The Quest for a New Paradigm for World Development

By Garvin Karunaratne,Ph.D.
Michigan State University

First published in Asian Tribune - 2005-12-06

In the words of Rene Dumont, a former French Minister, ‘We are first and foremost exploiters of the poor, because of an economic system based on dominance that has been cunningly devised by and for the rich nations’.(Stranglehold in Africa) This statement encapsulates the currently followed paradigm for development.

When the newly independent Third World countries in their aim at achieving economic development and full employment, commenced action through various programs designed with guidance and advice from the United Nations, with the help of Developed Countries and the cream of academia at leading Universities and were achieving some success while the Developed Countries found that they were losing markets for their agricultural produce and manufactures. Something had to be done and they resorted to subversive methods of neocolonialism. This took on a multi-pronged format.

The USA came up with the PL 480 Program, whereby the excess wheat produced in the USA was dumped on the developing countries. The wheat was offered at low prices undermining the local production and this was the ‘bread trap’ to which many countries have fallen: ‘We taught people to eat wheat who did not eat it before’. While PL480 can be utilized to help crisis situations and support Third World development, today it is used purely to create markets for U.S. produce. Consequently many countries like Mexico that formerly exported food became importers.

The Structural Adjustment Program

Then the World Bank and the International Monetary Fund came up with the Structural Adjustment Program(SAP), which comprise a number of policies that when implemented together inevitably cause poverty within any country.

The SAP provisions include :

The country should follow a high interest rate policy. This makes local manufacturers and producers obtain money at high interest rates while competitors from abroad can obtain loans at very cheap rates. This causes the death knell of local production and causes unemployment.

The country has to follow free trade policies and reduce import tariffs. When import tariffs are reduced local producers cannot compete and give up production for the market. Free market policies mean that imports cannot be restricted and this amounts to create an Import and Sell Economy which leads to increased prices. Every Developed Country has used tariffs on imports in their formative years to boost their local production. Third World leaders are brain washed to think of Free Trade Agreements as achievements; in actual practice local production is sacrificed and unemployment increases.

Removal of Subsidies is insisted on, while the Superpowers can continue with subsidies. What is not well known is that the subsidies offered to producers in developing countries is based on the cost of production while the subsidies offered in Developed Countries is based on the premise of enabling the farmer to live a life of affluence.

Privatization of national assets is insisted upon. When assets are privatized it gets into the hands of the private sector where the aim is not national development. The aim of the private sector is to make profits fast and ultimately the asset ends up in the hands of foreigners, where goals of national development, creation of employment are all secondary concerns.

Then the prime aim is to make profits for the shareholders in the mother country. It is a well known strategy of foreign corporations to control raw material assets and resources and manage it not in the national interest but in the company’s interest to bolster the sale of items manufactured in the Developed Countries.

Privatization of assets to raise money to spend on the recurrent budget is advocated. Successes in Developed Countries are hailed. One need to know that during the reign of Margaret Thatcher in the U.K. the Councils sold off many mental hospitals situated in prime areas and found money for expenses. The money raised was spent on recurrent expenses and the mental patients that were thrown out of the hospitals in the process fed into the communities.

These mental patients have become a scourge on the communities. The money realized from the sale has been spent and is lost. In the U.K, the Railways in the Sixties were the showpiece of the world. Privatization netted millions that were soon spent. Worse was to follow. Rail Track, the private company that was in charge of the track was not interested in spending on safety measures and instead handed over fanciful profits to its shareholders, high salaries and heavy bonus payments to its chief officers. Safety measures used in European trains were not used in the U.K. and the commuters have paid dearly with their lives in repeated rail crashes. In desperation the UK Government had to renationalize Railtrack. In California, the privatization of the electricity utilities ended up in the private companies overcharging and the attempt by the Governor to control it, ended up costing him the crown. This exposes the sinister side of privatization where service and national interest is sacrificed for the personal gain of the shareholders. However the WB and the IMF continue to force the Third World to privatize.

Privatization of State commercial concerns is advocated by the WB and the IMF. Accordingly the entire infrastructure that countries had built up for peasant agricultural development like BULOG in Indonesia and the Paddy Marketing Board and the Department of Marketing in Sri Lanka are abolished or privatized. The Fruit Cannery of the Marketing Department used to offer floor prices for fruits. This formed the base of a canning industry that produced the country’s jams and jellies achieving self sufficiency. It enabled farmers to sell their produce. The privatized cannery believes in importing fruit. Producers in their inability to sell the produce stop production for the market. Imports take the place of local production. The State has to play a major role by providing incentives and engaging in commercial activities that enable and help people to boost production. This is the one method of combating poverty and creating employment. However the WB and the IMF’s SAP forbid such activity.

Devaluation of local currencies is advocated on the grounds that the local currency should find its correct value in terms of supply and demand. Next, the IMF advises countries to Free Float the currencies. Free Floating means that the State- the Central Bank has no control over the foreign exchange that comes in and allows the commercial banks to determine the exchange rate.

Themodus operandi is to privatize the State Banks, get foreign banks in so that the currency can be controlled by foreign banks. In reality, the foreign Banks hoard foreign currency collections and bid the foreign exchange value upwards when a large bill has to be paid in foreign currency.

This happened in Sri Lanka in January 2001, when the Rupee was free floated and the Rupee plummeted. When the Turkish Lira was free floated in 2001, the Lira suffered a devaluation of 36%. In 2003, the USA pressurized China to free float the Yuan but the Chinese were not gullible.

The Sri Lankan Rupee has plummeted in value from Rs 15.70 to the £ in 1977, (when Sri Lanka started following the IMF’s SAP) to Rs 35 to the £ in 1983 to Rs. 180 to the £ in 2003, marking a drop of 1046% in 1977 to 2003 and a drop of 415% in the period 1983 to 2003. In Indonesia the Rupiah has been devalued from Rs 1330 to the £ in 1983 to Rs. 14,575 to the £ in 2003, a drop of 996%. The Turkish Lira has dropped in value from Lira 336 to the £ in 1983 to Lira 2,395,000 to the £ in 2003, marking a devaluation of 712,000%.

The Ghanian Cedi has been devalued from 5.7 Cedi to the £ in 1983 to 15,711 Cedi to the £ in 2003, a devaluation of 275,000%. The Nigerian Naira has been devalued from Naira 1.11 to the pound in 1983 to Naira 240 to the pound in 2003- a drop in value of 21,800%. This devaluation of currencies is done by induced supply and induced demand- all designed to trash the value of the currencies. Increasing the demand happens when foreign exchange is liberalized as insisted by the IMF, while restricting the supply is automatic because no economy can earn endless foreign exchange to support unrestricted imports and liberal use. In addition the supply is further restricted by foreign banks that hoard the foreign currency it can get hold of. The IMF plan is to privatize local banks so that foreign banks can act undeterred in their manipulations. It is important to note that the theory of supply and demand is restricted to the domain of textbooks.

The effect of these devaluations on any economy has to be assessed against the fact that under the terms of the SAP, the economies have become an Import and Sell economy because many consumer items are imported and the prices of all imports have skyrocketed because of the devaluation itself, making them beyond the reach of the people, whose incomes are stagnant. Though meager wage increases are given the value of wages dwindle in real terms. Abject poverty, unemployment and high inflation is the inevitable result.

It is important to note that through this process of Devaluation all exports are automatically discounted which enables the Developed Countries to obtain imports at very low prices and this helps them to keep the inflation of their countries at a very low level. obtain imports at lower prices. The IMF Report: World Economic Outlook, October 1999 states that recent falling import prices reduced consumer price inflation by an average of 0.8% points, mainly through the impact on the prices of tradable goods. In other words the reductions in the prices of imports have caused low inflation in the Developed Countries. The Economic Report of the President of the USA, 1998 states that four decades of trade expansion has boosted the income of the average American by 4%.

The provisions of the SAP help Foreign Direct Investment (FDI). Third World countries that are starved of foreign exchange eagerly await FDI because it enables the receipt of foreign currency for which local currency can be substituted for investment within the country. Devaluations help foreign investors because a higher amount of local currency can be obtained. It is forgotten that FDI investments come in on tax holidays, and they compete with local producers who get thrown out of business because FDI investors can enter into any area of activity. FDI only creates local employment. Further FDI conditions stipulate that the investment can be withdrawn at any moment without notice, with full repatriation of the investment in foreign currency, which can totally destabilize any country that had spent the foreign currency originally received for recurrent expenses. The Trade and Development Report 2003 of UNCTAD states that FDI inflows have contributed to financial instability as they have increased external obligations without generating the required capacity to service them….Ways must be found to improve the contribution of FDI to technology, productivity and exports.

The disastrous effects of the IMF’s Structural Adjustment Program is well documented. Professor Jeffery Sachs of Columbia University and Special Advisor to the United Nations’ Secretary General says of Africa:

Western Governments enforced draconian budget policies during the 1980s and 1990s. The IMF and the World Bank virtually ran the economic policies of the debt ridden continent recommending regimens of budgetary belt tightening known technically as Structural Adjustment Programs. By the start of the Twenty First Century Africa was poorer than in the late 1960s with disease, population growth and environmental degradation spiraling out of control.(From The End of Poverty)

The United Nations’ Human Development Report 1996, states, The Stabilization measures of the IMF aimed at reducing budget deficits and usually involved cutting public spending, reducing wages and increasing interest rates.. 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.

Professor Joseph Stiglitz, former chief economist of the World bank and Noble laureate on economics states :

Globalization has often not produced the benefits that were promised. Except in Asia-which had largely not followed the prescriptions for growth and development the United States had put forth- poverty was up, in some places drastically so. With growth in Latin America during the reform and globalization decade of the nineties just over half of what it had been in the Fifties, Sixties and Seventies, no wonder there was dissatisfaction. The gap between the haves and the have nots – both between the United States and the developing world and between the rich and the poor within the developing countries was growing. .. Argentina was touted as the A+ student of reform. Looking at the disaster that befell Argentina, developing countries ask, ‘If this is the result what is in store for us’…..The heralded transition of ex-communist countries to a market economy which was supposed to bring unprecedented prosperity instead brought unprecedented poverty. In fact GDP declined 40% and poverty increased tenfold.(From The Roaring Nineties)

The Aid Trap

Aid is today used as a trap to get the countries indebted to such an extent that they cannot manage their finances without Aid and thereafter Aid is given on strict conditions like following the SAP.

Mexico was self sufficient in cereals till it got caught in the Bread Trap and now has to import approximately half its requirements of rice and wheat.. Its massive debts were caused by it following grandiose plans that did not generate an income. This included building motorways. Mexico has a grand network of motorways that are beyond the use of the people due to the exorbitant charges levied for using them. It was mooted that money will flow when tourists use them but tourists are mostly of the package type and hardly rent a car and travel. I found the motorways totally empty. This is true of Turkey too. In Turkey there is no charge for using motorways but after the currency devaluation amounting to as much as 712,000% over the past two decades, the locals cannot afford to travel by car. These countries are highly indebted due to their commencing grandiose unproductive plans.

Aid given comes back to the Superpowers in a variety of ways. Take Education. When Sri Lanka was not indebted in 1969, it had effective foreign exchange controls- foreign exchange was not allowed for any studies abroad unless such studies were not available in Sri Lanka. Now when Sri Lanka is heavily indebted, foreign exchange is liberally made available for any study abroad, which enables the children of the rich to prosper. In this process the Universities of foreign countries benefit and in the meantime the indebtedness of the country increases. Aid given flows back as payments to Universities and sustenance for the students.

Foreign exchange restrictions on foreign travel are removed as advocated by the IMF. This enables the rich to get unlimited foreign exchange for travel abroad. This money ends in the Developed Countries. Even in 1969 when Sri Lanka was not indebted, there were restrictions on the issue of foreign exchange for travel.

When Aid is given for projects it is specified that the contracts for installation and evaluation should be given to contractors and consultants of the donor country, which enables the Aid money to go back and bolster the economies of the donor country.

It is important to note that the donor countries make money by giving Aid at higher rates of interest than in their own countries. The donor country is better off by giving Aid.

An Import and Sell economy enables the Developed Countries to sell their manufactures and every Developed Country is willing to give lines of credit if any country is willing to import from them. They thereby create trade which brings those profits and employment. This ensures that Aid given as grants and loans flow back with profits to the Developed Donor Countries.

What is required is for the WB and the IMF to be realistic- to understand for once that it is their policies that have caused poverty and the devastation of the economies of the countries that have followed the SAP. Every country that has meticulously followed the SAP has ended in disaster. Take Argentina, Chile, Mexico, Ghana and Sri Lanka- all countries that followed the SAP and were at one time the showpieces of the IMF. All these countries have totally devastated economies and rampant poverty. Chile is very special as it was the laboratory test for the SAP in 1973 to 1989, when dictator Pinochet offered the economy of his country to Professor Milton Friedman and the University of Chicago. Chilean Graduates trained at Chicago handled the economy according to Friedman dictates privatizing 160 government corporations, 19 banks and thousands of agro-industrial concerns. The statistics tell of the demise.

The foreign indebtedness of Chile increased from $ 4.7 billion in 1974 to $ 20.4 billion in 1985, an increase of 334%. During this experiment the Peso fell in value from 8.5 Peso to the $ in 1975 to as much as 282 Peso to the $ in 1989. This experiment period was marked by high inflation, high unemployment, a loss in real wages despite good growth rates pointing out to the fact that the profits went into the pockets of foreign investors and the rich in the country. The bashing that the economy got in the Pinochet sixteen years was such that the foreign debt is as high as 39.6 billion and the Peso has dwindled in value to Peso 725 to the $ in 2004.

The USA, the richest country in the world is caught up in a recession. Silicon Valley, the heartland of technology is crumbling down with leading technologists being declared redundant and corporations closing down. Traditional monetary methods of reducing interest rates and giving tax holidays have failed to arrest this decline. Japan has been in a recession for a full decade. The Developed Countries have to be able to arrest the decay in their own economies and also alleviate poverty in their own countries first. This illustrates the futility of the current paradigm.

Currently the aim of the Developed Countries is to exploit the Third World and thereby bolster their economies. Their current aim is to open up the economies of the world presumably for exploitation of the assets of the world to bring about prosperity in the Developed Countries. The pattern is that of the Anglo Iranian Oil Co which in 1947 had an after tax profit of $ 112 million giving Iran only $ 19.6 million, where there were doubts about accounting.(From All the Shah’s Men:An American Coup and the Roots of Middle East Terror) Even the most populous country, China with a population of 1.26 billion people was denied its legitimate place at the World Trade Organization till it agreed to allow American companies to exploit Chinese assets.

The modus operandi is to manipulate the rest of the world, privatize their assets so that the companies of the Developed countries can get profits, devalue their currencies so that all imports will be discounted, insist on implementing the SAP for local production to dwindle, flood the Third World countries with their manufactures and produce, provide loans to be spent on unproductive ‘white elephant’ type of grandiose schemes and get them more and more into debt and then history will be repeated like in Egypt where Ismail Pasha the ruler had borrowed over 100 million pounds from British and French banks and failed to pay its dues. The French and the British then sent their Navy in and took over the country in 1876.

The provisions of the SAP have brought the entire Third World to become a vast hinterland for the Developed Countries to exploit- the multinationals exploit the assets, the devaluation of the currencies enable the Developed Countries to benefit. This has also enabled holidaymakers from Developed Countries to enjoy holidays at very little expense and the reduction of tariffs on the purchase of property has enabled foreigners to purchase outright vast extents of prime land in the Third World. Even the education system is geared for the best graduates trained at the expense of the country to find a place in the Developed Countries. In short the Third World has been made an appendage of the Developed Countries for total exploitation. It is neocolonialism in its extreme.

The Richness of the Third World Countries

I served as a member of the Sri Lanka Administrative Service for 18 years and have worked at first as an Assistant Commissioner and finally at Head of Department level being in charge of a major District in charge of social and economic development. I worked in Bangladesh for two years as the Commonwealth Fund Advisor to the Ministry of Labour and Manpower. Bangladesh is the most fertile country I have ever seen. In my experience, there is no problem of these two countries achieving development- self sufficiency in food and small consumer goods within a few years. I can make this statement without reservation. I have traveled widely in Mexico, Turkey, Indonesia and Thailand and can state that there is no necessity for these countries to be indebted or to have their currencies trashed. All these countries have a tremendous potential, with ample land resources. Indonesia too has been advancing in development till the IMF forced them to dismantle the infrastructure the country had built up to help the peasants to become productive farmers. However these countries can develop only if the Developed Countries and their protégé the World Bank and the IMF stop their manipulations.

The current paradigm of development has totally failed in developing the Third World. Though this process has enabled the development of the Developed Countries, it has caused poverty, untold misery and sheer deprivation in the Third World.

The Path Ahead

It is time that the Third World countries take a hard look at countries like India and Malaysia where they have managed to follow strict tariff controls and develop their agriculture and industries and keep their currencies intact in value. Mahatir Muhammed showed the entire world that in order to bring Malaysia out of the East Asian Crisis in 1997/98 he had to follow the obverse of the SAP provisions. Malaysia succeeded and that offers hope to every Third World country.

In the Sixties the United States was genuinely interested in finding out how development can be brought about. They selected poverty stricken Thana (area of 102 square miles) in Comilla, Bangladesh, funded Programs for development with the help of expertise from Michigan State University. This was the Comilla Program of Rural Development. The aim was self sufficiency in food, full employment, the development of agriculture and industries in both the private and cooperative sectors. The method was to use community development and non-formal education techniques to ‘build people’ in the words of its legendary director, Dr Akhter Hameed Khan. In less than nine years the yield of paddy was more than doubled, full employment achieved and the employment created spilled over into adjoining areas. It is an achievement without any parallel in the annals of development. Despite the intrinsic success of this Program, the WB and the IMF ignored it in drafting their SAP.

In 1982, the Ministry of Youth Development of Bangladesh commenced a Youth Self Employment Program, in order to combat the growing tide of youth unemployment. It was based on the development of agriculture, poultry, dairy products and industries. The core elements were: to teach vocational trainees basic elements of economics, encourage trainees to prepare a project to be self employed and start implementing the project, not to offer any subsidies but to offer free training and a fast and efficient extension service- remedial action- technical assistance at the doorstep of the project and all training institutes had to provide extension services when any trainee commences self employment. The thrust was on non-formal education where the abilities and capacities of the youths were built up as they engaged in commercial activities aimed at making them self reliant entrepreneurs. This Program has by November 2002 enabled 709,993 persons to become self employed- derive incomes by creating production. Since 1997, annually 160,000 youths are given intensive training and guidance to become self employed. Upto now over a million people have been found self employment on a commercially viable basis. This is easily the largest self employment program the world has seen. I designed and established this Program when I worked there as a consultant in 1982 and 1983.

Both the Comilla Program of Rural Development and the Youth Self Employment Program has stood the test of time and stand as a beacon of hope for prospective developers.

There was once a time when the premier Universities concentrated on teaching disciplines- strategies to bring about development viz., community development and non-formal education. The Universities even directed projects to develop the Third World. I functioned myself as a Research Associate on the Michigan State University Non-Formal Education Project in Indonesia. This was funded by the U.S. Agency for International Development. The earlier mentioned Comilla Program of Rural Development was another such attempt. These were genuine attempts of the excellence in academia fuelled by the magnanimity of the Developed Countries.

The thrust was not only at providing Aid, but to explore ways and means of utilizing the Aid to bring about development. These studies and projects were stopped and in their place sprang up the Non Governmental Organizations. In the Universities studies in Community Development and Non Formal Education were stopped and instead the MBA became the doyen of finding lucrative employment. In the Business Schools the concentration was on methods to make profits, how to get workers to work more, methods of hiring and firing workers, how companies can show profits by selling assets-even by retrenching staff- the aim was to grope for methods to enable profits for the shareholders and in this craze, the aim of rounded development- creating local production- self sufficiency, looking after the interests of the country, the people- their well being and employment was totally sacrificed.

Earlier, in agricultural economics, management techniques and financial analysis were used to enable farmers to become profitable, how small industries could be developed, how cooperatives and marketing systems could be designed and implemented to help a peasant economy. In the Faculties of Education, Community Development was taught- techniques used to enable people to become partners in development and for communities to take charge of development. Non Formal Education was taught to equip professionals to guide and enable people to develop their capacities and become self reliant. The Business & Management Studies rapidly gained ground and there was no place for these educational strategies. Instead financial analysis and management techniques were devoted to amass profits for the shareholders. The people were an expendable commodity and the thrust was to enable riches for the rich. It was inevitable for the rich to become richer as happened in the last two decades.

Conclusion

It would behove of the Developed Countries to listen to the words of Joseph Stiglitz the Chief Economist of the World Bank when he tried to correct the IMF in Indonesia. In his own words:

“I suggested that the excessively concretionary 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 contractionary policies made these subsidies more desperately needed than ever.”

Indonesia blew up in riots deposing Suharto and the flames are yet taking their toll in human misery, easily evident when I visited in 2003. Stiglitz was actually thrown out of the World Bank for his very words of wisdom.

Even the Wall Street Journal has been extremely critical of the IMF. In their words:

“The IMF Drill is as follows. A Third World poor country with a pegged currency is working towards taming its inflation. Instead of 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 are now in real trouble…. Is this any way to run an international monetary system”(Feb22,2001)

Once when Robert McNamara assumed duties as the President of the World Bank he said that the World Bank had been going on the wrong track. He tried to correct it but miserably failed. The latter part of his tenure is noted for creating indebtedness among the Third World countries. It is time that the World Bank, the IMF and the Developed Countries do understand what is really happening in the Third World and instead of engaging in further exploiting the Third World, commence groping for a paradigm that will usher in development first in their own Developed Countries by arresting the recessions that scourge their economies, eliminating poverty and finally bring about development in the entire world. They have the ability and the strength to attend to this task. Today the attempt of the Developed Countries is to squeeze the assets of the Third World by price opening them for investment and thereby usher development in the Developed Countries. A paradigm for development based on the tears and tribulations of the people in the Third World is unethical. Let that not continue. Surely there is a paradigm by which development can be ushered in the First, Second and Third Worlds.

In developing this new paradigm for development it is necessary that firstly the IMF and the World Bank should abandon their Structural Adjustment Program and instead develop a program that is full of growth strategies. The Developed Countries should consider measures to bring about economic development on a global basis in their own developed countries as well as in the Third World countries. The latter should be helped to develop their own programs and projects that can make their people contributors to their economies and not be relegated to be mere consumers.

In this task of ‘building people’ as Akhter Hameed Khan, the director of the Comilla Program, and ‘developing the abilities and capacities of the people to make them partners in development’ the strategies of Community Development and Non Formal Education deserve to be utilized to the maximum. A further strategy is Community Economic Development, where communities handle their own development. In this community leaders are trained to establish commercial ventures on a cooperative basis to develop their areas. The advantage in this is that the commercial venture stays in the community as opposed to a private entrepreneur who with success may move to an area of affluence leaving behind the community within which he sprang up.

To enable the masses to become productive- the lost infrastructure for development should be built up; marketing and technical advice has to be provided. The IMF and the World Bank and the United Nations have to back track to how they attended to bring about development till the Sixties- the pre Structural Adjustment period. It is only then that countries can flower into development, producing their own needs and requirements, providing employment and incomes for their people- a self reliant type of development, what the world yearns for today.

Professor Stiglitz states that Globalization may be inevitable but the way we attempted to structure it- for our interests- was not consonant with our values and ultimately failed even to serve our own interests. The ‘globalization, boom like the stock market boom and the economic boom, was followed by a bust, and partly because as in the case of the other booms, they had within themselves the seeds of their own destruction.(From The Roaring Nineties)

A new paradigm for development has to emerge which includes all that is good within globalization, with prosperity for all people.

Let us hope that the leaders of the Developed Countries, the mandarins of the World Bank and the IMF, the Presidents and Vice Chancellors of the premier Universities- the depositories of academic excellence, may take on this challenge in the name of humanity.

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