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  #81  
Old Monday, June 18, 2007
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The election year budget that brings little respite




In the national interest

By Kamal Siddiqi( The writer is editor reporting, The News)
Monday,June 18,2007

The budgets have been unveiled. Both national and provincial. The government promises us relief and respite. In reality, we have neither. Subsidies are back in fashion, much to the disdain of the international finance institutions. Defence spending is up while there is a very marginal increase in spending on health, education and sports. If the state of a nation can be judged from its budget, then Pakistan does not come across as a country that cares much about its people. And yet, budgets are like promises of power by our rulers — seldom honoured usually broken.

At the same time, the CJ saga continues. And with it continues the government offensive on the media. In this age of good government, one finds it strange that those who are seen to be standing by the Chief Justice are being punished while those who are happy to file affidavits that go against him are rewarded. The divide is blatant and brutal. And yet there are those who continue to support the CJ. This worries the government.

This newspaper reported earlier this week that in an amazing “twist of fate” the government’s witnesses against the CJ are getting better deals one by one while those who did not toe the government line have to face the music. The details show that some have been rewarded with plum postings. Those who have opposed have faced arrest, torture and much worse.

In the case of the new Sindh IGP, Major (Retd) Ziaul Hassan, this is an example of shooting two birds with one stone. Major Hassan had earlier given an affidavit that showed the CJ in a negative light. Tongues are now wagging that this is his reward. But there is more. His appointment comes after earlier attempts by Islamabad to put their man in Sindh which were thwarted by the coalition partner, the MQM.

Sindh Advisor for Home Affairs had gone on record for saying that a senior police official from Sindh should be made the provincial police chief. However, after the incidents of May 12, it seems that this demand has been withdrawn. Now we have yet another man from Islamabad who will try to make the most of the situation in what is essentially unfamiliar terrain. Is it fair to Sindh to be given as a reward posting?

What is fair and what is not is subject to debate in Islamabad. Mercifully the minister of state for communications, Shahid Jamil, finally resigned from his position following the registration of a criminal case against him in connection with the alleged killing of a Pakistan-origin Canadian national at his residence. But one wonders why he was not arrested. Instead, when the media got wind of the story initially, the much hyped Motorway Police stood guard to protect the minister from the prying public. This is ironic.

The same irony also applied to the Minister of Tourism, Nilofer Bakhtiar, who resigned from her position because she was relived of a party position that she held. That change came after the paraglide pictures of the minister were made public with a group of men who she was obviously not related to. Why do we have two standards for everything? Also, if the minister should resign it should have been for the disaster she has made of the Visit Pakistan Year 2007. The only beneficiary of this ill-advised venture seems to be the minister herself who went around the world in a bid to “promote” Pakistan during its tourism year. Will we ask her to pay back the public money she spent on these sprees?

Is it not ironic that key members of Prime Minister Shaukat Aziz’s super-sized cabinet resign for all the wrong reasons? Possibly that is why many of the other ministers hold on despite all that is said and written about them.

We are told that yet another minister of state is in the firing line. This time for involvement in human trafficking. The FIA has sent a questionnaire to this minister to explain how his official stationery was used to procure European visas for people. One recalls that the prime minister had said that when he inducted his super-sized cabinet that their performance would be evaluated on a periodic basis. Given the antecedents of cabinet members so far, where is the report card the public should ask? Better still, say some, don’t ask. Ignorance, they say, is bliss.

The prime minister himself has been busy predicting the obvious. In an interview with an American news service, the prime minister said that he expects President Musharraf to secure another five years in office. One hopes the president has the same predictions for his prime minister.

Talking to this foreign news agency, the prime minister also unveiled the grand plan. The president would be re-elected by the sitting parliament between September 15 and October 15 after which around November an interim prime minister would take office so that elections are held within 90 days. So for all practical purposes, elections are expected in January 2008 or so.

Who will be the interim prime minister, one asks. More importantly, will it be someone seen as being close to the prime minister or the president? Or better still, a retired judge?

However, there are ifs and buts to this. For example, the US is insistent that the elections should be held “according to international standards.” US Assistant Secretary of State for South Asian Affairs, Richard Boucher, even went and met officials of the Election Commission of Pakistan this week “to ensure that arrangements are being made to hold free and transparent elections.”

While one is no fan of the military setup in place, a senior US official dictating to the election commission on how elections should be held in Pakistan is taking things too far. If this is not unnecessary interference in the affairs of Pakistan, then what is?

The mixed signals from the government, however, are confusing. The foreign office spokesperson stated “We don’t need an outsider to come and tell us what to do. This is for our people, our government and our media to discuss, debate and decide.” She said this when a reporter asked her about the state of media freedom in Pakistan and comments by some EU officials over recent “setbacks” in media freedom in Pakistan.

Should these comments also not hold true for elections in Pakistan as well? It is one thing to have independent observers from international organisations and another to have a foreign government insisting on supervising the process minutely. With such involvement, one worries about the outcome of the exercise itself.

Email: kamal.siddiqi@thenews.com.pk

http://www.thenews.com.pk/daily_detail.asp?id=60981
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Old Tuesday, June 19, 2007
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Economy’s current state




By Shahid Javed Burki
Tuesday,June 19, 2007

SINCE I write about the Pakistani economy, I am often asked about its health, performance and prospects. These questions are posed more earnestly in May and June as the calendar advances towards two events. The first is the release of the annual Pakistan Economic Survey; the second is the unveiling of the national budget. The Survey takes a detailed look at the financial year that is about to close; the budget views the year that is about to begin.

The Survey for the year 2006-07 was released to the public by the ministry of finance on June 8. Two days later, on June 10, the budget for the year 2007-08 was presented to the National Assembly. In the article today, I will reflect on the current state of the economy.

The most discussed number in the Survey is the rate of economic growth which is estimated at seven per cent. This is an estimate since the government has data for only the first 10 months of the year, from July 2006 to April 2007. This means that the economy continues to expand at a rate three and a half times the increase in population.

At this rate there should be a sizeable reduction in the incidence of poverty. The expansion that began in 2002-03, when the gross domestic product increased by 4.7 per cent, was maintained in the current year. The GDP increased by 7.5 per cent in 2003-04; by another 8.6 per cent in 2004-05; and by a further 6.6 per cent in 2005-06.

Factoring in the increase for this year, the economy has expanded by almost 40 per cent over the last five years — on average an increase in GDP of seven per cent a year. This makes it one of the most impressive periods of economic expansion in the country’s 60-year history, a fact that Islamabad should celebrate by using the right set of numbers.

I am really puzzled why the country’s senior economic leaders continue to use “nominal” rupees and dollars to underscore the good performance of the economy. A nominal rupee or a nominal dollar is the value of the currency in terms of what it can purchase at a given time. The nominal rupee in June 2007 is what it can buy in June 2007. Its value is eroded by inflation. Consequently, what it can buy today is less than what it was able to purchase a year ago or five years ago.

The rate at which a currency depreciates is what economists call the price deflator. It is the amount by which the value of the currency must be adjusted to discount for inflation. When the Economic Survey says that the GDP increased by seven per cent, the estimate is made in real rupees. It takes out the effect of inflation. It is the real expansion in the economy, not the consequence of inflation.

The claim made repeatedly that the size of the economy has been doubled in five years is correct only when the rate of growth is measured in nominal rather than in real rupees or dollars. That is never done. Growth rates should always be provided in real rather than in nominal terms. The difference between the two is important.

Although this “doubling of GDP stance” was dropped from the various presentations made in connection with the budget, the thinking behind some of these claims, unfortunately, has not changed. “The per capita income in dollar terms has grown at an average rate of 13 per cent a year during the last five years, rising from $586 in 2002-03 to $925 in 2006-07,” write the authors of the recently released Economic Survey. “Per capita income grew at a much lower rate of 1.4 per cent per annum in the 1990s.”

It is particularly worrying that this comparison in the performance of the economy in the 1990s and the early 2000s is being made in these terms. The 13 per cent increase in the recent period was in nominal terms, the 1.4 per cent growth in the earlier period was in real terms.

There was a suggestion that since per capita income is approaching $1,000 a year the country should be on the verge of becoming a middle income economy. But the line that separates the poor from middle-income countries continues to be moved up by institutions such as the World Bank that do this kind of accounting to take account of inflation.

When Pakistan crosses the line, the definition of a middle-income country will certainly have changed. Besides, as indicated in the Economic Survey, the country has continued to keep the exchange rate more or less fixed at Rs60 to a dollar. This has been done despite the fact that the rate of inflation in Pakistan is at least seven percentage points more than in the United States.

As I have suggested earlier, the rupee is now seriously overvalued and when the adjustment is finally made, it will result in reducing the size of the economy as well as income per head of the population when these two are expressed in nominal dollars. That would not mean that devaluation would bring back the country from a middle-income status to being once again poor simply because the exchange rate has been adjusted to a more meaningful level.

This is the kind of problem the use of nominal currencies poses. An economy that has grown at seven per cent average over a five-year period will not only be much larger in size, it will also be structurally different. This will be the case in particular if the rates of growth in different parts of the economy are different from the economy as a whole.

The Economic Survey has data on the sources of growth with the contributions estimated for the main sectors of the economy. Of the three main parts — services, agriculture, and manufacturing — the highest rate of growth was registered by manufacturing. This is to be expected of a rapidly growing developing economy.

The sector’s output increased by eight per cent in 2006-07. However, this was lower than the rate of increase in 2005-06, when the value added in the sector grew by 10 per cent. The rate of output increase in what is described as the large-scale manufacturing sector also declined quite significantly. It was 10.7 per cent in 2005-06 but declined to 8.8.per cent in 2006-07.

The service sector output increased by eight per cent while that of agriculture grew by five per cent. Agriculture’s higher than normal rate of increase was largely the consequence of the recovery from the previous year. In 2006-07, the output of major crops increased by 7.6 per cent, coming after a decline of 4.1 per cent in the previous year.

In other words, the high growth rate of the economy in 2006-07 may be due in part to good weather which normally contributes to wide fluctuations in agricultural output. Also, the fact that the value added by major crops was considerably greater than that by minor crops and the sector of livestock means that the sectors which will ensure high rates of sustainable growth are performing below their potential.

These growth rates suggest that the economy’s three major parts grew close to the average rate of economic increase. The contribution they are making to the economy has not changed by much; the proportions in the national GDP of agriculture, manufacturing and services have remained largely unchanged. This may be the sign of long-term weakness since looking at the country’s endowments growth will come from some of the economy’s components that are currently under-performing. Small-scale engineering and high value added agriculture are some of the activities that would provide long-term momentum to the economy.

What is particularly worrying about the state of the economy is the performance of exports. In the first 10 months of the current year, the value of exports increased by only 3.4 per cent, a sharp decline from the 16 per cent average a year increase in the previous four years. The value of imports has also declined from a sharp acceleration in the period between 2002 and 2006 and the financial year about to be completed.

The Survey identifies in some detail the reason for poor performance of exports among them the most important being the inability of the textile sector to remain competitive in a market that has many aggressive participants. This line of thinking represents a major change in

the government’s view of the performance of the textile sector.

The Economic Surveys from earlier years had celebrated the large investments that were made by the entrepreneurs in the textile sector. It was repeatedly pointed out that by investing massively in the modernisation of the industry, textile entrepreneurs had prepared the country well for the time when the quota regimes that had directed international trade in the sector, would be replaced by open competition.

The approach taken this time is correct since it puts emphasis on the sector itself rather than on the crutch that the entrepreneurs continue to demand from the government. It is the ready availability of the support the government was always prepared to provide that has retarded the sector’s development.

According to the Survey, “it is generally argued that Pakistan’s exports are uncompetitive in terms of adherence to contracted quality and delivery schedule. Pakistan’s competitors are investing heavily and creating better economies of scale.

These are structural issues and must be addressed by the industry itself with the government playing its role as a facilitator and providing some temporary assistance to address some short-term issues…” This is the right approach to adopt.

The real problem posed by the poor performance of exports is the burden it is imposing on the economy. The trade balance continues to deteriorate with Islamabad prepared to finance it by a combination of foreign borrowing and sale of government-owned assets.

This can’t be a permanent solution to the problem of large trade deficits; the only way out is to increase exports of merchandise as well as services. In both, public policy needs to take account of the country’s comparative advantage.

It is not right to focus so much attention on increasing the export of textile, a sector in which, as the Economic Survey correctly points out, Pakistan faces stiff competition. Not only must Pakistan compete with China in textile exports, it must also face competition from countries such as Bangladesh that enjoy privileged access to such large markets as the United States and the European Union.

In sum, the continuing expansion of the economy is something Islamabad’s policymakers can take credit for. That said, the economy needs careful tending particularly to ensure that the rapid growth spreads its rewards widely. I will discuss this aspect of economic performance next week.

http://www.dawn.com/2007/06/19/op.htm#1
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Old Friday, June 22, 2007
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Arrow Opportunities In The Development Of The Oil & Gas

OPPORTUNITIES IN THE DEVELOPMENT OF THE OIL & GAS
SECTOR IN SOUTH ASIAN REGION

Usman Aminuddin

World Energy Outlook

Before we address the issue of opportunities in the development of the oil & gas sector in the South Asian region, it is important to look at the world energy outlook over the next thirty years. If one looks into the future over the next thirty years, it depicts a future in which energy use continues to grow inexorably, fossil fuels continue to dominate the energy mix and developing countries fast approach consumption levels of OECD countries, becoming possibly as the largest consumers of commercial energy. Whilst the earth resources have adequate reserves to meet rising demands for at least the next three decades, but beyond that time frame there are serious concerns about the availability and security of energy supplies, the huge investments in energy infrastructure and the threat of environmental damage caused by energy production.

Energy trade is expected to expand rapidly in the coming years and, in particular, the major oil and gas consuming regions will see their imports grow substantially. This trade will increase mutual dependence among nations. But it will also intensify concerns about the world's vulnerability to energy supply disruption, as production is increasingly concentrated in a small number of producer countries. As such, supply and price security has moved to the top of the energy policy agenda. The governments of oil and gas importing countries will need to take a more proactive role in dealing with the energy security risks inherent in fossil fuel trade. They will need to pay more attention in maintaining the security of international sea-lanes and pipelines, and they will have to look anew at ways of diversifying their sources of fuels, as well as the geographic resources of those fuels.

Necessary expansion of production and supply capacity will call for massive investment at every link in the energy supply chain. Greater investments will be needed in developing countries, and it is unlikely to materialise without a huge increase in capital inflow from industrialised countries.

World energy use will increase steadily through to 2030. Global primary energy demand is projected to increase by 1.7% per year from 2004-2030, reaching an annual level of 15.3 billion tons of oil equivalent. This increase will be equal to twice the amount of current demand.

Fossil fuels will remain the primary sources of energy, meeting more than 90% of the increase in demand. Global oil demand will rise by about 1.7% per year, from 75mb/d in 2000 to 120mb/d in 2030. Almost three quarters of the increase in demand will come from the transport sector. Oil will remain the fuel of choice in road, sea and air transportation. As a result, there will be a shift in all regions towards light and middle distillate products, such as gasoline and diesel, away from heavier oil products, used mainly in industry. The shift will be more in developing countries, which have a lower proportion of transportation fuels in their products mix.

The demand for natural gas will rise more strongly than for any other fossil fuel. Primary gas consumption will double between now and 2030, and the share of gas in world energy demand will increase from 23% to 28%.

The consumption of coal will also grow, and China and India together will account for two-thirds of the increase in world coal demand over the projection period. In all regions, coal use will become increasingly concentrated in power generation, where it will remain the dominant fuel. Power sector coal demand will grow with the expected increase in gas prices. The deployment of advanced technologies will also increase coal's attractiveness as a generating fuel in the long run.

The world's energy resources are adequate to meet the projected growth in energy demand at least for the next three decades. Increased production in the Middle East and the former Soviet Union, which has massive hydrocarbon resources, will meet much of the growth in the world oil and gas demand. OPEC producers, particularly those in the Middle East, will meet most of the projected 60% increase in global oil demand in the next three decades. Output from mature regions such as North America and the North Sea will gradually decline. More oil will become available from Russia and the Caspian region, and this will have major and far-reaching implications for the diversity of supply sources for oil importing countries.

The production of natural gas, resources of which are more widely dispersed than oil, will increase in every region. International energy trade, almost entirely in fossil fuels will expand dramatically. Energy trade will be more than double between now and 2030. All the importing regions, including the three OECD regions will import more oil mostly from the Middle East. The increase will be more striking in Asia. The biggest growth market for natural gas is going to become much more dependent on imports. In absolute terms, Europe will see the largest increase in gas imports. Similarly large gas reserves in Middle East and former Soviet Union states will find potential markets. Cross border pipelines in many regions will multiply, and trade in natural gas, and liquefied natural gas will surge.
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Old Saturday, June 23, 2007
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Ten things this budget ignored



By Sherry Rehman
Satureday,June 23,2007


EVERY year in Islamabad, even the most lacklustre parliament comes alive during the budget session. This time, no one, particularly the treasury benches, seemed to care. Budget 2007-08, like the last five presented by the regime, once again bases its unmet targets on a small elite of Pakistani society.

Even after five years of public fury at high inflation and joblessness, there is clearly no understanding of the social unrest that this kind of model has unleashed in Pakistan. Why? Because this is a supply-side model where growth is based solely on benefits trickling down, and for this model to deliver effectively in a developing country one needs 10-11 per cent growth at a bare minimum.

Yet in Pakistan no European-style social nets or American-type domestic protection for farmers cushion the shocks intrinsic to this local variant.

Growth is always a good objective but it needs to be structurally balanced in emerging markets like Pakistan. Yet, the bottom line today is that macroeconomic fundamentals remain weak because Pakistan’s growth is driven largely by household consumption at 7.8 per cent of GDP. High growth in consumer sectors disguises dangerous red lines in poverty and low manufacturing growth.

The 74 per cent who now live below two dollars a day, as per World Bank statistics, have been largely ignored except in piecemeal pockets of “relief” which represent sops for a tiny fraction, but ignore a sea of the vulnerable and the socially excluded.

To prevent Pakistan from sliding into more chaos, to lower the stresses of an unemployed, under-educated population, where regional and income inequalities spark further political unrest, the regime should have focused on the following 10 items.

One, public money should have been better utilised and targeted at higher social spending. As it stands, the Public Sector Development Programme at Rs520 billion is illusory. Not only does the real PSDP stand at Rs427 billion, when foreign loans are deducted, but 86 per cent will go to on-going projects. This leaves only 14 per cent for urgent social investments.

At the same time, the governance of PSDP is so poor that 100 projects stand cancelled by the Asian Development Bank. Education and health continue to be neglected by the regime and get an embarrassingly low allocation of Rs24 billion and five billion rupees respectively. Spending should have gone up to 4.5 per cent and four per cent GDP respectively. Although this is old news, Bangladesh performs better on education than we do.

Second, the defence budget of Rs275 billion should have undergone parliamentary audit. If just military pensions worth Rs37.7 billion are added on, leaving out other assorted military items hidden in the civilian budget, the final figure is way above Rs312 billion.

Given that defence spending makes up more than half the amount allocated for development expenditure and got a boost of 10 per cent this year, it should have been discussed in the defence committee of parliament, as in India and other democracies. Under the circumstances, where the treasury benches are beholden to a general for their seats in parliament, there is no prospect of public accountability or transparency, let alone asking what happened to the Rs60 billion from the US Pentagon.

Thirdly, the windfalls from September 11, namely $ 35 billion, should have been used more prudently, preferably to fuel infrastructure and retire public debt. Instead, the fiscal space gained from remittance and aid inflows has gone into profligate spending.

Right now the country’s foreign reserves of $13 billion don’t amount to receipts for 18 weeks of imports, which given the current balance of payments, takes us back to the same situation as 2001 where lower forex reserves covered the same few weeks of imports. Current account expenditures account for 66 per cent of the entire budget of Rs1.8 trillion, so growth is more illusory than it seems. There is no explanation for why we still borrow $38 billion from external sources when the regime claims we have broken the begging bowl, affectionately known as the “expanding kashkol” in the National Assembly. Balance of payment deficits have grown from $1.4 billion in 2000 to $6.1 billion.

Four, deficit financing should have been used less and less as an instrument of policy. It fuels inflation and crowds out private investment, while jacking up interest rates and pushing up production costs. Right now, almost half the budget deficit is funded through bank borrowing, which the State Bank has warned against. Nobody from the treasury is willing to answer why the current account deficit is expected to be around five per cent of GDP at $7.1 billion.

Five, the dangerously high trade deficit — a constant peril to the stability of the economy — should have been lowered. Despite a record trade gap of $12 billion, up from $1.7 billion in 2000, increased foreign direct investment and workers’ remittances are expected to bridge the gap. The latter may persist after 9/11, but given the collapse of law and order today, such supply-driven factors cannot plug black holes in the economy.

Instead, a proactive diversification and higher value addition of Pakistan’s export base should have been pushed to maximise receipts. It goes against the elitist grain of this government, but the import of luxury items should have been reduced by taxing high-end consumer durables. This item jacks up the import bill by $2.04 billion out of a large tab of $27 billion. This way consumption would not have outstripped domestic production by such large margins.

Six, immediate relief should have been given to the growing number of Pakistanis living below the poverty line. Yet, out of the Rs113.9 billion allotted to subsidies, only Rs2.45 billion go to stabilise the prices of essential items. Food inflation still teeters between 10 and 14 per cent and represents a real threat to the inelastic incomes of the growing poor. The subsidies on food provide relief only at two rupees per head, while an obscene Rs98 billion funds the inefficiencies of Wapda, KESC and others.

Fiscal policy should also have been used to stem tragic levels of unprecedented financial destitution due to which more than one suicide takes place per day. At present, 60 per cent of the regime’s total tax revenue for 2007-8 is based on taxes on items like petroleum, sugar, edible oils and packaged milk and meat, as well as other essential items which burden the poor.

No new taxes on capital gains related to real estate transactions or the stock market have been imposed. The Economic Survey admits that the top 20 per cent gets 400 per cent more than the bottom 20 per cent.

Seven, private investment and job creation merit serious allocations to infrastructure and peace. But political instability has driven away private capital. On May 12 alone, the CBR admitted to losing over three billion rupees plus worth of sales tax in Karachi.

Other factors that cripple investment include the paralysing power deficit. Today, Pakistan needs an additional 8,000-10,000MWs by 2010 to meet energy demands. The present government has not added a single MW beyond the PPP government-commissioned Ghazi Barotha (1,450MW) hydroelectric power project, which went online in 2004. More investments in coal, thermal, solar and wind energy would have added surpluses for the economy to resume its growth.

The MOU signed by the PPP government for the Thar coal project should have been revived long ago. This alone can yield 5,000MW of power and 200,000 jobs. Large scale investments in industry including foreign direct investment cannot move without cheap and reliable electricity. Job creation, the knowledge economy, higher manufacturing and exports, lower inflation and a stronger rupee, all need energy.

Eight, as the largest employer, agriculture merited policy attention. Banks and financial institutions should have been mandated to reserve a percentage of credit for farmers for buying inputs. Focus on farm to market roads, higher investments in water management and food processing units per district would boost employment and higher value addition to this sector. Despite critical desertification and dwindling glacier melt, no allocations were made for water conservation. The destitution in the rural sector should have been addressed by initiating a rural employment programme, as successfully adopted in India.

Nine, regional inequalities should have been brought down by devolving sales tax to the provinces. Today, the government’s failure to announce an NFC award before the budget has created dangerous strains in the federation.

Under the interim NFC award, the provincial share in net proceeds of the divisible pool is 42.5 per cent, while the centre retains a major chunk of resources worth 57.5 per cent. Instead of delaying the award since 2002, a fair distribution of national resources based on more than population criteria was needed.

At the same time, the natural gas and royalty formula of the 1973 Constitution should have been applied immediately in order to stabilise the pressures emanating from the NWFP and Balochistan.

Lastly, to show some commitment to the financial austerity so badly needed to curb deficits, non-development expenditures should have been slashed. But the regime’s priorities reflect no concern for public opinion or institutional accountability.President House expenditures have gone up by Rs25 million to over Rs316 million. The National Accountability Bureau, which was established to hound political rivals of the regime, has nothing to show for its lavish spending. Its expenditures, too, have gone up in this budget to an astronomical Rs2.4 million a day at Rs897 million.

In contrast, the ministry of law, justice and human rights is set to spend only Rs179 million. But then we all know how the Supreme Court Chief Justice’s extra car burdened the economy, don’t we?

The writer is a member of the National Assembly and central information secretary of the Pakistan People’s Party.


http://www.dawn.com/2007/06/23/ed.htm#4
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Old Tuesday, June 26, 2007
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Inequality & development




By Shahid Javed Burki
Tuesday,June 26, 2007


IF budgets are meant to deliver marginal changes in the established fiscal order, they don’t deserve the hoopla that accompanies their announcement. With the private sector now playing the role which is unprecedented in Pakistan’s history, much that happens to the economy is not the result of what Islamabad does but what thousands of entrepreneurs think and do.

When the history of the economy under President Musharraf gets to be written it is the role that he and his associates have assigned to private entrepreneurship that will be singled out as the most important economic initiative of the period.

However, if the people in power choose to use the budget to bring about a major change in the structure of the economy then the changes in the fiscal policy they announce should deserve the attention that the budget normally receives.

From my way of looking at the Pakistani economy, there are two areas that deserve the policymakers’ attention. The first is making the current high rate of GDP growth sustainable. The second is to address the problem of growing inequality in the distribution of both income and wealth.

I will deal with the second issue in this article, having covered the first in several articles contributed earlier to this space. Both the government and independent observers of economic trends in the country have focused a great deal on the incidence of poverty and the rate at which it is declining.

At issue is not the exact estimate of the number of poor who live in absolute poverty (with incomes of less than one dollar a day) or in poverty (with incomes of less than two dollars a day) but the rates at which their proportion in the total population is falling.

The government contends that the incidence of poverty is declining at a significant rate. If this is indeed the case and if the high GDP growth rate of recent years (seven per cent increase per year over the last five years) is resulting in a fairly significant reduction in the proportion of poor in the population then public policy is set on the right course.

Contrary to Pakistan’s own experience in the 1960s and that of a number of other high-growth developing countries, the trickle-down effect may finally be working to help the poor.

However, the government’s critics maintain that the rate of decline in the level of poverty is exaggerated by Islamabad; that, for the rewards of recent high rates of GDP growth to travel down to the poor, public policy needs to be fashioned in a different way.

If the critics are correct then the trickle-down approach would need a helping hand. One way of coming to a conclusion about this argument is to analyse what is happening to economic equality as a result of the rapid growth in GDP in recent years. This is an area of analysis that has even less reliable data and information available than is the case with the incidence of poverty and its decline over time.

Concern with growth’s impact with equality is not confined to Pakistan. This is being debated in the academia as well as in a number of developed countries. Academics have come to it by following a circuitous route. It was in the 1990s that mainstream economists turned to growth as a concept that needed analysis and understanding.Then Robert Lucas of the University of Chicago and Paul Romer of Stanford University published path-breaking papers that laid the basis for what economists call the endogenous model of economic growth.“Endogenous”, as dictionaries inform us, means a process involved in “producing or growing from within.” Until then, economists had tended to describe growth as dependent on the quantities of factors of production – labour and capital – that were used in the process of production.

But there was a limit to the amount of labour that could be applied for economic production, even in a country such as Pakistan that had a rapidly growing population. Adding machines (i.e. capital) to the workplace resulted in what the economists called “diminishing returns”.

This theory had produced a puzzle for economists. With the countries such as those in Europe that had reached the stage of zero population increase, this theory implied a slowdown in the rate of economic growth to the point where developing countries with growing populations would begin to catch up. That was not happening. Economic theory predicted the closing of the gap between the rich and poor nations. Instead, the gap continued to widen.

This is when Lucas and Romer entered the picture by including in the production function inputs such as the quality of human capital and technological developments. This model implied that economies could continue to grow even if the size of the work did not increase. They could do this by investing in improving the quality of the workforce through education and training. Technological improvements would also contribute to growth.

With Lucas and Romer helping us, we begin to understand what is keeping Pakistan well below the growth trajectories being followed by a number of Asian countries, the government’s protestations notwithstanding.

Conventional economic theory informs us that capital accumulation drives economic growth up to a point. Our own experience tells us that capital accumulation, unless it is financed from resources obtained from within the economy, will remain dependent on external capital flows. These may come from sources other than the largesse of friendly rich nations.

In an article contributed to this newspaper a few weeks ago, Ishrat Husain provided some compelling statistics to show why a sudden cut off in American aid will not have the devastating effect it did in 1966 and 1990. Pakistan could survive a spell of bad relations with the United States because it has found new sources of external finance not dependent on Washington’s goodwill.

That said, the remittances sent by the Pakistani resident community in the Middle East, Britain and North America and the large amounts of investment capital that is pouring into the country from the Middle East are not good substitutes for domestic savings. No country has ever been able to secure for itself a good economic future by depending almost exclusively on foreign savings. It would be wrong for Pakistan to rely on this resource.

But there are other weaknesses. Pakistan has a large and young population which is poorly educated and poorly trained. It cannot contribute to sustainable economic growth. Moreover, the economy’s technological base is poor. Neither the state nor the private sector has invested much in technology; the country continues to rely on the technologies imported from abroad.

Even the development of nuclear weapons was made possible by technologies obtained from abroad, mostly be stealth. India, on the other hand, used indigenous technologies to build nuclear weapons.

I should mention two other advances in economic thinking before returning to the subject of the budget and what could it have done to set the economy on the high growth trajectory. The first reference is to the work done by the economist Douglas North on the importance of institutions for economic growth. Following North, institutional economists define institutions not as structures and organisations but as the laws, rules and regulations that govern human relations.

If these are weak, economies cannot grow rapidly. Institutional weakness is defined as the absence of established observable rules that don’t distinguish between the circumstances of the people.

The same set of rules applies to the poor as to the rich, to those who have little influence over the government and to those that are part of the government, to those who have influence over other human beings to those who have to exist within the orbit of other people’s influence.

Economists also borrowed some insights from sociologists and anthropologists to focus on what they began to call social capital. This is defined by the way, or ways, in which people interact with one another.

Economic growth is faster and economic modernisation is more rapid in societies that are well-endowed with social capital. With the rise in ethnic tensions and sectarianism, the quality of social capital is declining in Pakistan. Only political development can reverse this process.

The third major advance in policy thinking is the focus on inequality. For decades, economists have found it difficult to factor inequality in the subject of growth. For some years, thinkers such as Simon Kuznets who looked at the empirical evidence on growth and distribution, decided that in the early stages of development, inequality is an inevitable consequence of growth. But that has changed.

In recent times, economists such as Paul Romer who had pioneered the thinking about new growth models, have begun to focus their attention on income inequality as an obstacle to sustained economic advance.

Writes one commentator: “During the 1990s, Paul Romer, a Stanford economist, emerged as one of the leading theorists on economic growth. Recently though, Romer has changed his focus, and he told me that the country, too, is entering a new phase. For most of the 20th century, he explained, economists focused on stability — that is understanding and controlling inflation and depressions. Then, towards the end of the century, growth became the central obsession. Now, Romer said, we are embarking on the next great challenge in American economics: mitigating inequality.”

What is true for America is even truer for Pakistan where economic and social inequalities are considerably more pronounced. It is often political scientists who help economists understand why certain distortions created by the strategies they advocate can create social turbulence. Concentrating on growth without caring for its distributional impact is one area where policymakers can go wrong. This is the case in Pakistan.

It should be clear from the above discussion that the conditions just don’t exist in Pakistan which can support a high rate of economic growth, alleviate poverty and improve the distribution of income. We don’t save enough from our national income to accumulate capital. We have not trained our large and growing workforce to help modernise the economy and take advantage of the window of opportunity that exists as a result of falling rates of fertility in the developed world.

We have not invested in the development of technologies that would help improve worker productivity. We have not only under-invested in institutional development, we have destroyed even those institutions that were left behind by the British.

What we need, therefore, is a comprehensive strategy of growth that would help deal with these shortcomings. The budget could have started the process but was confined to introducing only marginal fiscal changes. What could have been done? I will pick up this question next week.


http://www.dawn.com/2007/06/26/op.htm#1
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'Consumption boom; taking its toll on the poor


MUZHAR JAVED
Wednesday,June 27,2007


ARTICLE (June 27 2007): The echoes of soaring and sustained growth have been sounding very strongly from the top echelons of the current regime since the day it came to power by ousting the then elected government. Seven-point agenda of President Pervez Musharraf, unfolded on October 17, 1999 set the tone for the revival of national economy.

According to the official claims, like the other military regimes, this too has been a superb success story economically. Recently the Economic Advisor's Wing of Ministry of Finance has made the economic survey 2006-07 public and is boasting of strong and sustained GDP growth rate, robust resurgence of agriculture sector, building up all-time high foreign exchange reserves, record Foreign Direct Investment (FDI), unprecedented flow of workers remittances, substantial revenue collection by CBR and shrinking the public debt.

This document lauds the incumbent regime on achieving 7 percent GDP growth rate in the current fiscal and 7.5 percent average growth rate during the last four years (2004-07). GDP growth that was 3.9 percent in 1999-00, 1.8 percent in 2000-2001 (one of the lowest in country's economic history), how it climbed and became sustainable and secular rate of growth? This is an open secret and debatable one.

This twist in economy was triggered with tremendous flow of foreign assistance taken after 9/11. Key and common cause of all the military regimes' high growth rates (from 'Ayub's 'decade of development or disaster' to current one) has been extensive foreign funding and empirical evidences suggest that growth financed by foreign assistance always proves lacklustre because saving-investment gap is filled in through non-traditional source of foreign aid.

Secondly, now a days, high growth rates are a common phenomenon in developing world. According to IMF report, 'World Economic Outlook' April 2007, the average growth rate in developing world has been 7.9 percent in current fiscal and 7.5 percent during the last four years, in India 9.2 percent in current year and above 8 percent during the last four years, in China 10.7 percent and 10.3 percent correspondingly and even Sri Lanka has witnessed the growth pace of 7.5 percent in current fiscal.

The current growth hike is quantitative in nature, devoid of 'trickle down' effect and lacks equity. The gulf between the rich and the poor has widened and according to Human Development Report, 2006 still Pakistan has Gini Index of 30.6 (zero is perfect equality and 100 is perfect inequality) that questions the liberal policies of the regime which lack balancing mechanism. Moreover the growth is consumption-led and economic managers are selling 'consumerism' as economic success.

The government hails the robust recovery in agriculture sector by putting the failure to achieve cotton and rice production original targets at back burner. In spite of bumper crops, government could not arrest the food inflation that is still rising.

Historically high foreign exchange reserves accumulated through non-traditional sources can hardly meet six months import requirements and never provide trouble-free short-term debt to foreign reserves ratio.

All-time high Foreign Direct Investment (FDI) of the regime is narrow based (confined to telecom, oil and gas and banking sector), embarrassing in comparison with traditional and regional competitor India, devoid of very purpose of employment generation and brought in through sale of state-run organisations. The sources of much-trumpeted FDI are not durable and dependable.

Record workers remittances are a more blessing in disguise of 9/11 episode and war on terror. This incident created panic for overseas Pakistanis across the world and forced them to repatriate their earnings. The government did no trick for bringing in the money of overseas Pakistanis, neither offered attractive rate of return nor investment bonanza. Moreover the workers remittances are also not hard-earned money of government and reliable source to bank on.

A very interesting fact is that only trade deficit, which is going to touch 14 billion, will wipe out total inflow of FDI, foreign remittances and assistance that is estimated around $13.50 in current fiscal. In spite of revising the original target, still current account deficit is going to make history.

Troika of economic managers' team (meaning thereby the Prime Minister who is also the Finance Minister, State Minister and Advisor on Finance portfolio) failed to tackle the twin deficits of trade and current account. Unabated twin problems of poverty and unemployment have questioned the quality of economic successes achieved. Only the severity of current power crisis is enough to gauge the depth of economic expansion of almost decade-long regime.

According to WAPDA update, the countrywide electricity shortage has increased to about 2,900MW owing mainly to continued closure of about 25 generating units across the country. This is the worst energy crisis in Pakistan's history. 'Consumption boom' has set the Consumer Price Index (CPI) and Sensitive Price Index (SPI) on upbeat tendency that are taking their toll on the poor.

Tax collection that is well on target becomes worthless when one looks at deteriorating tax-GDP ratio of 9.5 percent. This performance is further eclipsed when one casts a cursory glance at the current number of registered taxpayers which is 2.2 million according to CBR Master Index update.

The commitment and sincerity of tax administration is suspected when it leaves Real Estate and Capital Gains out of 'Tax net' only to patronise the 'Robber Barons' and 'Real Estate Army'. The government claims of breaking the begging bowl prove false when external debt has exceeded $38 billion, internal debt amounts to Rs 2500 billion, every new-born baby will owe Rs 2900 and government has allocated Rs 641 billion only for debt servicing from current budget.

An international research organisation, BCA, in its special report on Pakistan's emerging markets strategy, has characterised the country's economy as structurally weak because of a low investment ratio and lack of competitiveness. In Global Competitiveness Index ranking among total 125 countries, Pakistan stands at 91 with 3.66 points, India at 43 with 4.44 points, Sri Lanka at 79 with 3.87 points.

The report says that Pakistan's growth is driven primarily by household consumption. The macro fundamentals of Pakistan are thus inferior to those of many emerging economies.

Transparency International in its 'Corruption Perception Index' declares Pakistan 17th most corrupt country of the world (2006 report). In Human Development Index (measures the average achievements in a country in three basic dimensions: a long and healthy life, knowledge and a decent standard of living) Report among 177 countries Pakistan stands at 134th position while India at 126th and Sri Lanka at 93.

If we compare the statistics of fiscal year 1999 and 2006, then again the performance of the regime has eclipsed in major areas like inflation rate was 5.7 percent in 1999 and over eight percent in 2006; unemployment rate 5.8 percent in 1999 and 6.5 percent last year; trade deficit $1.5 billion in 1999 and $12 billion last year; the current account deficit $1.8 billion in 1999 and over $5.2 billion last year.

Above all, the current regime must be honest in self-assessment. Living in a global village, performance should not be evaluated in isolation. Regime should not compete within rather than competing with the rest of the world in general and South Asia region and 'Emerging Economies' (which are in transitional phase) in particular.

Secondly, the facts and figures should not be manipulated and maneuvered, sometimes by expressing them in absolute terms and sometimes converting them in percentage. They should be candid and have a fair play. Don't lose credibility that is more important, public is the best judge and actions speak louder than words.

For the sake of argument, let's assume that the regime has improved the performance of the economy as a whole. But the absence of 'trickle-down effect' has made the public reluctant to believe in. If still the regime turns a blind eye to the harsh ground realities and keeps on harping on the growth mantra, then 'Shinning India' episode is bound to repeat in the coming general elections.

(The writer is professor of economics at university of central Punjab, Lahore.)



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Uncontrolled inflation



Ismat Sabir
Monday,July 02,2007


The government has failed to control inflation this year. The same is likely to happen to the projected 6.7 percent inflation for the next year with 7.2 percent GDP growth and $ 8.1 billion current account deficit against $ 7.1 billion in 2006-07. A trade deficit of $ 10.6 billion and $ 17.7 billion foreign exchange reserves for the year 2007-08 were also estimated. July-April Fiscal Year 2006-07 food inflation depicted a rise. The State Bank of Pakistan figures indicated that food inflation was 15.7 percent in April 2005, 3.6 percent in April 2006, 9.4 percent in April 2007, that rose to 11.3 percent in May 2007. The average rate of inflation for five years was 7.5 percent.

In April 2007, consumer price inflation (CPI) was recorded at 6.9 percent that rose to 11.3 percent in May 2007. The main contributing factor for the rise in overall CPI inflation was food inflation, which was 5.6 percent in the same month last year. The contribution of the food group in overall inflation was 56.1 percent in April 2007, which was significantly higher than the 24.9 percent contribution of food during the corresponding month last year. According to details, food inflation in May 2007 was 11.3 percent. It increased as high as 12.7 percent in December 2006. In January 2007, food inflation was 8.7 percent, which increased to 10.7 percent in March 2007. It remained between 5.6 to 12.7 percent during May 2006 to May 2007.

To control the rising prices of essential items, the government has recently increased the rate of profit on National Saving Schemes, sucking the excess money from the market that is increasing prices. The national savings as a ratio of GDP have been projected at 18.8 percent to reach the level of Rs 1,883 billion and investment of Rs 2,384 billion during 2007-08, against Rs 2004 billion in 2006-07. As far as financing of the targeted investment is concerned, it has been estimated that national savings would finance about 79 percent and 21 percent would come from the foreign savings sector. If inflation was not high people could save more money and our dependence on foreign savings may be far less than projected in the budget.

During 2007-08, exports are projected to grow by 10 percent, to $ 18.9 billion, against $ 17.2 billion estimated for 2006-07. Imports during 2007-08 have been projected to increase moderately by 9 percent, to $ 29.6 billion, from $ 27.1 billion in 2006-07. Higher imports would be the result of higher volume of import of food items, POL, edible oil and fertilisers. Therefore, the trade deficit might reach $ 10.6 billion in 2007-08, against the deficit of $ 9.9 billion estimated for 2006-07. The main reason for out of control inflation is that the government monitors the price of essential items of daily use carrying high weight for low-income people on a weekly basis, presently consisting of 53 goods.

This system, which suits for short period price stabilization, enables the government to tackle transitory problems. The government intervenes in the market by importing deficit commodities, change in tariff rates, taking action against hoarders, providing subsidy on food items by selling through utility stores and financing through banks. To stabilise prices in the medium to long term perspective, monetary and fiscal policies are used to achieve the target. No measures have been taken in the budget to increase the production of value added products that could reduce inflation. Last year, the warning also came from international financial institutions when the inflation rate rose from 3.1 percent in terms of CPI (consumer price index, also known as wage inflation) to 4.6 percent. It doubled in the year 2004-5 and stayed at that level. The government has been invariably fixing its target in annual plans and budgets at around 6 percent.

Over the last three to four years, all government efforts were turned into disappointment. The recent budget stepped up the market interventions through the utility stores and support price for farmers. Official documents indicated that the existing inflation is due to high growth in incomes, increasing demand of food items and fuel inflation. The officials argued that all over the world prices are increasing and are low as compared to India. But this should not absolve the government from its basic duty of taming inflation. Besides, every year the upward adjustments in utility tariffs, gas, electricity and oil, pushed up the transport charges and cost of production in the agriculture and industrial sectors, which is passed on to the consumers. Similarly, almost every year the government increases the support price of agricultural crops like wheat, sugarcane, etc, that has an across the board effect, directly or indirectly, on the general price level.

Moreover, the expansionary fiscal policy pursued by all measures is not as effective as it should be. Despite some increases, the tax revenues are not adequate to match the budgetary requirements. Therefore, the government relies on borrowing for financing the budget deficit, which causes a rise in inflation. This trend would not be discontinued in the near future. This is one of the sources to increase aggregate demand, resulting in pushing up the general price level. The monetary policy of the central bank is generally aimed at price and exchange stability. Net budgetary borrowing alone accounted for Rs 212 billion out of the total domestic credit expansion of Rs 390 billion this year till May 12, besides foreign borrowings. Growing forex reserves have also increased prices of goods. But these developments in the external sector increase the monetary base through net foreign assets.

It is clear that there is a lack of selective domestic production expansion policy. The main pressure on the general price line comes from food prices. Food inflation this year is estimated to be in double digits. This is due to less production of vegetables and pulses. The problem has not been solved for the last 20 years. It can be solved by developing a suitable production strategy by modernising the agricultural sector; that would increase the yield per acre. After every two to three years, we face a shortage of sugar or wheat.

Inflation is also attributed to the push and pull effect of the foreign trade pattern. Exports price index has increased by 4 percent while imports price by about 10 percent. Thus, imports have contributed towards domestic inflation, which can be cured only with market forces. The existing wide disequilibrium in the external sector is reflective of the potential depreciation of the rupee till the time the country has good access to external borrowing. Eventually, it would be a great challenge to anti-inflation policies.

Monetary targets have not yet been revealed but the fiscal profile shows that budgetary borrowing and net foreign assets would push up the monetary base. No serious attention has been paid to remedy the production deficit of essential commodities. Utility stores as sales outlets, imports and occasional adjustments in import duties would prove temporary solutions for controlling inflation during the coming year. However, this scenario is the result of political developments connected with the forthcoming elections, which would come in the way of realising the inflation target.

The writer is a senior journalist and researcher

http://www.thepost.com.pk/OpinionNew...05197&catid=11
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Strangulations in the economy of Pakistan


Dr Tanvir Hussain Bhatti
Monday,July 02,2007

Since the inception of Pakistan the throng of wrinkly toffs on a good wicket framed policies and enacted rules that suited them and their elite community’s vested interests. The flushed and loaded people, tenaciously intoxicated in power, always turned a blind eye to the national concerns and the public welfare. The national economy has sunk into a state of torpor due to the ad-hoc policies of the fact twisting myopic top cats. Ayub’s industrialization and Basic Democracy were cast aside with his ousting, Z.A.Bhutto’s nationalization and land reforms were throttled with his hanging, Zia’s Islamisation crashed in the air, development strategies hatched by Benzir Bhutto and Nawaz Sharif were thrown out of Pakistan’s borders with their exile. The outcome of the ‘Enlightened Moderation’, ‘Devolution Plan’ and the progress plans pioneered by the current regime would not be very dissimilar from that of their precursors. Throughout the 60 years political history of Pakistan, the subsequent government considered its responsibility to brush aside the policies kicked off by its forerunner. The consequence of this frog in the well navigation of the cooties is that there has been no continuity of development plans, which is still gravely tattering our economy. Pakistan has made average steps forward by fits and starts at a snail’s pace since its birth. Foreign aid and assistance funneled by the donor agencies and developed countries acted as short-term laxatives to relieve economic constipation of Pakistan. Even the transitory swiftness of growth rate achieved by foreign assistance, a chunk of which has been provided by America when in hot water, could not give any advantage to man in the street because there is no ‘Trickle Down Effect’. With economic growth at 7.0pc in the current fiscal year, Pakistan’s economy has grown at an average rate of almost 7.0pc per annum during the last five years. This rapid pace of expansion on sustained basis has enabled Pakistan to position itself as one of the fastest growing economies of the Asian region. But, due to concentration of fruits of ephemeral economic growth within few hands the monetary planners have failed to translate this boon to trim down poverty. By 1999s it was acknowledged that growth alone does not diminish poverty and a more direct approach is indispensable. Time and again fiscal crisis ensuing from monstrous economic system of loot and plunder has deteriorated national economy. Therefore, a few growth periods were alternated by long stagnations. Perceptual budget deficit and trade shortfall resulting from wishy-washy failed monetary policies forced Pakistan several times to crawl before IMF to put the lug on. The country is currently entangled in the heavy debt trap of $38.86 billion that has hampered national economy. Splashing of national treasure on political gang-shag and luxurious activities of the men in the driving seat has further upset the applecart. Corruption is acting as a blight to ruin our monetary system. Even black money garnered through black economy and bribery is transferred to the foreign banks and not invested in the country. The reprobate apple-knockers have been transgressing all the bounds of decency by looting whooping national wealth with both hands. This reckless dishonesty has been depriving of the transfusion of cash to the indigenous industry, which has made it vulnerable to flourish. Rampant sleaze has permeated all spheres of national institutions. Economic benefits never trickled down in the politico-economic history of Pakistan but palm greasing has pervaded from top to bottom. Unprecedented surging social and political turmoil due to current judicial imbroglio, unending tide of volatile law and order situation, unchecked smuggling, uncontrolled hoarding, market manipulation by the big guns and shutter down strikes triggered by the business community have further enfeebled the already tightly squeezed economy. Energy is necessary to fuel the power hungry industry. Pakistan is passing through pitiable phase of severe energy crisis because no major dam has been constructed for more than 30 years to tap the country’s hydroelectric potential. During this summer episode, the situation has so worsen that the gap between supply and demand has touched 3,000 megawatts. Lack of national consensus and deficiency of mutual trust among the constituent units are major stumbling blocks in exploiting water resources to meet the immense challenges of water stress and energy shortage. Throbbing pains of mounting inflation are deeply felt by all and sundry. Inflation according to Economic Survey 2006-7 is as high as 7.9 percent, well in excess of the 6.5 per cent target. What is particularly nerve-racking is the considerable growth in food inflation. While everyone in the commercial food chain, i.e., growers, livestock owners, wholesalers and retailers can tailor their priorities to inflationary pressures; no such alternative or method is available to the pitiable and the stipulated income groups. Political stability is imperative for economic stability. Pakistan has failed in its quest to emerge as a developed country on the economic map of the world due to uninterrupted political precariousness. Frequent change of the government due to narrow-minded politicians, firmly rooted corruption-tainted bureaucracy, and time and again army intervention and abrogation of the constitution, have wrecked the establishment of democracy that can act as springboard to provide viable hope for social strength, political steadiness and economic vibrancy. Joseph stiglitz rightly said, “The real miracle of East Asia may be political more than economic.” Second largest economy of the world Japan, and Germany rose like phoenix from their ashes after they were ransacked in the World War II. Now they have become economic giants due their resolute national spirit and political strength. China with $915 billion has largest foreign exchange reserves in the world. A country of opium eaters has now become an economic clout due to indomitable will and dauntless courage of Mao Zee Dong. The walls of the White House are trembling from the fear of this economic powerhouse. It is forecasted by the distinguished think tanks that China can challenge its political and economic rival Uncle Sam in next 50 years. Therefore, America has adopted the” Policy of Containment” to impede China. The developed countries made progress by leaps and bounds because their public have pride of performance. Majority of the people in Pakistan consider work a burden instead of responsibility, especially in the government sector. They escape from liabilities while extracting maximum benefits by using their authority. Even unemployed educated youth avoid joining a job or initiating a business, which is considered menial in our feudal society. Sarcastically, when these people got golden opportunities to emigrate to developed countries they work there happily on a store, hotel, and some earn Dollars and Euros by giving bathe to pet dogs of the rich people which they cannot even dream of in Pakistan. Copious beans of patriotic sentiments are vital to invigorate the civil sector to ensure their meaningful participation in all walks of life. Human are the true assets of any nation. Therefore, there is pressing need of human resource development to give a bounce to national economy. Public can contribute substantially in state’s prosperity to make rapid steps forward. Ironically, patriotism has been deliberately crushed in Pakistan by the vested interests. Contrary to the developed nations, in our country personal interests are given priority over national interests, caste is given preference over patriotic fraternity, regional language is considered superior than national language, sect is propagated more vigorously than Islam, regional leaders gave an edge to provincialism over federation, ethnicity is considered higher than nationalism. Is it possible for such a fractured population to compete in the comity of nations? Can such a divided community come to a single point through consensus to resolve complex national issues, which is crucial to make progress? Internally we are divided and externally we are weedy. There must be fair distribution of resources and uplifting the socio-economic status of the off-scorings of humanity to ensure their full contribution in national productiveness. A host of remedial measures like fair collection and distribution of Zakat, true empowerment of women to guarantee their significant involvement in various institutions, replacement of interest based economy with Islamic monetary system, provision of technical education and micro credit facilities to the unemployed, redistribution of land among landless farmers through land reforms, mobilization of domestic resources, easy availability of loans to the peasants, formulation of effective programs with poverty cutback at their heart, and socio-economic reforms at national level to diminish insolvency can reduce the widening gulf between the prosperous and the poor by making the national economy more vibrant. A sound and long-term economic policy is the crying necessity of time. It is mandatory to develop indigenous goods self-sufficiency, which is vital to ensure pulsating economic independence. Foreign aid should be utilized for beefing up native industrial base instead of time and again getting into the ribs of the donors. Economic self-reliance can liberate our financial system from the tentacles of donor agencies that always have their own axe to grind. Agriculture sector is the main source of livelihood for 66pc of the country’s population. It accounts for 20.9pc of the GDP and employs 43.4pc of the total work force. It is the backbone of our economy. This segment faces numerous bottlenecks that must be removed. Law and order situation must be improved to ensure considerable foreign investment and to magnetize tourists. Alternative energy resources must be tapped to fuel the power starving industry. The black sheep involved in hoarding, tax evasion and grafting should be dealt with iron hands by establishing impartial and powerful accountability institutions. Media should play a constructive role to indoctrinate patriotism and pride of performance in the public.


http://www.thefrontierpost.com/News.aspx?ncat=ar&nid=70
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Indian imperialism



EHTISHAM AAMIR
Tuesday,July 03,2007

In theory, interstate relations are governed by principle of “Sovereign Equality” and “non interference”. But ours is an imperfect world. It is not entirely governed by theoretical principles. “Might is right” is usually the norm. But modern states and specially those who purport to be democratic display some degree of adherence and respect to principles. But in our neighbours we have a state which has violated most principles and norms of modern statecraft and democracy. It concurrently claims to be “the largest democracy of world”. India is one country which has track record of violating most accepted norms like human rights, non interference in internal matters of other states and has been expanding beyond national borders etc. Subsequent to acquiring overt nuclear capability in 1998, the jingoistic overtures and interference in internal matters of other by India has increased dramatically.
All of India’s neighbours have substantial complaints about its high-handed attitude in bilateral matters. But of late, this interference has reached alarming proportions. In 2006, Indian External Affairs ministry issued a statement about security situation in Balochistan. It was clear manifestation of interference in internal affairs of Pakistan.
Lately MK Narayanan, India’s National Security Advisor, issued a statement which reflects India’s designs and future intent about region. He almost thundered out on Sri Lanka “We are the big Power in this region. Let us make it very clear. We strongly believe that whatever requirements the Sri Lankan government has, they should come to us. And we will give to them what we think is necessary. We do not favour their going to china or Pakistan or any other country”. What else would constitute a blatant violation of “Sovereign Equality” and “Non interference” in domestic affair?
India coerced Srilankan government in accepting Indian Peace Keeping Force (IPKF) during late eighties. Subsequent humiliating withdrawal of this IPKF is history. During deployment of IPKF in Srilanka, it used even gunship helicopters to crush Tamils resistance. And the same country is denying a sovereign country the purchase of rudimentary arms and hardware from the desired source. This tiny island nation has never been a strategic or tactical threat to India. But Indian hegemonic designs know no limits. It wants a total subjugation and nothing short.
India belies the oft quoted comment that” democracies don’t go to wars”. it has had wars with almost all of her note worthy neigbours. With Pakistan it has had wars in 1948, 1965,1971 and many stand offs like 1986/87 and recent one of 2001/2002. It has gone to war with China in 1962 over NEFA valley. Has interfered militarily in Maldives in 1988. List is endless. The common point is that India has an insatiable desire of expansion. It can allow her neighbours to lead independent domestic or foreign policy. She wants to realize her dream of “Akhand Bharat”
Purchase of military hardware from any source is sovereign right of Srilankan. Especially if such equipment of Indian origin has failed to deliver. It is appropriate to mention that this statement in question is less of brow beating to Srilanka then a veiled threat to Pak and China. They have been cautioned to refrain from activities considered” unacceptable” by India in South Asia. It is revival of “Indra doctrine” and sign of Hindu Imperialism. This phenomenon, though present since 1947, has exploded post-nuclearisation and as a corollary to revival of "Hinduvita” by Hindu extremist parties. Pakistan and China must stand up and take serious note of renewed imperialist policy of India. But India is not expected to heed to niceties of diplomacy and peaceful coexistence. She has an unenviable record of disputes with all her neighbours on one account or other. Pakistan and China must condemn the statement in clear terms and must ask India to refrain from such overture against their sovereignty.

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Default ABC of the economics of tariffs and import quotas-I

ABC of the economics of tariffs and import quotas-I


SHAGHIL AHMED AND IFFAT ARA


ARTICLE (July 02 2007): Pakistan faces the important challenge of developing a comprehensive strategy for exports that can maximise long-run growth and per capita income without sacrificing the goal of poverty reduction and a more equitable distribution of wealth.

An understanding of and debate on trade policy issues - such as the sources of the disagreements among countries with regard to the liberalisation of agricultural trade that come up in World Trade Organisation (WTO) negotiations, the effects of tariff reductions and the effects of removal of textile quotas starting January 1, 2005 - would seem to be of central significance in meeting this challenge satisfactorily.

There are certainly experts in this area in Pakistan, including among policymakers. Nevertheless, there does seem to be some lack of a more widespread understanding of the basic economics of trade barriers like tariffs and quotas, among all the relevant parties that are engaged in debate. In particular, the discussion one sees in the press and in the electronic media, and even in some policy forums, could be better informed.

The objective of this article is to provide the basics on the economics of tariffs and quotas for the benefit of all those who wish to acquire a rudimentary, but analytical understanding of these issues. The idea is to encapsulate the gist of the analysis that would be found in a basic international economics textbook.

In doing so, we have tried to follow the famous scientist Albert Einstein's maxim that "everything should be made as simple as possible, but not simpler." Thus, while we will avoid equations, we will make use of diagrams (an age-old teaching tool in economics), which facilitate the exposition of the key arguments. But no prior knowledge of economic theory or economic concepts is required. Any concepts that are used will be introduced and developed as we go along.

At the same time it should also be emphasised that the real world of international trade and trade policy is much more complex than the simple world found in textbooks. Many - and often heroic - assumptions have to be made in the textbooks to understand the key building blocks. In particular, our analysis here will all be done in a static and partial equilibrium framework.

A static framework is one which does not take into account the dynamic feedbacks that can result in the future (eg the imposition of a tariff may be followed by retaliatory tariffs by other countries).

And partial equilibrium analysis, as opposed to general equilibrium, analyses the behaviour of a particular sector or portion of the economy separately, without modelling the feedback effects that changes in one sector may have on prices, outputs and other economic variables in other sectors.

Obviously, these are very simplistic notions, but the point is that the more subtle arguments and the finer points involved in the real world relationship cannot be understood without first understanding the simpler arguments which form the building blocks. It is the purpose here to apprise the reader of the key building blocks necessary for an analysis of the economic effects of tariffs and quotas.

The article deals with only a few issues and, in no way is it intended to be a substitute for a textbook or a course in international economics. Quite to the contrary, it is hoped that the interests of the readers will be sparke enough by the discussion here to spur them into acquiring a deeper an even more technical knowledge of trade policy issues.

This work is produced by the Social Policy and Development Centre (SPDC). It is part of a wider SPDC project on the elimination of textile quotas and Pakistan-EU (European Union) trade that is funded by the EU Commission under its Small Projects Facility (SPF) Programme for Pakistan.

It is difficult to grasp the case for free trade based on economic theory without understanding three key concepts - the law of comparative advantage, the notion of consumer surplus and the notion of producer surplus. The Law of Comparative Advantage, attributed to the 19th Century economist, David Ricardo, goes to the heart of the gains that countries will get from specialising in the production of some goods and trading with each other.

The concept is best illustrated through an example. Suppose there are two countries and they produce only two goods, wheat and cloth. By using one unit of labour, country A can produce either 6 bushels of wheat or 4 yards of cloth. Country B's technology is such that it can produce either 2 bushels of wheat or 2 yards of cloth with one unit of labour (Table 1).

TABLE 1

THE LAW OF COMPARATIVE ADVANTAGE:

======================================
Production Possibilities
Production per unit of labour
Country A Country B
--------------------------------------
Wheat (Bushels) 6 2
Cloth (Yard) 4 2
======================================
This example has been deliberately rigged so that country A is more efficient at producing both goods - that is, it has what economists call "an absolute advantage" in the production of both goods. However, country B has a "comparative advantage" in the production of cloth because this is the good in which it has least absolute disadvantage - it is only half as efficient as country A at producing cloth compared to one-third as efficient in producing wheat.

Both countries can gain if country B specialises in the production of the good in which it has comparative advantage (cloth) and country A produces the good in which it has comparative advantage (wheat). If country B specialises in the production of cloth, it would be willing to trade 1 yard of cloth for 1 bushel of wheat without being worse off. But this would represent a gain for country A.

This is because if country A specialises in the production of wheat, it is willing to trade 1 bushel of wheat for 2/3 yard of cloth, but it is getting the more favourable terms of trade of 1 yard of cloth for 1 bushel of wheat. It should be clear that for any terms of trade in between 2/3 to 1 yard of cloth for 1 bushel of wheat, both economies would be better off by country A specialising in the production of wheat and country B specialising in the production of cloth and then trading with each other to get the good they do not produce.

This example illustrates the basic argument for the gains from trade and how these gains depend not on absolute advantage in production of goods but on comparative advantage, which is a concept of relative efficiency. This does not mean that a country has to live with or cannot change its comparative advantage. Countries should certainly aim to move up the value chain and produce goods with higher value added so that their per capita incomes can increase faster.

What the law of comparative advantage implies is that countries can only do so by increasing their competitiveness and being able to produce the high-value added items relatively more efficiently than others. In East Asia, for example, we can see how some countries are adjusting to the increased emergence of China by developing new areas of comparative advantage.

CONSUMER SURPLUS:

Another key concept in understanding the basics of trade policy issues is the idea of consumer surplus (CS). To grasp this concept, we must start with a demand curve. The demand curve for a product shows the quantities of the good that will be demanded at different prices. It is downward sloping, as shown in Figure 1.

When the price is high (say, Rs 900 per unit of the good), only those who value the good really highly will demand it and thus relatively less units will be demanded (say, 20 units as shown in the figure). As the price falls, some more consumers who place relatively lesser value on the good also are now able to afford it and find it worthwhile to buy it. Thus, the quantity demanded will increase.

For a given consumer, CS represents the difference between the amount the consumer is willing to pay to acquire the good and the amount she actually pays. The willingness to pay is represented by the vertical distance to the demand curve from the horizontal axis - the willingness to pay is what any point on the demand curve represents.

Thus, the willingness to pay for the 20th unit of the good is Rs 900; for the 40th unit, it is Rs 800; and for the 100th unit, it is Rs 500. If the good sells for Rs 500, say, the total willingness to pay for all of the consumers taken together is the area under the demand curve, which is equal to the sum of the shaded areas A and B, as shown in the figure.

What is the amount that the consumers actually pay for the good? At a price of Rs 500, 100 units of the goods will be bought so that the amount paid will be Rs 500 x 100 = Rs 50,000, which is represented by the area of the shaded rectangle B in the figure.

THE CS, THEN, IS GIVEN BY:
-- CS = Willingness to pay - amount actually paid

= (A+B) - B = A

Thus the CS represents the sum of the gains to all the consumers as a result of purchasing the good at a market price that is lower than the value they place on the good.

PRODUCER SURPLUS:
There is a similar concept of a Producer Surplus (PS), which is also crucial to gain a basic understanding of the effects of trade policy. To illustrate it, let's first consider the industry supply curve for a particular good. The industry supply curve is upward sloping, as shown in Figure 2. The cost of producing an extra unit of the good by the industry (the marginal cost) rises with the quantity produced.

Thus, producers in the industry need a higher price to produce more to cover their costs and that is why the supply curve slopes up. For a given producer, PS represents that difference between the amount received for producing the good and the minimum amount the producer would be willing to accept to produce it. Suppose the industry price is Rs 500 and 100 units of the goods are supplied, as shown by the supply curve in the figure.

What is the minimum amount that the producers would be willing to accept to produce 100 units of the good? This would be the area under the supply curve represented by the shaded area A. This is because any point on the supply curve represents the amount the producers would be willing to accept to produce a particular unit. For example, as shown, to produce the 33rd unit, producers would need Rs 300; to produce the 66th unit, they would need Rs 400; and to produce the 100th unit, they would need Rs 500.

The amount that the producers actually receive for producing 100 units is the price multiplied by the quantity supplied, or Rs 500x100 = Rs 50,000, which is represented in the figure by the areas of the rectangle which forms the sum of the shaded areas A and B.

THE PS IS, THEN, GIVEN BY:

-- PS = Amount received for producing - amount willing to accept to produce

= (A+B) - A=B

Thus, the PS represents the sum of the gains to all the producers as a result of selling the good at a price higher than the amount they would be willing to accept to produce it. In other words, PS could be thought of as producer's profit.

WORLD EQUILIBRIUM

THE POWER OF MARKETS:

Consider the world equilibrium for a single good in the absence of any trade restrictions, illustrated in Figure 3. The price would adjust to equate world demand to world supply and, as shown in the figure.

This happens at the price P = Pw. Now that we are talking about world prices, it should be noted that for our purposes it does not matter here so much whether they are expressed in Rs or US dollars or Euros, or some other currency since throughout our analysis we will be abstract from exchange rate issues and might as well treat the exchange rate as fixed.

The remarkable thing about the equilibrium market-clearing price in the absence of any distortions is that it maximises the sum of consumer surplus and producer surplus, shown by the shaded areas CS and PS in the figure. At a price higher than Pw, say P1 > Pw, there is excess supply.

If price was lower than this, more consumers would be willing to buy the good and there would be producers that are willing to produce it at that price. Thus, the price would fall in this case until the price Pw is reached again. On the other hand, at a price lower than Pw, say P2 < Pw, there is excess demand.

If price was higher than this, more producers would be willing to produce the good, and there would be consumers that are willing to buy it at that price. Thus, the price would rise in this case until the price Pw is reached again.

The above equilibrium is for the world, and it does not imply that demand will equal supply in each country. In the case of those goods in which a country has a comparative advantage in production over other countries, domestic supply will likely exceed domestic demand and the excess supply will be exported.

But the world market would still clear, with excess supply in countries with comparative advantage being matched by equal excess demand in other countries.

Similarly, in the case of goods in which a country does not have a comparative advantage it is likely that domestic demand will exceed domestic supply and the excess will be imported. Again, the world market will clear, with the excess demand in countries having a comparative disadvantage in production being matched by excess supply in other countries.

In sum, the key result here is that the world equilibrium market- determined price maximises the sum of consumer and producer surpluses. Moreover, countries specialise in the production of goods in which they have comparative advantage in, and they are likely to become a net exporter of these goods and a net importer of those goods in which they do not have a comparative advantage.

THE ECONOMICS OF TARIFFS:
A tariff is a tax on the imports of goods. It is one important element of trade policy for any country. There are two main types of tariffs - a specific tariff, which is a fixed tax for each unit of the good imported (eg $2 per barrel of imported oil), or an Ad valorem tariff, which is levied as a fraction of the imported value of a particular good (eg 20 percent of the value of all imported automobiles). Tariffs are imposed both for the purposes of adding to government revenue as well as to try and protect certain domestic sectors of the economy.

Generally, the revenue and protective effects of tariffs occur simultaneously. However, in some special cases only one of these effects occurs at a time. For example, a tariff that is imposed on an import when no domestic producer exists would be a pure revenue tariff; also, a tariff that is imposed is so high that it becomes prohibitive and no goods are imported would be a pure protective tariff. In such a case no government revenue is collected.

SITUATION WITHOUT TARIFFS:

In order to consider the effects of tariffs from the viewpoint of the importing country, let's first set up what the situation might look like without any tariffs. Suppose the world price (Pw) of a good is determined from the equality of world demand and world supply, as shown in Figure 3 (Note that we have expressed the price here in dollars, but given a fixed exchange rate, we could speak interchangeably about the rupee price which would just be a multiple of this).

Since we want to focus on a country importing the good, let's suppose that at this world equilibrium price, the country in question has excess demand for the good and is, therefore, a net importer of the good. Recall that other countries would have to have excess supply and be a net exporter for world equilibrium to hold.

The initial situation without any tariffs is shown in Figure 4. At the world price of $100, the domestic demand for the good in this particular country is 500 units. 100 units of this good are supplied by domestic producers, who are efficient at producing this good.

However, after 100 units have been produced domestically, it is more efficient to import additional units of the good at a cost of $100, since supply curve shows that domestic producers would demand a higher price to produce more than 100 units. Thus, 400 units of the good are imported from abroad.

EFFECTS OF IMPOSING A TARIFF:
Now consider the imposition of a $15 tariff on each unit of imports by the home country (This is 15 percent of the original price of $100). If the domestic price remained at $100, no one will be willing to export the good at the world price of $100. The price difference between the home market and the world market will have to rise to $15 for someone willing to ship the good to the home country from abroad, given the import tax of $15.

In other words, at the old world price of $100, there is now excess supply in the world market (since the demand for imports from the domestic country has fallen). The world price would have to drop and the domestic price inclusive of tariffs would have to rise until the price differential between the two markets was exactly equal to $15.

Suppose this happens at a new world price of Pw* = $95 and a domestic price inclusive of tariffs of PT = $110. At this new higher domestic price, domestic supply rises to 200 units from the previous 100 units, and domestic demand falls to 400 units from the previous 500 units. Therefore, 200 units are now imported, which is less than the previous imports of 400 units.

What are the welfare effects of the imposition of the $15 specific tariff? Let's start with what happens to a consumer surplus. Recall from Figure 1 that the consumer surplus is the area of the triangle that is formed by the vertical axis, the demand curve and the horizontal line at the price at which the good sells. With the domestic price rising from $100 to $110, it is easy to verify that the consumer surplus falls by the amount of the sum of the shaded areas A, B, C and D in Figure 4.

Now consider what happens to producer surplus. Again, recall from Figure 2, that this was the area of the triangle formed by the vertical axis, the supply curve and the horizontal line at the sale price of the good. With the price rising to $110 from $100, the producer surplus increases by the amount of the shaded area A, shown in Figure 4.

In addition to these effects, the government now has tariff revenue of the amount shown by the area of the rectangle which forms the sum of the shaded areas C and E. This is equal, of course, to the tax per unit ($15) multiplied by the quantity of imports (200 units), or $3,000.

THUS, THE NET WELFARE LOSS FROM THE IMPOSITION OF THE TARIFF IS GIVEN BY:
-- Net welfare loss = loss of consumer surplus - gain in producer surplus

-- rise in government revenue

= (A+B+C+D) - A - (C+E) = B+D-E

Domestic producers gain because the tariff increases the domestic price, allowing some domestic producers to compete with the more efficient foreign producers. Consumers lose because the price rises, causing them both to consume less and pay more per unit for the amount that they still consume. The government gains because it has revenue now that it did not have before.

Part of the loss of the consumers becomes the producers gain and washes out on net - this is the area A. Part of the loss of the consumers becomes the government's gain and also washes out on net - this is the area C. However, there are net efficiency losses amounting to the sum of the triangle areas B and D because of the distortions to the incentives to consume and produce caused by the imposition of the tariff.

It should be emphasised that the areas B and D represent net welfare losses that go to nobody. These net losses are caused by the distortion or wedge created by the tariff. Part of this net loss (the area D) is because consumption of the good falls from 500 to 400 units; and part of it (the area B) is because more costly domestic production to the tune of 100 units is being substituted for less costly foreign production.

Offsetting this is a net gain to the domestic economy, arising from the fact that the tariff causes the world price of the good to fall to $95 from $100, which is represented by the area E. If the domestic country is relatively small, as in the case of Pakistan, its decrease in import demand resulting from the higher tariff would be expected to have only a negligible downward effect on the world price and the area E would be very small. Most of the burden of the tariff would then be borne by domestic consumers, and the imposition of the tariff would represent a net welfare loss to the nation.

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