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Features |
The economic predicament
of Sri Lanka
by Garvin Karunaratne |
Formerly of SLAS.
PhD,.Michigan State University
A protest in front of IMF headquarters
Today Sri Lanka is beset with two main problems. The first and
most important is the situation of the economy- the sliding
value of the Rupee, the ever increasing debt and the
increasingly unmanageable balance of payments deficit. The other
problem is the terrorist problem. An attempt has been made to
merge the two problems, which to my mind is not necessary. The
latter is purely an internal problem of a sovereign country,
not negotiable.
The economic problem of Sri Lanka has been man made and is of
recent origin. The country had a healthy balance of payments
record till 1977. In 1976 and 1977 the balance of payments was
recorded positive at 58 million $ in 1976 and 117 million $ in
1977. In fact the 1980 Annual Report of the Central Bank
states:
“After many years of disappointing performance Sri Lanka’s
balance of payments turned positive in 1977. Since then the
balance of payments has again turned adverse.”
It is interesting to note that from 1978 onwards the balance of
payments has been in the negative. It became 516 million $
negative in 1982, in barely five years of IMF Structural
Adjustment and now stands at a 1,000 million $. Sri lanka did
not become indebted till 1977. In that year the international
debt was in the region of 700 million $ and that too for
non-consumption development projects as compared with over 9,000
million $ today, mostly incurred for consumption purposes. The
value of the Rupee was Rs. 15.80 to the pound and Rs. 8.60 to
the US $, in 1977, which can be compared to Rs. 190.00 to the
pound and Rs. 99.90 to the $ today. This clearly points out to
a total mismanagement of the economy in the period after 1977.
These are indelible facts.
Something went really wrong after 1977 and the answer to the
economic problem of today- the inability to manage the economy,
the inability to manage the outflow of foreign exchange with the
incomes in foreign exchange, the inability to manage the economy
unless by extra borrowing or selling assets for a one off
payment like selling the laying hen, and the inability to stop
the sliding value of the Rupee, all point to the fact that the
economy has been totally mismanaged in the period after 1977.
Unless and until one can be certain as to what went wrong, one
will never be able to liberate the economy and get it on the
right track.
What happened in 1977 was that the new Government of President
Jayawardena listened to the IMF and the World Bank and did not
have second doubts about their advice.
One of the first voices that pointed out the flaws was the
SAARC Report of 1992:
The industrial countries, for the first time since World War
II are in need of markets for their products and services just
as their economies are made vulnerable by the international debt
crisis. So they have put into effect the Structural Adjustment
Programme… The main prescription of this SAP is therefore a
reduction in government expenditure which tends to fall
disproportionately on social services, government subsidies and
other forms of Safety Nets for the poor. This has often been
accompanied by devaluation, increases in the prices of public
utilities and import liberalisation. Studies of these
programmes show that they are regressive, that they adversely
affect the poor.
Till the Sixties it was the United Nations Organisations that
organised development. In the Seventies the World Bank and the
IMF usurped this task. It took over half a decade for the
United Nations to understand what was happening. The Human
Development Report 1996:
“The stabilisation 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 people’s
lives”,
It did take a long time for the World Bank to understand that
something was really wrong with their advice. In their words
many countries were doing well. Among the economists it was
only the Chief Economist Joseph Stiglitz that had the nerve to
speak out. When the Structural Adjustment was imposed on
Indonesia in 1998 he pointed out:
“I suggested that the excessively contradictory monetary and
fiscal program could lead to political and social turmoil in
Indonesia. … The IMF pressed ahead demanding reductions in
government spending. And so subsidies for basic necessities like
food and fuel were eliminated at the very time when
contradictory policies made those subsidies more desperately
needed than ever.”
Indonesia broke up in flames dethroning Suharto who had followed
all the IMF prescription for over two decades, even shooting
down the protesters.
Even the foremost Capitalist Journal, The Wall Street Journal
ridicules the Structural Adjustment policies of the World Bank
and the IMF in the following words;
“The IMF Drill is as follows: A Third World poor country with a
pegged currency is working towards taming inflation. Instead of
a growth formulae it gets the IMF’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- devaluation making the bank
predicament and capital flight worse. The currency slumps and
the banks(countries) are now in real trouble…. Is this any way
to run an international monetary system? If sound money and
pro-growth economic policies are good enough for the US, they
should be good enough for the Developing World” (23-02-01)
Now that it is established in an indelible manner that the IMF
and World Bank has messed up the Third World countries, it may
be worthwhile to find out what recommendations of the IMF
Structural Adjustment Programme have had an adverse effect on
the Developing Countries including Sri Lanka. The provisions of
the Structural Adjustment that brings about an adverse effect
are:
High Interest Rates. The imposition of high interest rates is
supposed to boost savings. Simultaneously high interest rates
cause inflation and also forces local manufacturers and
agricultural entrepreneurs to close down as they cannot compete
with foreign companies that can get funds at very low interest
in their own countries. This helps the Developed Countries to
sell their manufactures to the Developing Countries.
Reduction of Public Sector Activities does not enable the
Governments to be effective in bringing about development. The
private sector is not the engine of growth due to the fact that
socialist legislation has thwarted the activities and they have
been plagued with restrictions and would not take the leadership
like in Western developed economies. The Public Sector has to
provide the infrastructure necessary for development to take
place. A good example is the Paddy Marketing Board of Sri Lanka
that offered a guaranteed price for rice and other cereals and
BULOG of Indonesia that provided marketing for rice . Both were
abolished. This has caused the death of agricultural
development in both countries. It is important to note that in
the Developed Countries the Public Sector determines, controls
and provides for development which is denied to the Developing
Countries under Structural Adjustment.
Removal of Subsidies. Subsidies are required to enable
production that is nationally required and to keep people in
employment. It is not well known that Japan offers three times
the world price for rice farmers to be in production and to
keep its farmers in employment.
Free Trade, Deregulation and Removal of Tariffs By Free Trade
the USA and other Developed Countries have opened up the markets
of the Developing Countries. Mexico lost severely on the NAFTA.
Since 1994 US exports have increased 141% to Mexico and 64% to
Canada. All Developed Countries placed restrictions during the
time that they developed manufactures. Even today the Developed
Countries use quota restrictions, tariffs to control imports.
Liberation of foreign exchange restrictions is imposed. The
inflow of foreign exchange is severely limited as foreign
exchange has to be earned by exports or exports of services. All
countries have foreign exchange restrictions to enable them to
match the supply of foreign exchange and the demand. When the
demand is liberalised while the inflow is the same there is a
severe shortage which cannot be found unless by seeking loans.
This leads to indebtedness. The currency value falls as a
result. This is directly due to the IMF policy of not allowing
the Governments to control and restrict the outflow of foreign
exchange. In short the IMF itself creates a foreign exchange
problem whereby the countries become indebted.
The devaluation of currencies is also caused by foreign banks
that hoard their collection of foreign currency and bid the
price upwards when any bill has to be paid in foreign currency.
The foreign banks in Sri Lanka were caught in this in January
2001, when the State Banks had to pay a large petroleum bill
and wanted foreign currency from the other banks. The foreign
banks bid the price upwards causing the dollar to reach Rs 116
from Rs. 85 and settle for the day at Rs. 100. This is all due
to the IMF policy.
All these policies when worked together will definitely cause
the collapse of any economy.
What the IMF and the World Bank did to the Developing Countries
is evident in what happened to Tanzania. Under Julius Neyerre
Tanzania was proceeding well on its path to self sufficiency,
development and self reliance, when the IMF and the World Bank
provided them the wrong advice. This is aptly given by Cheryl
Payer:
“The IMF in routine consultations advised Tanzanian Leaders
that their reserves were embarrassingly large and might lead
the country’s Aid donors to reduce their contribution. A poor
country, the Fund argued should not hoard its reserves but spend
them in order to develop more rapidly. They persuaded the
Government to abolish the foreign exchange budgeting system…
and lift controls on imports: 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 self reliant economy was broken down and brought to its
knees.”
Now the mantram of the World Bank and the IMF is investment.
After breaking down the economies by following the Structural
Adjustment policies the economies are opened up for investment.
The Third World leaders like this investment because it comes in
foreign exchange and gets converted into local currency enabling
the leaders to spend it on extravagant budgetary expenses. It
is investment for the foreign investors.
They come on tax havens use local resources and get into
manufacture and export the products without paying any profits.
But their produce and profits gets taxed at 40% or more in their
mother countries. It is in reality exploiting the resources of
the Developing Country.
A good example is Noritaki that has since its inception been
working on a tax holiday which was extended about two years ago.
It is true it provided employment but in the process it also
depleted the ceramic resources of Sri Lanka. The net result was
the taxes it paid to the exchequer of Japan.
A further problem that this investment creates is that the
investors move their money from country to country and when they
leave the country falters, become bankrupt, the investors run
away and once the currency falls comes back and reinvest reaping
a fanciful profit.
The futility of this process of investment as a element to
bring about development is given by Paul Krugman,
“ The idea of a country or even a whole region that for some
reason becomes a favourite of investors and as a result
experiences a temporary boom that is not grounded in
fundamental productive success is by no means hypothetical.
Mexico in the late 1970s, Mexico again in the early 1990s,
Russia in 1995 to 1998 all were places that experienced a
feverish consumption boom driven by foreign investment for a few
years only to crash when some of those investors concluded that
the real economy to justify their investments simply wasn’t
there”. In fact he concludes that “the world is lurching from
crisis to crisis, all of them crucially involving the problem of
generating sufficient demand”. Krugman has correctly identified
the futility of investment though he fails to find the solution.
Sri Lanka is not alone in this plight. Many are the Third
World countries that have become indebted in the process of
following the IMF and the World Bank prescriptions of Structural
Adjustment. Many countries have had to have their currencies
devalued and this has brought a windfall to the Developed
Countries by enabling them to obtain imports from these
countries at a very low cost purely because the currencies of
the exporting countries have been devalued. The following table
will illustrate the fall in value of the currencies from 1983 to
2003:
Country Currency Value of currency to the pound Fall %
In 1983 in 2003
Sri Lanka Rupee 35.00 180 415%
Indonesia Rupiah 1330 14,575 996%
Turkey Lira 336 2,395,000 712,000%
Ghana Cedi 5.7 15,711 275,000%
Nigeria Naira 1.11 240 21,800%
The extent to which the local currencies have been devalued
illustrates the extent to which poverty that has also been
created in these countries. In short the people cannot live
with their wages. I have travelled on the vast motorways in
Turkey recently. The cost of petrol and other necessities have
created a people who have to resort to petty thieving to live.
The motorways are empty. A wage earner cannot buy fifty gallons
of petrol with a months wages. Turkey spent billions of
borrowed money to build these motorways and the country is so
indebted that it has to allow the currency to be devalued. Sri
Lanka’s present craze on motorway creation will end up the same
way making the country indebted and increasing the poverty.
There will be no riders on the motorways like in Turkey.
What is the solution
To my mind no expert has come up with a solution. Jeffery
Sachs has recently said that extreme poverty can be eliminated
by 2015. Poverty can be eliminated in a few years if only the
World Bank and the IMF will understand that it is their policies
that has aggravated it. Jeffery Sachs thinks that it is the
military prowess of George Bush that is the constraint.
It has to be first understood that the IMF and the World Bank
has to understand what has gone wrong, which they have failed to
understand as yet.
To start with these two institutions have to free the
Developing Countries of the yoke of Structural Development that
they have imposed. It is a heavy mill stone that they have tied
round the neck, a burden which no country can bear.
It is necessary also to study the loans that have been provided
so far causing the countries to fall into the debt trap. If the
loans had been given for development purposes, i.e. to bring
about production, then rightly the onus of repayment falls on
the country. If the loans were given for consumption purposes,
then the loans should be written off completely because the onus
of responsibility also falls very squarely on the donors that
did give the loans. Also the officers and the leaders who
obtained the loans should be personally held responsible in
case they are alive.
This is the only method of starting on a clean sheet.
As far as future loans are concerned the donors should be
well aware that the record of loans by the World Bank and the
IMF is such that there is not a single country in the entire
world that has benefited from their Structural Adjustment
Policies.
In the circumstances it is hoped that the donor nations, the
IMF and the World Bank will infuse fresh thinking and help the
Developing Countries to develop instead of imposing reforms that
have been proved to be failures
I humbly request the World Bank and the IMF to impose these
Structural Adjustment policies on the USA, UK, France, Germany
or any other successful country and see for themselves their
economy falling to bits in months not years.
Garvin Karunaratne
Former |SLAS.
PhD. Michigan State University |
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