Category Archives: Economy

The Giant in the East – II

By Adnan Syed

This three part series examines the rise of India as an economic giant, the threats that India faces in this remarkable rise, and implications for Pakistan.

(AZW)

The Rise of India

Indian economic growth is expected to be 8.50% this year. This is a remarkable rate of growth for any economy. But this rate is dwarfed by the double digit growth rates that China has been producing for the last 10 years. India’s growth rate is expected to accelerate in the coming years, and Morgan Stanley expects that within next three to five years, this growth rate will outpace the Chinese rate of growth. Many economists are now forecasting that India would have the best economic performance among all nations of the world for the next 25 years.

The biggest reason for this higher expected growth rate is the demography. Economic growth of any nation relies on increase in workers (or the working age population) and increase in productivity. In 2040, India would have 58% of population as workers. The same number for China is only around 40%. India’s working age population will increase by 136 million over the next 10 years. China’s will grow by mere 23 million. To give some idea, during the similar time frame, the European working population will decline by 15 million over the next 10 years.[i]

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The Giant in the East – I

By Adnan Syed

This three part series examines the rise of India as an economic giant, the threats that India faces in this remarkable rise, and implications for Pakistan.

(AZW)

Before the Twenty First Century

As the twentieth century dawned, the world had continued to consolidate the technological boom during prior two centuries. This technological progress started with the invention of the printing press in fifteenth century. This invention quickly enabled mass availability of knowledge. Man began exploring the world around him more intently, by compounding the knowledge already gained by the earlier pioneers. As the scientific renaissance kicked in, man began accumulating more wealth by producing, discovering and innovating further. With the arrival of the scientific renaissance, the human output growth rate that had remained close to zero for thousands of years before, started rising  at a good multiple of its population growth rate.

The arrival of scientific renaissance coincided with incremental social awareness that began permeating the human consciousness. The United States came into being right in the midst of the great human renaissance that was exploding across the western world. The renaissance had begun moving forward in fits and starts towards institutionalizing the ideals of human liberty and freedom. The United States, with its rich natural resources and eager migrant entrepreneurs, began taking a lead in the social and scientific revolution that had begun sweeping the western civilization.

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Pakistan needs immediate assistance

PTH is starting a series of posts devoted to the Pakistan’s current crisis effects of which will be long term in nature. While millions of Pakistanis are in dire need of emergency help, our country’s political and economic instability will have ramifications for the region and the world. This is why it is extremely important to understand how several parts of Pakistan have lost decades of development and a state with weak capacities needs billions of dollars in the short term to start a major programme of rehabilitation. If Pakistani state is unable to intervene, the Taliban and other Al-Qaeda militants (and their allies in South Punjab) will find a golden opportunity to annihilate the Pakistani state, discredit constitutional governance and capture political space. Pakistanis cannot be silent victims and therefore we will speak. Pakistan has to be rescued and the international community cannot absolve itself of the responsibility towards its frontline state. Raza Rumi

AA Khalid, a regular at PTH, has written the first article for this series.

Pakistan Floods – Issues and Lessons

The weakness of the State in Pakistani politics has always been a concern but with the advent of the tragic floods it has been exemplified and magnified. In a recent Guardian article it has been observed that:

‘’Ever since Pakistan was created, the army has been the only institution capable of responding to natural disasters. One of the reasons that the military has been so politically dominant is that successive civilian governments have relied on the generals to help them deal with national crises.’’

This is not a problem contingent on which political party is in office, but rather is a comment on the inability of the State to take control and have a discernable sphere of influence and power.

Elsewhere it has been noted that the problem of the international response has been marred by perceptions of Pakistan that have been focused and limited to violence. In another Guardian article:

‘’ Compare and contrast: within days of the 2004 tsunami, £100m had poured into Oxfam, the Red Cross and other charities, and by February 2005 when the Disasters Emergency Committee (DEC) closed its appeal, the total stood at £300m. The Haiti earthquake appeal closed with donations of £101m. The DEC total for the Pakistan floods appeal has just reached £10m. .’’ Continue reading

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Pakistan’s budget: Policy sans public

Raza Rumi
Last week, a former Minister while referring to the budgeting process remarked how the budget documents were accessible to only 3% of the parliamentarians. A lady MNA whom I met after the budget speech was ploughing through the shabbily printed pink documents, looking for the allocations for regulatory bodies and both of us could not find the relevant figures. This should be enough to describe the inaccessibility and obfuscated nature of the budgeting process in Pakistan and several other developing countries.

Executive board-room syndrome
: Lack of public consultation in the budgetary processes is another hallmark of how the executive formulates the national priorities and finances them. Our state considers the people as ‘beneficiaries’ and ‘recipients’ of the wise decisions made in air-conditioned secretariats and donor board-rooms. This is why the economic and social policies are seldom reflective of the will of the people. Pakistan’s deep rooted authoritarian tradition explains this dilemma. But the civilian governments have rarely attempted to change this trend. More often than not, they also rely on the same evergreen bureaucrats. Our present elected government has chosen economic managers who are former international bureaucrats representing the good-old Washington Consensus.

Lack of participation:
Across the globe, pre-budget consultations are exercises seeking public support and inputs for policy. Countries in democratic transition are adopting participatory decision-making processes. There is also a growing consensus that budget decisions need to be subjected to public scrutiny and debate. Earlier, our government organized seminars in big cities and consulted the business, middle classes and other stakeholders to frame the policies. This time last-minute public consultations focused on the VAT issue. Quite obviously, for purely political reasons, these consultations have failed and we have a higher GST rate thereby more exposure to inflation.Development charades: The development allocations at the time of the budget announcement are almost always notional. Invariably these are slashed in the last quarter when fiscal crunch hits the government (40% in the last fiscal year). The new PSDP is Rs 663 billion but it remains to be seen if this will hold. How has it been estimated and prepared; only a handful of people know. The overall ceiling is guided by the NFC award. But, does it address the key development challenges? Perhaps not. Overestimated figures from the Friends of Democratic Pakistan were also factored in the previous years and even this year the allocations reflect what is expected and not necessarily what we have or need.

Lobbies who always win: As before, the big business, the landlords and the security establishment benefits from the limited resource base. The business lobby has avoided VAT at least until October, no mention was made of agricultural income tax in the budget speech and of course the defence budget is higher by 17%. The local vehicle-manufacturing industry will continue to enjoy protection. Much of the defence budget is hidden under the “General Public Services” category as the salaries and pensions are not reflected in the defence category.

Inflation will rise:
Contrary to various claims, inflation is here to stay. Higher energy prices and increased GST will lead to further increase in prices of commodities with a direct impact on the poor and the fixed-income groups. Apparently a study has been carried out to disprove the link between GST and inflation but it is not in the public domain. If and when VAT is imposed, inflation will further increase whether we like it or not.

Saving graces: Three key policies are somewhat promising. First, the focus on energy conservation, by providing 30 million energy savers, is a step in the right direction. The allocation of Rs. 40 billion for Benazir Income Support Programme and lastly the increase in salaries of the government employees are commendable policy decisions. It is not clear, though, as to how far the pay and pension commission’s recommendation was taken into account while finalising these figures.

Sterile debate:
Given the lack of budget awareness, the new gurus of Pakistani conscience have been holding endless talk shows on the budget. The commentary by TV anchors and their ‘political’ hosts is emotional and largely uninformed. Debate is good but spiraling ignorance is something that we must avoid. Similarly, the polemical statements in the National Assembly are intriguing. For instance, the leader of the opposition criticized the increase in government salaries for the adverse fiscal impact on the Punjab government, and at the same time lambasted the government for not doing enough for the vulnerable. MQM’s refrain that electricity should be cheaper in Karachi is also beyond logic.

Pakistan’s democracy is nascent and fragile. However, it is also an opportunity for the budgeting process to be reformed. The government should involve the media and civil society in raising awareness and building consensus on reform. In several parts of the world, accessible materials to increase budget literacy are commonly used. Similarly, it is time that the legislators are made more familiar with the budget process to enhance public oversight. Techniques that track inter-governmental expenditures can help reduce corruption and waste. All of this requires deepening of democracy, civil service reform and the emergence of a responsible media. We need a light year to get there.

First published in The Friday Times, Lahore (June 11 issue)

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THE GREAT RECESSION, THE EUROPEAN FISCAL CRISIS AND LESSONS FOR PAKISTAN. Part 3: The European Debt Crisis

The Exploding Debt in Europe

By Kashan Wali, exclusive to the PTH

 

Wealth cannot be artificially created

Finance in a real world relies on underlying wealth of a society. Governments cannot create wealth by printing money. Print too much money and it will lose its value. A fall in the value of money leads to inflation. Inflation viciously attacks the value of savings of the population. As population loses the stored wealth, the population becomes dependent on the state. State has to pay more now for healthcare, education and in extreme situation, food and shelter for population that is going poorer by the day. Either way, unless the underlying wealth (net output of goods and services produced) does not increase, a country cannot become wealthier.

Let’s say state tries to pull another trick here; it starts borrowing heavily from the investors to boost its cash reserves. A smart market will quickly catch on to the trick as it analyzes the conditions of the local economies to see if this state has good books and stable revenues. If investors decide that the state cannot pay off its liabilities in the future, it will charge a lot more in interest rate to justify taking that excessive risk. Investors may decide not to lend at all to a government running shady practices.

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THE GREAT RECESSION, THE EUROPEAN FISCAL CRISIS AND LESSONS FOR PAKISTAN. Part 2: The US Sub-Prime Crisis and the Great Recession

By Kashan Wali, exclusive to the PTH

As the United States economy took off for most of the 1990s, the new found wealth across the world was staring at the best of both worlds; high economic output due to technological advances, cheaper labour entrance into the global economy from India and China, entrance of Eastern Europe and Latin America in the democratic capitalist system, all combined with a lower inflation. What could go wrong?

In some ways, the situation was similar to the roaring 1920s of the United States. 90 years ago, the US economy was expanding rapidly. New technological advances in automobile and telephone technology were erasing geographical distances within and outside of the United States. Rising productivity was increasing wealth and the signs of prosperity were evident in the stock market and the housing market.

The stock markets in the United States took off for most of the 1990s. Most of the rise was understandable; internet was revolutionising the distribution of knowledge. And modern economy is a knowledge based economy, not the traditional manufacturing based economy of the 20th century. Technology is a self perpetuating phenomenon. It builds on a wider base and increases exponentially. The equity market future expectations of higher revenue in the future due to higher revenues and profits down the road were probably justified.

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THE GREAT RECESSION, THE EUROPEAN FISCAL CRISIS AND LESSONS FOR PAKISTAN. Part 1: Background, The Roaring 90s and the rise of leverage

 

By Kashan Wali, exclusive to the PTH

Today is May 08, 2010. As I write these line it occurs to me that this weekend is one of the most critical weekends as the seven month long crisis that started with initial doubts about Greece’s ability to pay off the massive debt that Greece had accumulated. The world nervously watches the European debt crisis morph into a contagious financial nightmare. Investors are worried that indebted nations like Greece, Portugal, Spain and even UK have accumulated too much debt too soon.

Coming on heels of the subprime crisis in 2007 and 2008, the world economies and the financial system are still in the recuperation phase from the wounds inflicted from the subprime crisis and the subsequent Great Recession afterwards. Below, we examine the European debt crisis in more detail. We will also look at the lessons for Pakistan and other emerging countries. There are a lot more similarities between the Greek tragedy and the Pakistani fiscal conditions. For those who do not learn from others mistakes end up being others down the road.

But first let’s take a step back to the subprime crisis that had the fiscal implications for the United States and Europe. Even before the subprime crisis, let’s examine the roaring 1990s that were a direct result of the massive globalization unleashed with the arrival of the internet. This was an important decade as two most populous countries properly entered the global economic arena for the very first time. They were China and India. For the next two decades, we see an explosive growth in the world economic output, globalization of trade, fall in industrialized world inflation, falling yields and the rise of phenomenon called the “leverage”. A few decades from today, we may exclaim what a shame that such prosperity became a victim to excessive leverage and regulatory failure. Yet we have countless examples of this reckless behaviour throughout the human history.

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