Tuesday, February 1, 2011

An economic mess

That the Pakistani economy is in tatters is no secret. However, what is being kept a secret is exactly how the government plans on remedying this economic free fall. Prime Minister Yousaf Raza Gilani has, of late, been running from pillar to post to convince the public that the government, its economic team and the political parties are elbow deep in consensus and dialogue to chalk out a ‘comprehensive’ economic reform plan. In a recent meeting with senators in Islamabad, the PM assured all stakeholders that an economic turnaround was imminent. He also met the Board of Investment (BOI) Chairman Saleem Mandviwala to assure potential investors of the government’s commitment to safeguard foreign and local investments, aimed at boosting the country’s economic welfare. All this sounds very good, but traditional rhetoric is not going to get us anywhere. Pakistan has come to a state where, until solid results are not seen, no one will believe that this new round of efforts to revive the economy will bear fruit.

In this entire scenario, the ordinary people are worst hit with prices of commodities getting out of their reach. Alarmingly, reports are filtering in that the health ministry is looking for a massive seven percent increase in the prices of various medicines. Only the over-burdened masses will suffer if this move is approved. The International Monetary Fund (IMF) is withholding the next tranche of cash promised to us because of the government’s failure to get the reformed general sales tax (RGST) approved by parliament. Therefore, a mega 50 percent cut in the country’s development programme as part of the new economic plan has been proposed. How does the government hope to get the economy back on track without money being spent on vital infrastructure such as roads, bridges and the uplift of rural areas is beyond comprehension.

The country is devoid of electricity and natural gas. Industries are shutting down left, right and centre with the textile industry going bankrupt because of irregular power supply. The Obama administration is discussing a preferential trade access programme for Pakistan in the Congress, especially for its textile sector. If the Congress approves this programme, it has the potential to provide a boost to the economy by creating jobs. It remains to be seen what we will export when the industry is shutting down due to the inability of the government to develop our power resources and infrastructure.

The PM can attempt to assure potential investors, but the fact remains that they are highly suspicious of Pakistan’s security and profitability. Daily corruption scandals traced back to the incumbent government are sending red signals to all those who could inject the country with a healthy dose of investment. Until some concrete plan is approved with transparency and accountability being main priorities, no investor will come to our aid.

It is bordering on vulgarity that in a country where the flood victims are sleeping out in the cold without food, warm clothes and shelter, the PM recently gave the go-ahead for luxury parliamentary lodges that will cost the national exchequer a dizzying Rs 3 billion — a move the PML-N is opposing. When the government is contemplating cuts in development, when the masses are facing massive inflation, when even simple medication might become out of reach and when electricity and gas have become privileges, such trivial pursuits further disillusion the public and the investors.

It is time the government introduced some credibility to its words by following them up with actions. No exports or new investments are possible without addressing the issues at hand.

The new world balance

At the dawn of the 21st century, the US was the undisputed global superpower with no apparent peer on the horizon who could challenge its interests in trade, diplomacy and military might. In the last decade, after the terrorist attacks of 9/11, when the US was engaged in its twin wars, aspiring new powers were slowly and gradually building their spheres of influence. China, Russia, Brazil, Turkey and India are the five emerging powers ready to take their place in world affairs.

China, throughout its history, has played a dominant role in South and Southeast Asia. Although China has competed with Japan for regional influence for over a thousand years, its one key distinguishing characteristic has been never to go beyond its seas. This has changed; for the first time in its history China may be extending its reach beyond the South China Sea. The Chinese have carefully chosen their expansion plans to include countries that are rich in mineral resources to satisfy the hunger of their vast manufacturing appetite. They have executed plans to have direct influence in Africa and Asia while they have formed a strategic alliance with Brazil and Turkey for an indirect influence in South America and Europe respectively. The first phase of their strategy was to use their vast cash resources to build a network of seaports in Asia and Africa. These ports are fully financed, built and operated by Chinese companies. The next phase in their development is just starting, which is to have trade and security pacts with these nations to ensure a smooth sailing of Chinese merchant ships from these ports. The recent naval influence exerted by the Chinese navy in the South China Sea is a message to the world to be aware of their activities in their backyard.

The US embarked on the strategy of expanding NATO during eight years of President George Bush to induct the former Soviet state Ukraine as a member along with plans for a missile defence system in Poland. This produced an angry response from Russia, so much so that it had to create a military crisis in South Ossetia to express its intent to use force if needed. When President Obama took oath of office, he immediately embarked on mending relations with Russia.

From the media polls it is quite clear that Prime Minister Putin, a passionate Russian nationalist, might emerge as a leading contender to grab a second tenure as the president of Russia in 2012. If that happens, there would be no doubt that Russia would accelerate the creation of a regional organisation of former Soviet states to create a cartel of commodity-rich countries. The recent signing of a currency deal between Russia and China is a step in creating an economic collaboration between this emerging bloc and China.

India, in recent weeks, has been in the limelight because of visits of world leaders starting with US President Obama, who endorsed India’s candidacy for the United Nations Security Council (UNSC) permanent membership. This was followed by Angela Merkel of Germany, Nicolas Sarkozy of France, David Cameron of UK, Prime Minister Wen Jiabao of China and ended with Dmitry Medvedev of Russia who also endorsed India’s candidacy for the UNSC. These visits clearly indicate that India is recognised as a player on the world stage but not yet fully capable to handle the diplomatic and military requirements of an international power.

This would mean that during the next few decades India has to align itself with one of the three dominant players, i.e. the West led by the US, Russia, which is an old ally, or China, which is a traditional rival. Their long history of alliance until the dismemberment of the USSR and the socialist character of Indian society would suggest that Russia is a natural partner. But this time around, economic growth has been the main driving force of Indian foreign policy to maintain its annual growth of seven percent. With the adoption of capitalism, large numbers of non-resident Indians (NRI) in western countries and a democratic government, it is likely that India will align itself with the West in the form of trade and security alliances. There is a possibility that NATO will remake itself to be a global alliance with India as its member in South Asia.

The two minor powers with long histories of regional influence are Brazil and Turkey. Former President Lula da Silva’s economic policies have produced a strong Brazil, which is confident in its roots and culture. Brazil has traditionally competed with the US to have influence in South America. This rivalry has created an opening for China to form trade relations with Brazil with an eye towards increased cooperation in other spheres of influence. For the foreseeable future, Brazil will focus inward with an occasional role on the world stage like the recent tripartite, along with Turkey, agreement with Iran to contain its nuclear ambitions.

Turkey was an alliance partner with Germany in World War I, which ultimately resulted in the disbanding of the Ottoman Empire that existed for 700 years. This long history of global influence has endowed Turkey with deep knowledge of diplomatic, military and trade relations. For most part of the 20th century, it focused inward to improve its economy and strengthen its social fabric. At the dawn of the 21st century, Turkey has emerged as an important player in the region that can play a significant role in the resolution of conflicts. In almost all negotiations in the last five years, Turkey has played a major role. Whether it was a back channel discussion between Syria, Israel and the US, or negotiations on the containment of Iran’s nuclear ambitions, or a summit meeting between the Afghan and Pakistani presidents, Turkey has been centre-stage. On the other hand, Turkey has reached out to Russia and China for trade pacts to strengthen its position as a gateway to resource-rich Central Asia and Europe.

While these relationships and players emerge, the most important development that would establish the balance of power will be the reorganisation of the UNSC. The negotiations are already underway for this purpose, but it is clear that the opening will be for more than one new permanent member and that the veto power will be democratised. There are many formulas in play to promote candidates but one thing is significant. Representation of the Muslim bloc will be important to provide a voice to over 33 percent of humanity that are connected by a shared system of beliefs. Turkey meets many requirements as representative of the Muslim world. First, it was a global player during the Ottoman rule for over 700 years. Second, it has a long history of relations with the West. Third, it has the diplomatic goodwill among the Muslim countries to represent their interests. And last, it understands global diplomacy to resolve conflicts.

Almost all countries have Muslim communities and most conflicts involve their interests. Radicalisation of Muslim societies is a political phenomenon and results from the absence of their voice on the world stage to resolve these conflicts. It is important for world peace that the voice of Muslims is heard by seating them at the UNSC.

Corruption and economic development

An overwhelming body of empirical evidence suggests that the impact of corruption on economic growth and development is highly devastating. Corruption impedes foreign and domestic investment, and increases transaction costs. It raises uncertainty and is responsible for low incomes and underdevelopment as it sands the wheels of economic growth. Validity of the literature that sprang up in the context of the ‘Asian paradox’, i.e. miraculous growth of most East Asian countries despite the prevalence of corruption stands discredited in the light of the latest empirical studies on the subject. There are a number of channels through which the negative effects of corruption are transmitted to the economy.
Corruption misallocates talent and resources, and distorts technology choices. People, being rational human beings, join the fields of employment that possess maximum potential for rent seeking. For example, university graduates may prefer to become tehsildars or police station house officers (SHOs) rather than agriculturists and business entrepreneurs.
Public sector employment in Pakistan is a pertinent example of this misallocation of talent. Up until the last few years, a dominant majority of the graduates appearing in the civil services examination hailed from medical and engineering backgrounds — students who had burnt the midnight oil to become ‘pen pushers’ despite having good qualifications in the fields of medicine and engineering. Although other factors such as respect for the civil service in society (which is fading now), security of service tenure and passion for public service delivery should not be ruled out as motivating factors, yet the fact remains that rent-seeking by grabbing power remains one of the potential reasons for joining the public sector in Pakistan.
As regards sectoral misallocation, huge deals in arms by developing countries are pertinent examples. Scandals have surfaced from time to time in several developing countries (like the Bofors scandal in India and Agosta submarine deals in Pakistan) where allegations of receiving fat commissions were levelled against politicians and those at the helm of affairs. If the incentive for commissions had not been there, there is every possibility that the funds would have been funnelled to other sectors like physical infrastructure development, directly related to economic growth and development.
Corruption also distorts technology choices. One of the motivational factors for imports of capital-intensive technology by developing countries stems from the potential opportunities of corruption attached to such deals. It may be pointed out here that most developing countries are abundant in labour, so labour-intensive technology generally is the best fit for these countries as it creates more employment opportunities. The health sector presents another glaring example of distortion in technology choices. Big hospital infrastructures and sophisticated medical equipment are generally preferred to rural health clinics specialising in preventive care even in the poorest countries.
Corruption hampers the ability of the state to raise taxes, encouraging informal businesses. The reasons are obvious. Due to corruption in the tax machinery and complex procedures of tax collection (upon which corruption thrives), businesses avoid getting registered for tax purposes. This direct correlation between corruption and the informal economic sector is easy to understand. In countries where corruption levels are high, informal sectors of the economy are huge. Again, Pakistan is a pertinent example. According to various estimates, the informal sector constitutes 50 to 60 percent of our total GDP.
Further, corruption impacts decisions to start businesses because you need information on bribes to start and run the business in a corruption-ridden set-up. Thus potential entrants to business face uncertainty as to what bribes to pay and when to pay. In this way, corruption acts as a barrier to the entry of new firms into business. Additionally, it acts as a heavy drain on existing businesses as well. Whenever there is an upward increase in tax revenue targets, it is the existing tax-paying businesses upon which the hammer falls, as governments are unable to tax the businesses operating in the informal sector. This eventually harms economic growth. We can also say that the low tax base has a direct link with corruption.
Moreover, the impact of corruption is differential and discriminatory. It falls heavily on small businesses and disadvantaged sections of society. Corruption deepens the chasm between the poor and the rich, big businesses and small enterprises, the powerful and the powerless, the big man and the small fry. It is a well-known fact that strict enforcement of the canons of rule of law is lacking in developing countries. The elite are well connected socially as well as politically. They can buy public services/goods like utility connections, access to law enforcement agencies for redressal of their grievances and dispensation of justice, whereas the cost borne by the less powerful for such public goods in a corrupt institutional set-up is very high. Corruption is regressive for small businesses as well. One of the potential reasons for the less developed small and medium enterprises (SME) sector in Pakistan can be traced to corruption. Corruption creates, sustains and perpetuates poverty and inequality traps in society.
The question is: why is corruption so widespread in developing countries? Surely it is not due to difference in the quality of human beings. The reasons are many but the chief reason is over-regulation of the economy. Over-regulation basically stems from the fact that developing countries are low-trust societies. Unnecessary rules, procedures and multiple layers of checks and supervision are common in developing countries. Added to this, accountability mechanisms are weak.
Our understanding of the corruption issue is fallacious. If corruption is high and the state feels that it needs to tackle it to recoup its eroded legitimacy in the eyes of the public, an immediate prescription is to set up one more anti-corruption agency, which is generally as corrupt as other institutions. Rather, in some cases, the level of perceived corruption about such watchdogs is higher when compared to the institutions they are supposed to oversee.
Corruption should not be viewed merely as an administrative problem. The corruption issue has economic dimensions as well and requires economic insight for its solution. Economic reforms aimed at simplifying cumbersome laws and procedures, doing away with inefficient regulations and redesigning the incentive system for the civil services can go a long way in reducing the levels of corruption, both real and perceived, in the ‘land of the pure’.

SECP registers 23 cos having foreign investment

The Securities and Exchange Commission of Pakistan registered 23 companies having foreign investment in December. In addition, 3 foreign companies were also registered.
Out of these 23 companies having foreign investment, 5 have foreign investment by foreign nationals from Singapore, 4 from China and the remaining from the UK, the US, Australia, Japan, Saudi Arabia, Canada, Spain, Iran, Egypt, Germany, and Oman.
Among these, 11 companies were registered in Karachi, while 6 in Islamabad, 4 in Lahore and one in Quetta and Multan. As for the sector-wise breakdown, 7 companies were registered in the transport sector, followed by 4 in trading sector, 3 in miscellaneous sectors, 2 each in services and communication sector, and 1 company each in IT, chemicals, education, food and beverages and mining. Of the three foreign companies, 2 companies have South Korean origins. They plan to do business in engineering and construction sector each, while one company has Netherlands’ origin and it works in the IT sector. Two foreign companies were registered in Lahore and one in Karachi.

The republic of silence

“We were never more free than during the German [Nazi] occupation. We had lost all our rights, beginning with the right to talk. Every day we were insulted to our faces and had to take it in silence. Everywhere, on billboards, in the newspapers, on the screen, we encountered the revolting and insipid picture of ourselves that our oppressors wanted us to accept. And, because of all this, we were free” — Jean Paul Sartre, La République du Silence (The Republic of Silence).
Jean Paul Sartre writing about the Nazi occupation of France said that the occupation and oppression made the French more conscious of the freedom that they possessed than they ever were. Pakistan today faces similar occupation, similar oppression and consequently similar freedom. Like occupied France, venom today has seeped into our society, our thoughts, into our beings; every accurate thought is now a conquest. Tyranny today coerces us to hold our tongues; every word takes on the value of a declaration of principles. As we are and increasingly will be tracked and hunted down, each and every gesture has the weight of a solemn commitment. The circumstances, as atrocious as they are similar to Nazi-occupied France, have finally made it possible for us to live without pretence or false shame. Salmaan Taseer’s martyrdom has compelled us to be free.
Hegel writes in The Phenomenology of Mind, that it is solely by risking life that freedom is obtained; the individual who has not staked his life may, no doubt, be recognised as a person, but he has not attained the truth of this recognition as an independent self-consciousness. Salmaan Taseer’s martyrdom has obliged us to achieve this self-consciousness, has forced us to be humans.
Unlike Salmaan Taseer, most of us do not possess the courage to willingly sacrifice our lives, but like Salmaan Taseer all of us have Qadris confronting us every day. According to Sartre, the very cruelty of the enemy drove the French to the extremities of this condition by forcing them to ask themselves questions that one never considers in times of peace. For the secret of a man is not his superiority complex or his inferiority complex: it is the limit of his own liberty, his capacity for resisting torture and death. Salmaan Taseer was an exceptional warrior; he pushed the boundaries of these limits. Today, in times of war in Pakistan, we are painfully aware of the limits of our liberty.
Many of us want a compromise; we are afraid of defeat, pain and death. We want to be non-confrontational, to blend in. The choice is no longer ours to make. Qadri sees right through our deceit, he will never accept us as one of his own. Qadri today constrains you and me to be liberated. The choice of being an apologist is not available to us anymore. The battle will continue, whether we choose to actively participate or not is only relevant to the extent of determining if it will be combat or slaughter. After Salmaan Taseer’s martyrdom, Qadri frightens no one; he no longer even has the means to intimidate: he is beginning to horrify, he is just grotesque, and that is all.
The Pakistan Peoples Party’s (PPP’s) stance today puts Brutus and Judas to shame. Many of us have voted for and supported Shaheed Zulfikar Ali Bhutto and Shaheed Benazir Bhutto’s PPP; we will fight Babar Awan’s party. Many of us have nowhere else to go, but we will go nonetheless. The choice of going back is becoming increasingly difficult; if the trajectory does not change, soon the place we are from will not exist anymore. The PPP does not only betray Salmaan Taseer it betrays the legacy of Mohtarma Benazir Bhutto Shaheed. BB preferred martyrdom over compromise. The PPP I know of and support is one where BB recites “main baaghi hoon” (I am a rebel) in 1988. The sermons of Babar Awan and the diabolical statements of Rehman Malik are surrealistically insulting to BB’s memory. The ostensible reason for compromise by the PPP is self-preservation, ignoring a countervailing consideration of infinitely superior magnitude; the liaison is vile, it is indecent.
Protect, support and cherish Sherry Rehman. Bending over backwards and kneeling before tyranny will not get you Qadri’s vote; it will certainly lose you mine. I personally would want them on board, but the PPP needs to understand that this fight will go on with or without them. Freedom is no longer optional.

Oil down as dollar rises, Brent close to $100

Oil slipped on Monday while the dollar strengthened and equities faltered as OPEC said the market was well supplied and inventories should build in the first half of the year.
North Sea Brent crude futures on the Intercontinental Exchange (ICE) consolidated around $6 above US crude oil futures and were not far below $100 per barrel, a level not seen since the beginning of October 2008.
US crude for February fell 40 cents to $91.14 by 1243 GMT, while ICE Brent for March lost 50 cents to $97.88.
The spread between the two futures contracts has narrowed since the ICE Brent contract for February expired on Friday. At one point on Friday, the spread between the two February contracts hit more than $8.00 a barrel, its widest in 23 months. US markets were closed for the Martin Luther King holiday and traders said that was likely to help keep oil futures within fairly narrow ranges on Monday.
Christopher Bellew, at broker Bache Commodities, said the stronger dollar had put pressure on commodities markets: “The oil price has been in an uptrend since the middle of November and now we are getting close to $100. The weather in the northern hemisphere has turned a bit milder, and the end of winter is in sight,” Bellew said.
OPEC said on Monday the world oil market remained well supplied and inventories should build in the first half of the year, even it raised its 2011 global oil demand growth forecast. The Organization of the Petroleum Exporting Countries increased its global oil demand growth forecast by 50,000 barrels per day (bpd) to 1.23 million bpd in 2011.
OPEC said in its monthly report the early onset of winter weather and an increase in investment flows into commodities were among the factors behind a recent surge in prices. The group maintained its view that consumers have enough oil. The UAE’s oil minister said fluctuating prices were not a worry: “The price keeps going up and down and all I can say for now is that we are happy,” Mohammed al-Hamli told reporters.
Al Hamli said markets were well supplied and prices reflected market conditions. But the head of the International Energy Agency, Nobua Tanaka, said on Monday oil prices were alarming at current levels and would have a negative impact.
OPEC Secretary General Abdullah al-Badri told an Austrian newspaper that, while the organization was ready to act to address supply shortages in the oil market, it would not intervene if prices were driven by speculation..
At this stage, higher output would not stem a rise in oil prices, as the climb is driven by increasing demand in emerging countries, chief executive of French oil major Total Christophe de Margerie told Reuters on Sunday. News a key Alaskan oil pipeline was about to reopen after being closed for over a week also put some extra pressure on oil prices, analysts said.
The operator of the 800-mile (1,280-km) Trans Alaska Pipeline System, which has been struggling with a leak in piping at the Prudhoe Bay intake station, said the oil artery would resume normal operations later on Monday. “We are seeing the end of exceptional support due to supply disruption on this pipe, and also the weather has become much warmer than usual both in Europe and in parts of central and eastern United States. So we are losing some support from cold temperatures,” said Christophe Barret, oil analyst at French bank Credit Agricole.
Asian shares mostly fell on Monday, led by Shanghai after China’s latest attempt to contain inflation. The benchmark Shanghai Composite Index closed down more than 3 percent. The index lost 1.7 percent last week amid fears over monetary tightening steps.

Euro falls on fading hopes for bailout fund

The euro fell broadly on Monday as hopes for an increase in the eurozone’s bailout fund faded and as investors reassessed a recent rise in European Central Bank interest rate expectations.
Uncertainty about whether Germany would support an increase in the lending capacity of the rescue fund, known as the European Financial Stability Facility (EFSF), clouded sentiment.
Europe set up the safety net fund, which can borrow on the markets with eurozone government guarantees of up to 440 billion euros, in response the debt crisis that forced Greece and Ireland to take bailouts last year. But a new package of anti-crisis measures is seen as unlikely to come any time soon.
Attention on Monday was focused on a meeting of eurozone finance ministers, at which an increase in the effective lending capacity of the rescue fund is expected to dominate discussion.
Senior European sources told Reuters the sense of urgency in Berlin for boosting the fund had diminished after successful bond auctions last week in Spain and Portugal, the two countries seen most at risk of needing any further bailouts. Instead Germany is pushing for broader anti-crisis measures to be agreed at a summit of European Union leaders in March.
“It’s becoming increasingly apparent that Germany doesn’t want an increase in the rescue fund and that’s weighing on euro sentiment today because there were positive expectations building last week,” said Manuel Oliveri, currency strategist at UBS in Zurich.
“We believe the euro is a sell on rallies because investors are not minded to buy euro-denominated assets while structural problems in the eurozone persist,” he added. The euro traded at $1.3270, down about 0.8 percent on the day after falling as low as $1.3243 on trading platform EBS.
It was off a one-month high of $1.3458 hit on Friday when speculators went long after solid debt auctions from Spain and Portugal, hawkish comments on inflation from European Central Bank President Jean-Claude Trichet and hopes that eurozone policymakers may expand their rescue funds. ECB policymaker Athanasios Orphanides played down rate hike expectations, saying last Thursday’s statement was not overly hawkish and that there was sometimes an overreaction to the underyling message.