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Beware of IMF's prescriptions
Weaknesses in foreign-dependent growth strategy
By Bharat Jhunjhunwala
INDIA has concluded the annual review of its economy with the IMF recently. The IMF has recommended that India should reduce its fiscal deficit, lower the import tariffs and encourage more foreign direct investment instead of portfolio investments. The IMF has been advocating these policies for the last two decades. But after short run gains they have led to the decline of many an economy.
Newsweek has recently published a report from Bolivia which I take the liberty to quote at some length: "In 1985, Bolivia was in dire need of economic salvation. So Harvard economist Jaffery Sachs and the IMF advised the elimination of price controls and encouraged severe cuts in state spending, sweeping tax reforms, lower tariffs and the privatisation of some state companies. The country's economic vital signs stabilised, it controlled its hyperinflation and the 'Bolivian model' - or neoliberalisation - caught on around the world.
"But 17 years later, the original supermodel has fallen on hard times. The only significant investment in recent years has been in the natural gas sector, which provides few jobs and spinoff benefits, Unemployment is soaring, and barely a dent has been made in reducing poverty.... The global market has created few labour-intensive industries in Bolivia... the traditional industries were no longer protected by high tariffs and were either closed down by the state or moved out by transnational companies."
What went wrong? And why is it that the IMF persists in tendering such advice despite the failure of this model not only in Bolivia but also in Argentina, Brazil, Mexico, East Asia, South Korea and Russia and other countries? The simple answer is that the objective of the IMF is to strangle the developing economies and make them surrogate to the rich countries.
Let us examine the IMF advice to India in this background. The Directors of the IMF, says the Press release, "supported the objectives specified in the original draft Fiscal Responsibility and Budget Management bill - to reduce the Central Government deficit to 2 per cent of the GDP by 2006 and the Central Government debt to 50 per cent of the GDP by 2011." Note the stress is on reduction of all fiscal deficit irrespective of the nature of the expenditures. It does not matter whether the fiscal deficit has been incurred for building roads or paying fat salaries to government servants.
Printing notes is an acceptable method of taxing people. The purchasing power of the people's money is reduced due to inflation. But this is still an acceptable method if the money is used to build roads. The people get less consumption but the roads enable them to make higher incomes subsequently.
The choice before us is whether to build these infrastructure on our own by resorting to borrowing or printing notes or to rely on foreign investors to do the same. The IMF gives a blanket prescription that fiscal deficit should be reduced at any cost and borrowing too should be brought down. The implication is that India should not make its infrastructure on its own. The objective is to enhance the ability of the West to economically enslave this country.
Secondly, the IMF Director "welcomed the steps taken to increase trade openness and the outward orientation of the Indian economy. They noted, however, that the trade regime remains relatively restrictive and that further steps are needed to foster a more friendly environment for trade." There is no doubt that foreign trade has many benefits. We can export things that we can make cheap like garments, films, software, cut diamonds and wooden furniture. We can import computers and airplanes. But this is not a one-way street.
Integration also has its disadvantages, particularly in times of global distress. Wars can cut off supply mines for critical spare parts or raw materials. The USA, for example, has been putting pressure on Israel and Russia not to transfer certain advanced technologies to India. We could possibly generate these technologies ourselves if we have, in general, created an import substitution base. But if we are dependent on the West for middle-level technologies then there is no chance of our building the advanced technologies. Therefore, one has to weigh the advantages of free trade against the disadvantages of such dependence. But for the IMF, precisely such dependence is the objective. Therefore, it only speaks of the advantages of free trade, It does not point to the fact that reliance on foreign trade for essential materials is a danger to the integrity of the country.
Thirdly, the IMF Directors "stressed that strong prudential measures should be put in place to prevent offshore banking units from becoming conduits for short-term capital flows that could increase the vulnerability of the domestic financial sector." It is well known that sudden withdrawal of huge portfolio investments had created a crisis in East Asia.
But there is another dimension to the issue. Portfolio investment puts more money in the hands of domestic companies. It strengthens their ability to compete with the MNCs. Direct investment, on the other hand, competes with our industrialists. General Motors investing in the Mumbai Stock Exchange would streng-then Telco against Daewoo and Hyundai. General Motors making the Corsa competes with Telco's Indica. The objective of the IMF is permanent enslavement of the developing countries. Therefore, it suggests that developing countries should invite more of FDI which is more stable. Just like the zamindar likes to give loan to one who would become bonded for lifetime rather than to him who would return the money after a couple of months, so also the IMF wants to promote FDI which kills domestic industries over lifetime. Note that the IMF does not say that the developing countries should increase their own domestic savings and investment and build more of their industries.
It is time for India to realise that the objective of the IMF is to use short term crisis of the developing countries to permanently debilitate them. This is what it did successfully in Bolivia. Severe cuts in government spending resulted in the slowing of long-term growth. Lower tariffs resulted in domestic industries being wiped off. The only industry that remained was that of supplying natural gas to the industrialised countries. FDI has not created either jobs or economic growth. But the IMF policies did control the crisis in 1985. The landlord takes the advantage of a drought or death in the family of the poor labourer to give him some advance and bond him for life. So also the IMF. It has succeeded in most of Latin America and East Asia. Chinese leaders are, of their own, following the same disastrous policy the results of which should certainly appear in a few years, if not later.
We should not be taken aback by China's so-called "spectacular" success. China has a long history of such spectacular shows - the Great Leap Forward of the mid-fifties when iron was melted in crucibles in every village; the Cultural Revolution of the mid-sixties when technicians were sent to villages to grow paddy; and now the love of exports and FDI. Any foreign-dependent growth strategy has to meet a roadblock sooner or later.
India is perhaps the lone country that has resisted such complete integration as would bond it perpetually. We can only hope that our leaders will not sacrifice our long-term interests for short-term relief.
The writer is a well-known economic commentator.
Courtesy http://www.tribuneindia.com
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