year. It was a strictly\ncontrolled situation because the country had to manage with the foreign\nexchange it had. We had no other option whatsoever.<\/p>\n\n\n\n

Countries had  two\nbudgets, a Foreign Exchange Budget and a Local Currency Budget. The foreign\nexchange  budget had to manage all our foreign expenditure, within the\nincoming foreign exchange while the Local Currency Budget was managed with tax\ncollection supplemented by printed local currency,<\/p>\n\n\n\n

The IMF Model- the\nStructural Adjustment Programme, liberalized the use of foreign exchange.\nThe IMF  prescribed that  the countries should  allow anyone any\namount of foreign exchange  for everything-for luxury travel, for\nimporting anything, for foreign studies and advised the countries to raise\nfunds by privatizing State assets and also by borrowing foreign exchange if the\ncountry could not meet the demand. The IMF initially, gave loans at low\ninterest and even gave periods of grace, when no repayment was charged. This\nhelped the countries, and the leaders did not care about borrowing because they\nmay  not be in charge when the loans have to be repaid.<\/p>\n\n\n\n

Even a small commercial\nentrepreneur,  a sweets peddler on the street, will know that this Model\nof extravagant spending, without matching the expenses to what is available is\na guaranteed recipe for disaster, but the IMF bluffed its way through, by\nretaining the likes of erudite professionals like Stiglitz and Sachs, with whom\nno one could ever argue and win.<\/p>\n\n\n\n

The IMF laid down\nvarious conditions that had to be followed.<\/p>\n\n\n\n

The conditions laid down\nwere carefully decided to help the Developed Countries. Paul Volker tells us of\nhow the conditionality was decided.  <\/p>\n\n\n\n

As\nChairman of the Federal Reserve ,  along with administrative colleagues,\nmajor foreign Central Banks and especially the IMF, could arrange stop\ngap  official financing and set out appropriate conditions  for the\nheavily indebted borrower countries (determined) out of our common concern\nabout threats  to the American  and the global banking system\u201d(From Banker\nto the World)<\/em><\/p>\n\n\n\n

The funds obtained on\nloan were actually used to pay the debts and because the debts were to the IMF\nand financial institutions of the Developed Countries. Thus the foreign\nexchange that came in was shunted back  with profits (the interest), back\nto the Developed Countries.  However the country\u2019s books recorded the loan\nas a debt and this is the how the foreign debt has ballooned.<\/p>\n\n\n\n

Imports were not to be\ncontrolled.<\/p>\n\n\n\n

The incoming foreign\nexchange was to be collected by the banks and to be used for imports and\npayments. The Government provided a list of items which should not be imported.\nThe banks were to decide the exchange rate at which they would buy and sell the\nforeign exchange that came into the country. It was no longer to be controlled\nby the Government. It was supposed to be done by the process of supply and\ndemand, but because the relaxed use of foreign exchange  caused a great\ndemand, when the supply was inadequate, the local currency was inevitably\ndevalued. Devaluation meant that all exports were discounted to the\namount of the devaluation. In 1978 Sri Lanka devalued the Rupee by 101%. (Rs.\n15.70 to Rs. 31.50)  This devaluation meant that our exports were sold at\nhalf price \nwhile we had to pay double-101% more for imports.<\/p>\n\n\n\n

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

The Private Sector was\nenthroned as the engine of growth and the Public\nSector  activities were constrained. The problem is that the aim of the\nPrivate Sector is to gain the maximum profit while the aim of the Public Sector\nis the development of the Country.<\/p>\n\n\n\n

The commercial\ninfrastructure that the country had built to enable development had to be\nabolished. This included the \nguaranteed price scheme for paddy,  loan schemes to spur production\nand these had to be abolished. In Sri Lanka this also included the Marketing\nDepartment that offered high prices for vegetables and fruits and\nsimultaneously conducted sales at fair prices to consumers through a network of\nsmall shops to avoid inflation. The aim of the Marketing Department was to\nbreak even and therefore kept a margin of around 15% to cover cost of transport\nand wastage, while the Private Sector traders kept a margin of 100%. This\nScheme helped the producer because a price higher than what was paid by traders\nwas offered to producers. Simultaneously the produce was sold at cheap rates to\nconsumers in cities,  at Fair Price Shops. This effectively\ncontrolled inflation.  The Marketing Department also ran a\nCannery that purchased stocks of fruits and produced jam, food\npreparations  and juice, making the country self sufficient thereby saving\nforeign exchange spent for imports.  There was the Cooperative Wholesale\nEstablishment that purchased essential items abroad and sold keeping a low\nmargin to avoid importers charging high prices. <\/p>\n\n\n\n

The Small Industries\nDepartment imported cotton yarn for distribution to textile makers. It also \nguided handloomers to get into production. It  provided expertise\nfor cooperative powerlooms to make fabric. The Department had a Research Unit\nat Velona to help the powerlooms. Thus Sri Lanka had a developed textile\nindustry. We were self sufficient in producing all our textiles. <\/p>\n\n\n\n

This entire commercial\ninfrastructure necessary for national development was abolished at the instance\nof the IMF on the grounds that the Public Sector should not deal with commerce.\nThis was inimical for development.<\/p>\n\n\n\n

The IMF recommends that\ncountries should obtain Foreign investment.\nCurrently the Third World Countries  are bending backwards to entice\nforeigners to invest in Sri Lanka..  Investors come in search of profits.\nOne area of Foreign Investment is Water.  Opening up water services\nfor investors mean that foreign companies come in  establish water storage\nand purification systems and sell water to the people. They(foreign companies)\ncollect profits for ever. This is the process set up by the IMF  for\ncapital(foreign exchange ) to flow back from the Third World  to the\nDeveloped Countries.  Water services and purification systems are simple\nwell known devices that can be easily set up by local entrepreneurs, but the\nlocals are not provided with inducements  like tax haven periods and loans\nat reasonable interest to get into business. What has happened when foreign\ninvestors invest in water is that the local resource of water too has been\nconverted to foreign exchange to flow from Third World countries to the\nDeveloped Countries!<\/p>\n\n\n\n

Third World countries\nhave enticed McDonalds,  Pizza Hut and such Multinationals to come in.\nThey bring in a small sum of foreign exchange initially to establish their\nbusiness. They  get into local trading in the local\ncurrency, but take away the profits in foreign currency for ever without paying\nany taxes. It amounts to a net loss of our foreign reserves. <\/p>\n\n\n\n

Foreign companies\ngetting into trading in local Rupees \u2013 like Uber etc. also amounts to a net\nloss of our foreign exchange as though they calculate profits in Rupees they\ntake away their profits in foreign currency. One of the latest inroads is hotel\nbookings by foreign companies over the internet. Hotel bookings done insist on\npayment in Rupees to the hotelier, but the internet companies gets fifteen\npercent of the payment paid to them in foreign currency. Again this goes from\nour reserves. It is sad that our Central Bank fails to even understand how our\nforeign reserves are being robbed by these foreign investors.<\/p>\n\n\n\n

Overall all  the\neconomies of the Third World got restructured by the IMF\u2019s Structural\nAdjustment Programme and foreign exchange flowed from the Third World Countries\nto the Developed Countries.<\/p>\n\n\n\n

Tremendous \nfunds  were sent out of the Third World countries to the Developed\nCountries. The debt service alone flowing from Developing Countries to the\nDeveloped Countries amounts to $ 600 billion annually. This amounts to five\ntimes the Aid budget. The WTO\u2019s  Agreement on Intellectual Property\n(TRIPS)  collects $ 60 billion annually. (Jackson Hickel: \u2018Aid in Reverse:\nHow Poor Countries develop Rich Countries\u2019, in Global\nPolicy(newleftproject.org)<\/p>\n\n\n\n

Thus as far as Third\nWorld countries are concerned foreign investment bore a negative result.<\/p>\n\n\n\n

On the whole every\naspect of the IMF’s Structural Adjustment Programme  caused\npoverty in Third World countries  and created a situation where foreign\nexchange flowed from the Third World back to the IMF and the Developed\nCountries.<\/p>\n\n\n\n

Milton Friedman  of\nthe Chicago School of Economics, the author of the Free Trade- Liberalization\nNeoliberal Model of the IMF died recently having taken all Third World\ncountries and even some European countries to their graves.<\/p>\n\n\n\n

All these countries have\nfollowed the Neo Liberal \u2013Free Trade Model. This Model also brought riches in\nbillions  from the Third World to the Developed Countries. <\/p>\n\n\n\n

Yet the IMF holds on to\nthis Neo liberal-Free Trade Model, like flogging a dead horse. It is upto the\nIMF to understand their mistake and provide a growth strategy. The single strategy\nused by the IMF is to impose Austerity, which only brings about more poverty in\nthe country. The rich are supported as their life style and mode of living-\npurchase of luxury cars and luxury items, travel, sending their offspring for\nforeign education and holidays all create a flow of foreign exchange from the\nThird World countries to the Developed Countries.<\/p>\n\n\n\n

This is not a Model for\nDevelopment; instead it is a Model designed to make the Third World countries\nindebted , create the flow of foreign exchange from the Third World \ncountries to the Developed Countries, in short to make the Third World\ncountries \u2018colonies\u2019 of the Developed Countries.<\/p>\n\n\n\n

Isn\u2019t it sad that the\nIMF despite its failures over the past four decades has failed to find an\nalgorithm to bring about growth and prosperity. My book: How the IMF\nSabotaged Third World Development(Kindle) documents this story of how the\nThird World countries were gradually brought under the IMF  control. Their\nModel of Development actually enriched the Developed Countries at the cost of\nThird World Countries.<\/p>\n\n\n\n

As far as economic\ndevelopment  is concerned, the IMF Model of Development is not functioning\nin the interests of the Third World countries. Already the ruler of Ecuador has\ndecided not to pay up  the loans, because the loans were non developmental.<\/p>\n\n\n\n

It is upto our leaders\nto ensure that loans are obtained for development purposes only and not used to\nprovide for luxury living, the import of luxury cars and luxury travel all\nfor  the rich.<\/p>\n\n\n\n

It is not surprising that\nthe neoliberal policies imposed on Sri Lanka by the IMF has resulted in our\nhaving accumulated a foreign debt of some $ 55 to 60 billion, a debt to service\nwhich our country has to pay $ 4.8 billion in 2020.<\/p>\n\n\n\n

The solution<\/p>\n\n\n\n

In view of the fact that\nforeign direct investment has today a negative effect on our foreign resources,\nthe only option available to the Government is to insist that where the profit\ncomes from trading in the local currency, the profit cannot be taken away in\nforeign currency. In the days before the IMF introduced its Structural\nAdjustment Programme, the USA had to collect payments for the supply of food\nunder the PL 480 in local currency. . Then the USA offered \nthis money to US agribusiness firms at below market interest.(Wessel\n& Hantman: Trading the Future) The Government has to understand the\nbasic fact that  foreign investment brings a negative\nresult to our own foreign reserves in case the investors trade in the local\ncurrency.<\/p>\n\n\n\n

The only path available\nto the Government is to follow import substitution, where we ourselves produce\nwhat we import and stop imports. We save the foreign\nexchange spent for imports and also find incomes for workers in the process.\nThis has to be done on a massive scale. Our country has a great deal of experience\nin handling import substitution type of  industries. We hand a\nMarketing Department Cannery that was able to make Sri Lanka self sufficient in\nall food preparations, fruit juice and jam. It would be of interest to note\nthat self sufficiency was achieved within three years-1955 to 1958. Once we\nproduced around fifty percent of our Paper requirements. During the Divisional\nDevelopment Councils Programme of Mrs Bandaranayake in 1971-1977 we established \nmany successful industries. There was a Paper Making Industry\nestablished in Kotmale, a Mechanised Boat Making Industry was established at\nMatara. \nThe Crayon Factory established in Morawaka is well known for its\nsuccess. The art of making Crayons was unearthed at the Rahula College Science\nLab at Matara after  three month long experiments under my\npersonal direction. A crayon is a sophisticated product and if we could have\nproduced crayons and successfully marketed it, which we did achieve, we can be\ndead certain of being able to spearhead a programme of import substitution.<\/p>\n\n\n\n

That to me is the only\nmethod of economic development available to us.<\/p>\n\n\n\n

Over to our new leaders.\nHope the message in this Paper reaches our leaders.<\/p>\n\n\n\n

Garvin Karunaratne<\/p>\n\n\n\n

Former G.A. Matara<\/p>\n\n\n\n

Author of How the IMF\nRuined Sri Lanka & Alternative Programmes of Success(Godages) 2006 &\nHow the IMF Sabotaged Third World Development(Kindle & Godages)2017<\/p>\n\n\n\n

13\/01\/2020<\/p>\n","protected":false},"excerpt":{"rendered":"

By Garvin Karunaratne It is heartening to note that our new Governor of the Central Bank had understood that the IMF\u2019s neoliberal economics that we have closely  followed from 1978, has miserably failed.(Sri Lanka\u2019s new chief flays Neo Liberalism”: Economy Next 28\/12\/19) Following the IMF since 1978- for over four decades, has made us become […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"closed","sticky":true,"template":"","format":"standard","meta":{"footnotes":""},"categories":[57],"tags":[],"class_list":["post-97663","post","type-post","status-publish","format-standard","hentry","category-by-garvin-karunaratne"],"_links":{"self":[{"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/posts\/97663","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/comments?post=97663"}],"version-history":[{"count":0,"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/posts\/97663\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/media?parent=97663"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/categories?post=97663"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/tags?post=97663"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}