A Call to Action Against Misdirected Development

Karnataka Forfeits its fortunes in the hands of IFI

4 November 2004 by Collective


IFIs in Karnataka

The World Bank World Bank
WB
The World Bank was founded as part of the new international monetary system set up at Bretton Woods in 1944. Its capital is provided by member states’ contributions and loans on the international money markets. It financed public and private projects in Third World and East European countries.

It consists of several closely associated institutions, among which :

1. The International Bank for Reconstruction and Development (IBRD, 189 members in 2017), which provides loans in productive sectors such as farming or energy ;

2. The International Development Association (IDA, 159 members in 1997), which provides less advanced countries with long-term loans (35-40 years) at very low interest (1%) ;

3. The International Finance Corporation (IFC), which provides both loan and equity finance for business ventures in developing countries.

As Third World Debt gets worse, the World Bank (along with the IMF) tends to adopt a macro-economic perspective. For instance, it enforces adjustment policies that are intended to balance heavily indebted countries’ payments. The World Bank advises those countries that have to undergo the IMF’s therapy on such matters as how to reduce budget deficits, round up savings, enduce foreign investors to settle within their borders, or free prices and exchange rates.

group is poised to increase its lending to India to US$ 3 billion annually in the period 2005-2008, up by a billion from the previous corresponding period. The Asian Development Bank (ADB) has also increased its lending to India to US $ 6.47 billion for the period 2005-07. These institutions combined, now provide loans and “policy advice” in a number of key sectors such as fiscal management, revenue collection and management, governance, agriculture, forestry, education, health, physical infrastructure, energy and water.

With its liberalised investment regime and willingness to undertake market oriented economic reforms in practically every sector, Karnataka has been an attractive destination for multilateral and bilateral International Financial Institutions (IFIs) over the past decade. Karnataka was the first state to implement the new agriculture policy in 1996, which ushered in corporate dominated agriculture including floriculture, aquaculture and also the production of special gherkins for export. The State has amended land reform laws to facilitate corporate agriculture and has systematically opened up its agricultural markets, thus exposing its farmers to unregulated competition from outside. The State Government has actively supported the expansion of the Information technology (IT) and Bio-Technology (BT) sectors by facilitating land acquisition, power and water supply, and offering other economic incentives to private companies in these sectors.

While such developments have boosted investments in the IT and BT sectors, they have substantially contributed to the displacement of small and marginal farmers, whose lands are acquired for a pittance in compensation, while the benefits accruing to investors by such grants are immense. At the same time, the conditions of the state’s farmers have worsened, as indicated clearly by the increasing rates of suicides in farming communities. There is no thought to writing off their debts, or extending low, or no interest Interest An amount paid in remuneration of an investment or received by a lender. Interest is calculated on the amount of the capital invested or borrowed, the duration of the operation and the rate that has been set. periods of credit to farmers, while the IT sector, for instance, continue to enjoy tax haven Tax haven A territory characterized by the following five independent criteria:
(a) opacity (via bank secrecy or another mechanism such as trusts);
(b) low taxes, sometimes as low as zero for non-residents;
(c) easy regulations permitting the creation of front companies and no necessity for these companies to have a real activity on the territory;
(d) lack of cooperation with the inland revenue, customs and/or judicial departments of other countries;
(e) weak or non-existent financial regulation. Switzerland, the City of London and Luxembourg receive the majority of the capital placed in tax havens. Others exist, of course, such as the Cayman Islands, the Channel Islands, Hong Kong and other exotic locations.
status, thus depriving the state’s exchequer of much needed resources.

The World Bank’s focus in Karnataka has included comprehensive structural adjustment Structural Adjustment Economic policies imposed by the IMF in exchange of new loans or the rescheduling of old loans.

Structural Adjustments policies were enforced in the early 1980 to qualify countries for new loans or for debt rescheduling by the IMF and the World Bank. The requested kind of adjustment aims at ensuring that the country can again service its external debt. Structural adjustment usually combines the following elements : devaluation of the national currency (in order to bring down the prices of exported goods and attract strong currencies), rise in interest rates (in order to attract international capital), reduction of public expenditure (’streamlining’ of public services staff, reduction of budgets devoted to education and the health sector, etc.), massive privatisations, reduction of public subsidies to some companies or products, freezing of salaries (to avoid inflation as a consequence of deflation). These SAPs have not only substantially contributed to higher and higher levels of indebtedness in the affected countries ; they have simultaneously led to higher prices (because of a high VAT rate and of the free market prices) and to a dramatic fall in the income of local populations (as a consequence of rising unemployment and of the dismantling of public services, among other factors).

IMF : http://www.worldbank.org/
measures through the Karnataka Economic Restructuring Loans (KERL), as well as urban and rural projects including watershed management, highways development, the Karnataka Municipal Reforms Project and the Karnataka Urban Water Supply Improvement Project (KUWASIP). The ADB has largely focused on urban projects: the Karnataka Urban Infrastructure Development Project and the Karnataka Urban Development and Coastal Environment Management Plan. In a recent statement issued to the Bangalore press, the World Bank’s Country Director stated that consultations are on with Karnataka Government to sanction the Karnataka Economic Restructuring Loan Phase III in excess of US $ 200 million, primarily for urban sector reforms and health sector projects. The ADB is planning to expand financing to ten North Karnataka towns.

While the World Bank has expressed interest in poverty alleviation programmes such as literacy, health care and rural development, its involvement in Karnataka is driven by its interest in the state’s power and infrastructure sector. The World Bank has pushed hard for structural and economic reforms in the power sector, which would result in wide ranging privatization of the sector and provide lucrative contracts for external power corporations. In fact, one of the main reasons for a delay in sanctioning of the KERL III was the World Bank’s condition demanding that Karnataka privatise one of its electricity supply companies. Despite various attempts the Government of Karnataka was unable to fulfill this demand and the proposed disbursal was contained to USD $ 200 million. Subsequently, the Government of India stepped in and vetoed the loan in Nov 2003.

The State Government has clearly veered away from its commitments to providing energy equitably, as is evident from its continuing emphasis on meeting Bangalore’s growing power needs largely by establishing green field projects. Little attention has been paid to improving the extraction benefits from existing installed capacity, or improving the energy security of rural areas. In addition, considered inputs from local experts have been pushed aside by World Bank and ADB selected consultants, whose expensive consultancy reports add to the loan burden of the people of Karnataka. During the Bangalore consultation in July on the World Bank’s Country Assistance Strategy (CAS), Mr. Vijay Gore, Addl. Chief Secretary of Karnataka charged Mr. Michael Carter, World Bank Country Director, with promoting consultants who the State had blacklisted!

Dangerous Trends

A closer look at IFI supported projects in Karnataka and the conditions that come with such financing reveal strong cause for concern. The Greater Bangalore Water Supply Scheme—which the World Bank is likely to fund-demands user fees that are clearly un-affordable by majority of the project’s “beneficiaries.” In the ADB funded Karnataka Urban Development and Coastal Environment Management Project (KUDCEM)—where the ADB’s co-financing component is US $ 175 million—project managers have coerced local municipal authorities into accepting terms and conditions that they are unable to justify to the public; the project is characterised by poor quality construction material, prolonged delays in completion, non-disclosure of important project information to the public, non-transparent and non-participatory decision-making and a refusal to subject project implementation to public scrutiny and supervision. In order to repay the project loans, Municipal Councils were required to hike land taxes mooted as part of the self assessment schemes (SAS) along with other user fees on services covered by KUDCEM project. Unable to carry the public with them, some municipalities have passed resolutions against such increases.

These projects place a mammoth debt burden on the state exchequer and thereby on every citizen of Karnataka. Equally important, they weaken local and state level governance through their undemocratic, non-transparent and non-consultative methods of operation. Constitutionally instituted local governance structures such as Municipal Councils and Panchayats are undermined by the parallel decision making structures that most IFI funded projects require.

The World Bank’s recent “consultations” on its new India CAS were characterised by such a lack of due process, which denied Indians an opportunity to debate the main features of the CAS before the World Bank’s Board of Executive Directors in Washington, DC approved it. Taking a serious note of such arbitrariness a gathering of peoples’ movements and civil society organizations in August rejected the CAS on grounds of:

a) poor and lackadaisical consultation in developing such a critical document, especially considering that it released only a part of the document on its website.

b) flawed country analysis that it used as the basis for developing new projects and
c) unjustified push for large scale privatization of key sectors outlined in the CAS.

Reclaim Development and Government

While development, improved infrastructure and a higher quality of life are urgently needed, economic gains for a few at tremendous costs for many cannot be acceptable as a desirable development model. Nor is it acceptable that the State Government agrees to the policy conditions demanded by the IFIs, and makes policy and project decisions without public debate and scrutiny.

In solidarity with worldwide actions against the World Bank, the IMF IMF
International Monetary Fund
Along with the World Bank, the IMF was founded on the day the Bretton Woods Agreements were signed. Its first mission was to support the new system of standard exchange rates.

When the Bretton Wood fixed rates system came to an end in 1971, the main function of the IMF became that of being both policeman and fireman for global capital: it acts as policeman when it enforces its Structural Adjustment Policies and as fireman when it steps in to help out governments in risk of defaulting on debt repayments.

As for the World Bank, a weighted voting system operates: depending on the amount paid as contribution by each member state. 85% of the votes is required to modify the IMF Charter (which means that the USA with 17,68% % of the votes has a de facto veto on any change).

The institution is dominated by five countries: the United States (16,74%), Japan (6,23%), Germany (5,81%), France (4,29%) and the UK (4,29%).
The other 183 member countries are divided into groups led by one country. The most important one (6,57% of the votes) is led by Belgium. The least important group of countries (1,55% of the votes) is led by Gabon and brings together African countries.

http://imf.org
and the ADB, various organizations in Karnataka have come together to articulate these concerns. This is part of a process which would be followed by a series of actions that would pressurize the State Government to pause in its negotiations with the IFIs, and shape its development policies and programmes according to the needs and priorities of its own people rather than the vested interests pushing the IFI’s economic agendas.

In specific, we demand that the Government of Karnataka urgently:

1. Immediately review all loans from the IFIs and bilateral donors that carry anti-people conditionalities and undermine sovereignty.

2. Prepare a White Paper that presents the total loan and interest burdens of the state arising from IFI and other donor funded programmes highlighting policy conditionalities that accompany these programmes.

3. Initiate evaluations of IFI and bilateral donor funded loans and projects from the perspective of development effectiveness and impacts on governance. These evaluations should be open to the public; panchayats and municipal councils, farmers’ groups, unions and workers’ organizations, tribal/indigenous peoples groups, and other civil society organizations must be involved in shaping the terms of reference for these evaluations.

4. Release the White Paper and evaluation reports to the public and table them for discussion in the legislature. New guidelines should be developed for the State’s contractual relationships with IFIs and donors based on the impacts of past loans and conditionalities.

5. Start exploring means of development financing development that do not compromise the public interest through policy conditions and heavy debt burdens. This could include the devolution of financial powers from the Centre to State so that States can increase their tax based by taxing corporate sectors on par with others and recovering tax arrears from the wealthy.

Kodihalli Chandrashekar,
Karnataka Rajya Raitha Sangha (Karnataka State Farmer Association)

Leo F. Saldanha,
Environment Support Group

Shalmali Guttal,
Focus on the Global South

Vidya Rangan,
Equations

Vinay Baindur,
CIVIC Bangalore

Harsh D’souza,
NGO Task Force, Mangalore

Kote Nagabhushan,
Tumkur Citizens’ Forum

Maj. Gen. S. G. Vombatkere (Retd.),
National Alliance of People’s Movement

Address for Contact:

Environment Support Group ®, S-3, Rajashree Apartments, 18/57, 1st Main Road, S. R. K. Gardens, Jayanagar, Bannerghatta Road, Bangalore 560041. Telefax: 91-80-26341977/26531339/26534364 Telefax: 91-80-51179912 Email: esg at esgindia.org oresg at bgl.vsnl.net.in Web: www.esgindia.org

Focus on the Global South, 3A, Classic Residency, 15th Cross, Eshwara Layout, Indiranagar II Stg, Bangalore 560038. Email: s.guttal at focusweb.org
Web: www.focusweb.org

CIVIC Bangalore, 14, IInd Floor, 4th main road, Vasanthanagar, Bangalore- 560 052.
Phone: 2226 4552, 2238 6864 Email:civicblore at vsnl.com Web: http://education.vsnl.com/civic_bangalore/



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