Tuesday, April 22, 2008

Krugman's conundrum

Source: http://www.economist.com/finance/economicsfocus/PrinterFriendly.cfm?story_id=11050137

Apr 17th 2008
From The Economist print edition

The elusive link between trade and wage inequality

“THIS paper is the manifestation of a guilty conscience.” With those words, Paul Krugman began the recent presentation of his new study of trade and wages at the Brookings Institution. Mr Krugman, a leading trade economist (as well as a New York Times columnist), had concluded in a 1995 Brookings paper* that trade with poor countries played only a small role in America's rising wage inequality, explaining perhaps one-tenth of the widening income gap between skilled and unskilled workers during the 1980s. Together with several studies in the mid-1990s that had similar findings, Mr Krugman's paper convinced economists that trade was a bit-part player in causing inequality. Other factors, particularly technological innovation that favoured those with skills, were much more important.

At some level that was a surprise. In theory, although trade brings gains to the economy as a whole, it can have substantial effects on the distribution of income. When a country with relatively more high-skilled workers (such as America) trades with poorer countries that have relatively more low-skilled workers, America's low skilled will lose out. But when the effect appeared modest, economists heaved a sigh of relief and moved on.

In recent years, however, the issue has returned. Opinion polls suggest that Americans have become increasingly convinced that globalisation harms ordinary workers. As a commentator, Mr Krugman has become more sceptical. “It's no longer safe to assert that trade's impact on the income distribution in wealthy countries is fairly minor,” he wrote on the VoxEU blog last year. “There's a good case that it is big and getting bigger.” He offered two reasons why. First, more of America's trade is with poor countries, such as China. Second, the growing fragmentation of production means more tasks have become tradable, increasing the universe of labour-intensive jobs in which Chinese workers compete with Americans. His new paper set out to substantiate these assertions.

That proved hard. Certainly, America's trade patterns have changed. Poor countries' share of commerce in manufactured goods has doubled. In contrast to the 1980s, the average wage of America's top-ten trading partners has fallen since 1990. All of which, you might think, would increase the impact of trade on wage inequality.

But by how much? If you simply update the approach used in Mr Krugman's 1995 paper to take into account today's trade patterns, you find that the effect on wages has increased. Josh Bivens, of the Economic Policy Institute, a Washington, DC, think-tank, did just that and found that trade widened wage inequality between skilled and unskilled workers by 6.9% in 2006 and 4.8% in 1995. But even with that increase, trade is still far from being the main cause of wage inequality. Lawrence Katz, a Harvard economist who discussed Mr Krugman's paper at Brookings, estimates that, using Mr Bivens's approach, trade with poor countries can account for about 15% of the growth in the wage gap between skilled and unskilled workers since 1979.

Even this is almost certainly an overstatement. Many imports from China have moved up-market from easy-to-produce products, such as footwear, to more sophisticated goods, such as computers and electronics. As a result, to use economists' jargon, the “factor content” of American imports—in effect, the amount of skilled labour they contain—has not shifted downwards. Mr Katz says factor-based models suggest trade with poor countries explains only 5% of rising income inequality.

Mr Krugman argues that the effect is bigger, but that import statistics are too coarse to capture it. Thanks to the fragmentation of production, Chinese workers are doing the low-skill parts of producing computers. Just because computers from China are classified as skill-intensive in America's imports does not prevent them from hurting less-skilled American workers. Mr Krugman may be right but, as he admits, it is hard to prove.

Blame it on the rich
Robert Lawrence, another Harvard economist, has looked at the same evidence and reached rather different conclusions. In a new book, “Blue Collar Blues”, he points out that the contours of American inequality sit ill with the idea that trade with poor countries is to blame. Once you measure income properly, the gap between white- and blue-collar workers has not risen that much since the late 1990s when China's global integration accelerated. The wages of the least skilled have improved relative to those in the middle. Some types of inequality have increased, notably the share of income going to the very richest. But there is little sign that wage inequality has behaved as traditional trade theory might suggest.

Mr Lawrence offers two reasons why. One possibility is that America no longer makes some of the low-skilled, labour-intensive goods that it imports. In those goods there are no domestic workers to lose out to foreign competition. Second, even when America does produce something that is imported from China, it may make it in a different way, with more machinery and only a few high-skilled workers. If imports from China and other poor countries compete with more-skilled American workers, they may displace workers but will not widen wage inequality.

Given the lack of fine-grained statistics, none of these studies settles the debate. It is possible that globalisation is becoming a bigger cause of American wage inequality. But contrary to the tone of the political debate, and the thrust of Mr Krugman's commentary, the evidence is inconclusive. “How can we quantify the actual effect of rising trade on wages?” Mr Krugman asked at the end of his paper. “The answer, given the current state of the data, is that we can't.”

* Sources

“Growing World Trade: Causes and Consequences”, by Paul Krugman, Brookings Papers on Economic Activity 1:1995

“Blue Collar Blues: Is Trade to Blame for Rising US Income Inequality?”, by Robert Z. Lawrence, Peterson Institute for International Economics, January 2008

“Trade and Wages, Reconsidered”, by Paul Krugman, Brookings Papers on Economic Activity (forthcoming – a draft version is available)

“Globalisation, American Wages and Inequality”, by Josh Bivens, EPI Working Paper 279, 2007

Monday, April 21, 2008

Futures caused the market manipulation

Futures caused the market manipulation
Krishan Bir Chaudhary

Source: Financial Express

Futures trading in wheat, rice and pulses like tur and urad has been suspended by the Forward Markets Commission as it caused market manipulation, leading to a rise in prices. But, still, futures trading is being carried out in a number of agricultural commodities.

The government knows for certain that futures trading in farm commodities is the cause for market manipulation. Finance minister P Chidambaram, while presenting Budget 2008-09, slapped a commodities transaction tax (CTT) on options and futures on the lines of the existing securities transaction tax. “The commodity futures have come of age in the country and should be treated at par with the equity market,” he had said. Chidambaram also brought the commodity futures exchanges in the ambit of service tax. These measures were aimed at curbing manipulation.

But the government’s move is only a piecemeal approach although it has realised the damage futures trading in agricultural commodities can cause. It should nip the problem in the bud by banning futures trading in all agricultural products.

There is a wrong notion that the farmers are benefiting from the existing futures trading in the country. The farmers get the lowest price for their produce in the season at harvest and, thereafter, the produce passes into the hands of traders and corporate houses that manipulate high prices for commodities in the futures markets. Farmers have no opportunity to participate in this.

The Economic Survey 2007-08 clearly says: “Direct participation of farmers in the commodity futures market is somewhat difficult at this stage as the large lot size, daily margining and high membership fees … work as a deterrent to farmers’ participation in these markets. Farmers can directly benefit from the futures market if institutions are allowed to act as aggregators on behalf of the farmers.”

Farmers have no time to participate directly in the futures markets. They have to prepare the field after harvest for the next crop. The concept that institutions or corporate houses should act as aggregators on behalf of farmers amounts to leaving the peasants at the mercy of these marketing giants.

The government has now gone into a panic mode as inflation, as measured by the point-to-point movement of the wholesale price index, reached a 40-month high at 7% for the week ended March 22, 2008. Yet, it is not totally critical about the neo-liberal architecture of the economy that it has imposed upon the nation. It is taking a piecemeal approach like banning exports and liberalising imports of certain commodities. It is time the government rejected this neo-liberal and corporate-led agriculture model and replaced it by a farmer-centric one.

There is no shortage of food either at the global or at the domestic level. According to a recent report of the International Grain Council (IGC), the world wheat production would be at 646 million tonne (mt), an increase of 42 mt over the previous year, due to a 2.5% increase in the area under cultivation. The global prices of maize were around $240 a tonne by March 27. The IGC forecasts global maize output to decline by 20 mt to 748 mt. Barley output would increase 10% to 148 mt.

According to the official estimate, India has achieved record grain production of 219.32 mt in 2007-08, including 94.08 mt of rice, 74.81 mt of wheat, 36.09 mt of coarse cereals, and 14.34 mt of pulses. The cotton output is estimated at 23.38 million bales of 170 kg each, an all-time record. The oilseeds output is estimated at 27.16 mt.

Despite the good production, there is a deliberate manipulation of food prices both at the global and at the domestic levels. At the global level, there are a few corporate players in the food business that buy produce from farmers cheap, hoard the stock and manipulate the prices. The bio-fuel programme in Europe and the US is also a contributing factor to price rise.

In India, too, the corporate houses and retail chains have been allowed to buy produce from farmers, hoard and manipulate the market. The farmers do not gain in the process as they are paid relatively lower prices than what the corporate houses quote on the futures exchanges or in the spot market, or at what the retail chains sell to the consumers.

—The author is the president of Bharatiya Krishak Samaj, India’s largest and oldest farmers’ organisation

Currency devaluation and its impact on the economy

Source: http://jang.com.pk/thenews/apr2008-weekly/busrev-21-04-2008/p3.htm

Devaluation is usually undertaken as a means of correcting a deficit in the balance of payments. Some analyst are of the view that weakening the value of currency could actually be good for the economy – since a weaker currency will boost exports, which in turn will lift employment and all this will set in motion economic growth and keep the economy going
By Parveen Zaiby

Devaluation means decreasing the value of nation's currency relative to gold or the currencies of other nations. Devaluation occurs in terms of all other currencies, but it is best illustrated in the case of only one other currency. Devaluation and Depreciation are sometimes used interchangeably, but they always refer to values in terms of other currencies and the value of currency is determined by the interplay of money supply and money demand. In common modern usage, it specifically implies an official lowering of the value of a country's currency within a fixed exchange rate system, by which the monetary authority formally sets a new fixed rate with respect to a foreign currency. In contrast, (currency) depreciation is most often used for the unofficial decrease in the exchange rate in a floating exchange rate system.

Historically, early currencies were typically coins stamped from gold or silver by an issuing authority which certified the weight and purity of the precious metal. A government in need of money and short on precious metal might abruptly lower the weight or purity of the coins without announcing this, or else decree that the new coins had equal value to the old, thus devaluing the currency.

Present day currencies are usually fiat currencies with insignificant inherent value. As some countries hold floating exchange rates, others maintain fixed exchange rate policy against the United States dollar or other major currencies. These fixed rates are usually maintained by a combination of legally enforced capital controls or through government trading of foreign currency reserves to manipulate the money supply. Under fixed exchange rates, persistent capital outflows or trade deficits may lead countries to lower or abandon their fixed rate policy, resulting in devaluation (as persistent surpluses and capital inflows may lead them towards revaluation).

Devaluation is usually undertaken as a means of correcting a deficit in the balance of payments. Some analyst are of the view that weakening the value of currency could actually be good for the economy—since a weaker currency will boost manufacturing production, which in turn will lift employment and all this will set in motion economic growth and keep the economy going. But the dangers of a falling rupee too quickly, would be that the foreigners will stop investing in the country, which would make it impossible to finance the current account (trade) deficit. It will then be forced to push interest rates up to defend the rupee (crashing rupee stock and bond markets is supposed to make the rupee more valuable), and that could create recession.

In an open market, the perception that a devaluation is imminent, may lead speculators to sell the currency in exchange for the country's foreign reserves, increasing pressure on the issuing country to make an actual devaluation. When speculators buy out all of the foreign reserves, a balance of payments crisis occurs. Economists Paul Krugman and Maurice Obstfeld state that the balance of payments crisis occurs when the real exchange rate (exchange rate adjusted for relative price differences between countries) is equal to the nominal exchange rate (the stated rate). In practice, the onset of crisis has typically occurred after the real exchange rate has depreciated below the nominal rate. The reason for this is that speculators do not have perfect information; they sometimes find out that a country foreign reserve are at lower level after the real exchange rate has fallen. In these circumstances, the currency value will fall rapidly. This is what occurred during the 1994 economic crisis in Mexico.

Devaluation of a currency was a matter of prestige in the past. However with the lapse of time it has been learnt that such an operation is sometime necessary to save the country from economic hardships. Devaluation is not an enduring way to improve the economy, unless the Government revises its method of economic planning and execution of plans, no amount of devaluation will stabilise the external value of our currency. We must give highest priority to the consolidation of our economy vis-a- vis expansion. A strong discipline should be exercised over all the unproductive expenditure whether it is in public or private sector.

Possible impact of the devaluation on the economy

Possible impacts of the devaluation on the economy could be the stimulation of merchandise exports, discouraging merchandise imports and thus improving terms of trade, increase revenue collection and savings in repatriation of profits and royalties by existing foreign investors, bringing illegal foreign exchange leakages into official channels and putting an end to gold smuggling. Inflow of foreign capital can be improved by devaluation only if prices do not rise. It is supposed to provide an escape from vexation import controls that prevent utilisation of full industrial capacity, stifle export drive, bestow monopoly profits on a few, inefficient market regulation and pressure on budget and domestic prices will sky rocket. The obvious consequence of devaluation in the short run would be to worsen the balance of payment position and raise the burden of Pakistan’s foreign debt and debt service liability and foreign loans repayment would break the back of the budget, which would in turn increases the trade gap. It will upset all the cost-price relationships in the economy, lead to galloping inflation, and will stall many ongoing projects due to rising costs.

Persistent adverse trade balance and disequilibrium in balance of payment are the main causes, which compels a country to devalue its currency. Major components of trade balance are exports and imports of a country. Adverse trade balance is generally the result of slackness in exports in comparison to imports. It might affect exports prices and thus wipe out all the edge that might be hoping to gain in the export markets through devaluation. The markets for Pakistan’s traditional export are inelastic, therefore devaluation may thus in fact give no big boost to their exports, because there is a small quantum of value added exports and major requirement is based on export of raw material. Further the quality of export not competitive in the foreign market. If an export -boom in agro-based industries does come about, the consequential diversion of land from food crops will raise food prices and cause a rise in wages unaccompanied by any gains in productivity. Moreover, most of the bigger enterprises will face increasing difficulties in loan repayments and the cost of new industrial investments will shoot up sharply.

In Pakistan, industries are heavily dependent on imported raw materials for industrial goods and capital goods and components, and their access too many advanced countries are blocked by quotas and tariffs. , any rising of the prices of such inputs through devaluation, would raise industrial costs and reduce the intensity of capacity utilisation. Therefore, it should be avoided as a resort to deficit financing. Devaluation with its implications will cause a contraction in economic activity and consequential slide down in income tax receipts will raise the burden of Pakistan’s defence equipment, and foreign debt overnight. It cannot stop smuggling as long as black- market transactions in foreign exchange continue. Devaluing the Pak. Rupee means devaluing the price of Pak labour and talent in the international market who send foreign exchange through home remittance. Devaluation will make Pakistan lose heavily both as seller and as a buyer and will make no good substitute for remedial changes in economic policies and developmental planning. Devaluation of Pakistan Rupee will mean devaluation of Pakistan labour and talent in the international market evaluation will serve as a drug rather as a stimulant and cause an unprecedented inflation.

Bold steps must be taken to enliven capital market and more foreign aid procured. Strong disciplined should exercised over all unproductive expenditure, whether it be public sector or private sector. Lavish spending of aid was bad enough, but it would be even worse to raise the cost of debt repayment through devaluation, whose benefits in terms of larger foreign investment are quite illusory.

Central exercise as well as sales tax receipts and custom duties should go down due to lower volume and high prices of imported inputs resulting in cut-backs in industrial production.

Devaluation in Pakistan in different periods

Pakistan had experienced an increased in wholesale price, after its first devaluation in 1955, due to inelastic production structure, which had generated uncontrollable inflationary pressure. Again on 11th May 1972, Pakistani Rupee was devalued by 56.7% in terms of gold to a new, unified Official Rate of PRs11.00 per U.S. Dollar and 4.5% fluctuation range for the currency was also introduced. At the same time, the entire Export Bonus Voucher scheme with its complex accessory rates was abolished. On 8th January 1982, the Rupee was devalued when the currency was unhitched from its link to the U.S. Dollar and the fixed Official Rate abolished. A controlled, floating Effective Rate for the Rupee, initially at the Rupee dollar exchange rate was Rs9.9 per U.S. Dollar was established in relation to a trade-weighted basket of currencies, Pakistan has been on a system of managed float since January, 8, 1982, under this system the country has experienced massive downward slide in its exchange rate. In 1997, retail prices rose significantly to 20 to 24 rupees/kg (US 55.4 to 66.5 cents/kg), indicating short domestic supplies, the devaluation of the rupee against the dollar was highest in 1996, which contributed to the rise in price since sugar had been traded internationally in US dollars. As imports had increased in the 2 years period, the rising price of imported sugar (in rupees) was also reflected in the rising domestic price. An import tariff of 10 percent was removed in mid-1997, so as not to contribute to increasing sugar prices. It rose to very high amounting to Rs64.1 in July 2001. The economic indicators showed some visible improvement since the year 2001-02 and it continued to be so, which helped the authorities to turn around the creeping devaluation and the rupee has stabilised in the range of (Rs) 59-60 per dollar till 2006 and May 2007 (Rs60), but after that the currency has started devaluing since 2007 to date i.e., April 2008 it stands to now Rs63.40 against a dollar. It is concluded that devaluation may temporarily boost exports only if the demand of exported goods in the foreign country is price elastic, but this is not necessary for those goods for which the demand is not price elastic. We therefore, should first try to analyse the price elasticity of demand of goods exported from Pakistan, because experienced has taught that devaluation did not lead to increase in exports. Further to this, it has been observed that successive devaluation in the past have failed to evoke a favourable long term response in terms of improved exports. Apart from encouraging speculation it also shatters the confidence of the foreign investor in the domestic economy. It takes the economy on the path of devaluation aided cost push inflation and is a never ending vicious circle. A long term plan is required to put the economy on the right track. This should provide a framework for exporting value added branded products, improving the quality and image of existing products, finding new export markets and better marketing strategy.

We should try to effectively utilise the human resources, which is abundant in Pakistan and is under- utilised. Moreover, cut in government expenditure, improvement in budget and trade deficit, multiple and persistent exchange rate would also be of great help. But devaluation is not the solution of the current economic crisis and should not be resorted to in future.

Mobilisation of savings for self-reliance

source: http://jang.com.pk/thenews/apr2008-weekly/busrev-21-04-2008/p2.htm

By Aftab Ahmad Khan

The inability to mobilise adequate domestic resources to finance development has continued to restrain the rate of growth in Pakistan. This is an important reason why the actual rate of development has been below the potential rate of development. It has been responsible for increasing our dependence on external savings in the form of loans, investments and grants to an extent that it now impinges on our economic sovereignty. According to Prof. Ragnar Nurkse “the vicious circle of poverty” that runs from low income to low investment to low productivity and then back to low real income can be broken by an increase in the ratio of savings and investment to national income.

Pakistan’s national savings to GDP ratio in FY07 was 18.0 per cent as compared with 17.2 per cent in FY06 and 17.5 per cent in FY05. Savings –Investment gap in FY07 was 5 per cent of GDP as compared with 4.6 per cent of GDP in FY06.

Savings to GDP ratio in Pakistan is quite low as compared with the regional economies. According to Asian Development Bank (key indicators 2007), gross domestic savings as a percentage of GDP in 2006 were 32.4 India, 20.3 in Bangladesh, 50.5 in Singapore, 43 in Malaysia, 47.3 China and 13.7 in Pakistan.

The State Bank of Pakistan has quite appropriately pointed out that a large savings-investment gap is not desirable for the country in the long run because of its negative impact on macro-economic stability. It results in accumulation of external debt and puts additional burden on the country’s balance of payments in terms of mounting debt servicing.

Despite low rates of national savings, Pakistan has somehow managed to sustain a respectable growth rate of domestic output. This apparent contradiction is resolved if one accepts the view that estimates of savings and investments are considerably under-stated as they do not take into account saving and investment activity in the parallel on black economy. A more likely explanation might be that Pakistan over the last decades has been depleting its existing stock of capital and neglecting maintenance and replacement, thus attaining high income growth with low investment at the expense of future growth. This is visible in the public infrastructure facilities under-maintained roads, railways and irrigation networks, and by the low level of investment in social sectors. Whatever the reason, it is prudent to assume that the Incremental Capital Output Ratios (ICORs) will be higher in the future. The composition of future investment with heavy infra-structure requirements for every, irrigation, transport and urban renewal as well as new emphasis on social sectors will entail more capital per unit of output and therefore higher rates of investment.

The prevailing rates of investment and savings are not adequate to support future economic growth at the socially necessary rate of 8 per cent per annum. Pakistan therefore has no alternative but to make determined and sustained efforts to raise significantly its national savings and investment rates.

Various reasons have been advanced to explain Pakistan’s lacklustre savings performance. These include the existence of a large unorganised black economy whose savings are not captured by official statistics, a feudal outlook characterised by wasteful expenditure, a development strategy which has emphasised the production of consumer goods, conspicuous consumption and ostentatious living by the elite, rates of inflation higher than the rates of return on financial savings, lack of adequate attention to the efficiency dimension of investment, a high population growth rate with a concomitant high dependency ratio and low level of per capita income.

The most frequently cited reason, however, is a culturally induced bias in favour of consumption. But while such a bias would affect the propensity to save, it cannot by itself satisfactorily explain all aspects of Pakistan’s savings performance and by constantly citing this cultural factor as a principal reason for Pakistan’s low savings rates, the importance of other determinants tends to be either disregarded or discounted. In our case, it is quite clear that inadequate returns on financial savings and unequal and inefficient distribution of credit have exercised inhibiting impact on the process of savings and investment. Admittedly, the rate of return is not the only determinant of savings, but the evidence suggests that it is far more important than bankers and policy makers have acknowledged for a long time.

Savings, like other economic variables are related to a large number of factors, such as income expectations, investment opportunities, import regulation, pattern of industrialisation, inter-sectoral transfer of income and distribution of income etc. The rate of savings can be influenced by many of these variables.

Growth and savings feed back into each others in the virtuous circle of savings-investment-growth-savings.

The feed back mechanisms depend on the efficiency with which savings are channelled into productive investments. Hence, financial infrastructure, such as banking systems, stock and bond markets, insurance and the degree of monetisation play a key role in packaging risk for savers, transmitting information and lowering the cost of equity for firms.

The main imbalance between savings and investment in Pakistan arises in the public sector. Budget deficit i.e. the gap between consolidation revenues and expenditures has been one of the most serious problems facing the economy and is an important cause of the low level of domestic savings. During the 1980s and 1990s it annually averaged 7.1 per cent and 6.9 per cent of GDP respectively.

The budgetary deficit was, however, brought down to 4.3 per cent of GDP in FY06 and FY07. In the current fiscal year FY08, unfortunately on present indications it is likely to substantially exceed 4.0 per cent GDP target.

It is heartening to note that the present government has realised the importance of a significant fiscal adjustment involving major public resources mobilisation effort and expenditure control / rationalisation measures accompanied by steps aimed at improving tax administration.

The present tax structure of Pakistan unfortunately falls short in all major functions of a modern tax system. The system is characterised by the dominance of indirect taxes (around 63 per cent of total tax receipts). At the same time the system has many exemptions and concessions. Furthermore, those subject to taxation, with the exception of wage and salary earners are known to pay only a fraction of their share. In order to maintain the present low tax-GDP ration (10.2 per cent), the tax system needs to be supplemented with frequent ad-hoc measures.

Moreover, tax evasion has encouraged the growth of a parallel economy which in turn results in cumulative loss to the public exchequer.

In the context of stepping up the rate of national savings, the necessity of avoiding ostentation and waste in public and private expenditures cannot be over-emphasised. In our bi-polar society wherein a small island of opulence and privilege is vulnerable to an ominously rising tide of poverty and despair, conspicuous consumption and waste (manifesting itself in palatial houses and costly furnishings, high priced conveyances, expensive banquets and marriage ceremonies, vulgar display of jewellery and frequent trips to foreign countries) rub salt as it were on the wounds of large number of poor. In the case of a poor country like Pakistan, extravagant living is highly immoral insofar as it involves the unproductive use of limited resources; moreover, (this is of much greater significance), the frustration and discontent generated by it impede the process of social cohesion and stability.

The very high incomes, which accrue to businessmen, industrialists, landowners and speculators, have their justification only, if these lead to increased savings and high productive investments.

Using remittances for development

Source: http://dawn.com/2008/04/21/ebr15.htm

By Nusrat Khurshedi

REMITTANCES have emerged as a major source of foreign exchange. Global official remittances have increased from $2 billion in 1970 to the present level of over $80 billion. About sixty per cent of the global remittances’ flow towards developing countries. And these exceed the global official development assistance as well as capital market flows to the developing countries.

However, over the years, concerns have been expressed on the limited productive use of these remittances. It is estimated that 50-60 per cent of remittances are spent on current consumption and only about 10 per cent go into investment.

Much of the remittances are used for repayment of loans, in daily expenses such as food, clothing, child education and healthcare and basic subsistence needs. Funds are also spent on building or improving housing, buying land or cattle or durable ,consumer goods such as washing machines and televisions. Remittances are also utilised for financing migration of other family members on social ceremonies and community development activities.

Generally, only a small percentage of remittances is used for savings and what is termed ‘productive investment’ e.g. income and employment-generating activities such as buying land or tools, starting a business and other economic activities with multiplier effects.

Due to poor infrastructure, lack of access to credit, and limited opportunities for small-scale investment, the migrants are making rational decisions about the use of their remittances.

While Overseas Pakistanis Foundation (OPF), offers investment advisory services to returning migrants and assists them in obtaining services from relevant government departments in setting up business, much more effort is needed to influence the pattern of utilisation of remittances for productive purposes.

First, there is a need for policy change to promote remittances. For migrants, the desire to remit savings through official channels is a function of convenience, flexibility and profitability of their transaction. Convenience depends on the ready availability of financial intermediaries who can easily remit funds to their families. Flexibility affects deposits more than remittances and is related to the availability of facilities for migrants to keep their deposits in foreign exchange and make withdrawals when desired. Profitability is determined primarily by the gap between the official rate of exchange and the unofficial rate available to the migrants. Besides this gap other important factors relate to the ‘real’ interest rate, inflation rate and exchange rate, as well as expectations regarding changes in these rates.

In order to encourage migrants to hold their saving balances in financial assets at ‘home’ as opposed to the host country, the government has introduced foreign currency denominated bonds. A special package of foreign exchange remittance card (FERC) has been implemented and under these, five categories of remittance cards are offered to those overseas Pakistanis who remit $2,500 to $50,000 in a year. A wide range of incentives are also being offered to the foreign exchange remittance card holders.

To encourage savings, the government provides temporary and permanent migrant workers with the incentives to remit to foreign–currency accounts (RCFAs), which can be repatriated, by domestic banks by offering a premium over and above the interest rates available in the international financial market. However, Bangladesh offers additional incentives through a preferential exchange scheme applied to conversions of foreign exchange from the RCFAs to local currency. Its Wage Earners Scheme (WES) enables migrants to sell their foreign exchange to importers at daily auctions at a premium over the official exchange rate.

In India, non-resident Indians are allowed to open foreign currency non-resident accounts which can be denominated in dollars or pounds sterling. The balances on these accounts and interest earned are repatriable The deposits are also exempt from wealth tax.

In terms of productive investment of remittances, it is noted that the focus of the incentive policy regime is on the high skill/income migrants living abroad permanently, either in the industrialised or developing countries. There is very little effort that is addressed to low skill, low income, temporary migrants, mostly workers in the Middle East who provide a substantial amount of foreign exchange through transfers and re-enter the labour market in search of employment on their return. The prospective returnee should be provided an enabling environment to place her/his saving into ‘productive’ investment.

South Korea has launched an experimental training programme for returning migrants. It aims at training returning migrants in new skills so that they can move to other industries or establish their own businesses. In Thailand, banks offer an advisory service on investment opportunities to its migrant-worker customers. The workers who seek advice are also eligible to obtain supplementary loans from the bank if they have a good record of savings.

In the Philippines, the POEA (Philippines Overseas Employment Administration) in collaboration with the ILO has established training centres in various high-migration regions. These centres provide business consultancy, information services, training in small-scale business management and financial supports to returning migrants and their family members. In Sri Lanka, the Department of Labor initiated a counseling service for return migrant. A “Return Migration Branch” was established in the Research and Development Division of the Ministry of Labour, to identify the problems of returning migrants and provide counseling and advice.

Along this, Pakistan has a “Non-Repatriable Investment Scheme” under which overseas Pakistanis (including those returning permanently) are allowed to import machinery and equipment at concessionary rates of duty to establish manufacturing enterprises. Migrant workers are also encouraged to invest in export processing industrial zones. In India migrant workers are given preferential access to capital goods and raw materials. Even Bangladesh offers special incentives for domestic investment..

Sri Lanka was the first labour-exporting country in Asia to launch an entrepreneurship development programme for returning migrants. This programme, inaugurated in 1982 by the Sri Lankan Ministry of Labour in collaboration with the Merchant Bank of Sri Lanka (referred to as ‘ML-MB Programme’) aimed at guiding returning migrants in business creation. In Turkey and Yugoslavia, investment by migrants, is encouraged through workers’ companies and ‘village development cooperatives’.

Policy makers in Pakistan need to focus on diverting remittances into productive avenues.

Alternative energy sources for rural areas

Source: http://dawn.com/2008/04/21/ebr9.htm

By Abdul Waheed Bhutto

The eradication of poverty, improved environment and a better quality of life for the poor are unachievable without electricity needed for lighting homes/ schools, clinics and for running industry.

A significant per cent of the rural population has no access to electricity.

People living in remote areas still depend on traditional biomass i.e. fuel wood, charcoal, animal dung etc, to meet their daily energy needs. The present extensive use of these sources of energy has led to depleted natural resources and degraded local environment.

Traditional stoves cause indoor concentrations of pollutants. Such exposures are linked to acute respiratory infections, chronic obstructive lung diseases, low birth weights, lung cancer and eye problems, found primarily, among women and children..

Similarly, kerosene-based household lamps are inefficient, expensive, and source of health and fire hazards. These lamps produce unhealthy fumes which in poorly ventilated homes pose serious health hazards such as respiratory and eye problems; and lighting using kerosene can be twice as expensive as and up to 19 times less efficient per lumen of output than fluorescent lights using electricity as the energy carrier.

The poor often pay higher unit costs for energy than do the rich due to high cost associated with kerosene and LPG. Kerosene stoves are also a major cause of fires. LPG is relatively cleaner and safer fuel, but is poorly distributed. Its high cost is also a problem for poor households because of the initial cost of deposit or outright purchases of gas cylinder and stove compared to a kerosene stove.

Access to modern energy enables development of productive economic sectors in rural areas. Energy services add to economic growth by reducing unit costs. Additionally, if connected to the national grid, people would benefit from subsidised tariff rates. In the absence of modern energy services, the workers, teachers, doctors and nurses are reluctant to live in rural areas.

In the recent years, technological developments in small hydropower, biomass utilisation, wind energy and solar photovoltaic systems have created new opportunities for rural development. The decentralised rural electrification (DRE) is a proven competitor for grid extension.

The new renewable energy (RE) is still in its initial stages of development, and has not made any notable contribution to national electric supply. The government has set a target to generate 2,700MW electricity through renewable by 2015.

Currently, photovoltaic (PV) technology is being used for stand-alone rural telephone exchanges, repeater stations, highway emergency telephones, cathodic protection, refrigeration system for vaccine and medicines in hospitals, etc. Solar energy can be used to warm and cool buildings, heat water for industrial and domestic purposes, distil water and dry the agriculture products etc.

In Balochistan, 77 per cent of the population lives in the rural areas. The population density is very thin. About 90 percent of villagers are yet to be electrified. These villages are separated by large distances with absolutely no approach roads. Transmission lines are very expensive and there is no chance of grid connection in the near future. These conditions favour development of solar energy for off grid electric supply. With rising fuel prices, most of the solar energy technologies are becoming economically viable.

Along the coastline and in number of North-West Frontier valleys Pakistan possesses about 50,000 MW of economically exploitable wind-power potential. The sea coast is about 1,120 kilometer long and has a rural population of about 10 million people. Most of small coastal villages do not have access to electricity, which could be supplied through the use of wind power, available all year round in these areas.

Unfortunately, at present there is almost no share of wind in the energy mix. However, about 30 wind mills for pumping water have been installed on experimental basis in different parts of Sindh and Balochistan. The experiment suffered due to low quality equipment and lack of proper infrastructure.

Research has identified Pasni and Jivani as the prospective sites for use of four kW and 20 kW wind machines while locations of Karachi and Ormara can utilise wind power throughout the year using four kW machines. Small wind unit do not need grid system and can be deployed locally in rural and remote areas for generating electricity and pumping water for irrigation purposes.

Small hydropower plants are an alternative that has emerged as a desired option, especially for hilly terrain where natural and manageable waterfalls are abundantly available. Within the range of small hydro power, mini-hydro refers to schemes below one MW, micro-hydro below 100 kW and pico-hydro below for five kW. Although these technologies could be regarded as small hydro power, they have specific technical characteristics that warrant their own definition. Generally speaking, micro- and pico-hydro technologies are used in developing countries to provide electricity to isolated communities where the electricity grid is not available, whereas mini-hydro tends to be grid connected. In most of the cases, no dam or reservoir storage is involved in pico-, micro and mini-hydro schemes.

In fact, PCRET has implemented 290 micro-hydro power (MHP) schemes in FATA and the northern areas with a total capacity of 3.5MW, ranging from 3-50kW per plant, with the participation of local community. All of these plants are run-of-river type in the low (four meter) to medium (30 meter) head range.

Similarly, Aga Khan Rural Support Programme (AKRSP) has constructed 171 micro- hydro units providing electricity to around 17,000 households in the remote and isolated region of northern areas, and currently provides 11,000 households with electricity at remote locations.

These plants not only provide electricity for light at night but are also used to run small industrial units such as flour mills for wheat and maize threshing, and cotton ginning during day time when electricity is not required for lighting. Once the plant is installed, the local community takes the operating responsibility.

A major advantage of micro hydro is that it can be built locally at a relatively low cost. For instance, imported turbine sets generating up to 50 kW cost nearly $500--1000 per kW, while the local manufacturers offer facilities for turbine manufacturing at $170--250 per kW, with marginally reduced turbine efficiencies. The cross flow turbine used by PCRET and AKRSP are manufactured in local workshops.

The costs of local manufacture can be reduced by developing local engineering capabilities and advisory services. Unfortunately, turbine used by PCRET and AKRSP is manufactured in local workshop having no design or quality control facilities. In order to accelerate the development and enhance the performance of small hydro power, it is imperative to benchmark the work of the SHP industry to identify and adapt the proven best practices of the world leaders in the industry. As the huge potential of hydro power remains as yet untapped, there is a great potential for benchmarking in the SHP industry.

Decentralised renewable energy systems can also help reduce energy distribution losses and result in system-wide and national efficiency gains. Mainstreaming of renewable energy and greater use of indigenous resources can help diversify the energy mix and reduce dependence on imported fossil fuels, thereby militating supply disruptions and price fluctuation risks. In addition, costs and risks relating to fuel stocking, transportation, and temporary substitute arrangements are also irrelevant for renewable energy systems, except for backup purposes.

High investment but low operating cost is a common characteristic in renewable and advanced energy systems. Because of this, most of these energy systems are not very cost-competitive with other conventional systems on the basis of the initial investment cost. However, as these systems have much lower operating cost compared to conventional systems, the overall cost of energy appears much more attractive on the basis of life-cycle analysis. Moreover, when, due to the non-polluting nature of their operation, environmental credit is given to these sources, many of them appear cost-competitive with conventional technologies.

Chopping apple tree for firewood

Source: http://dawn.com/2008/04/21/ebr2.htm

By Dr Zafar Iqbal & Hasaan Khawar

THE government is considering raising money through exchangeable bonds from the international financial market. An exchangeable bond comes with an embedded option to exchange the bond for the stock of a company at some future date under certain terms and conditions.

The company linked with the proposed exchangeable bonds, in this case, is likely to be Oil and Gas Development Company Limited (OGDCL), a prized strategic asset with majority share held by the government.

Apparently, the option of exchangeable bonds has surfaced after the government has been advised by some foreign banks that the other alternatives may not be viable. Despite the urgency and gravity of the matter, the government must consider a few key questions, before going for such an option. While on the broader level, the issue a fortiori, highlights the need to review the overall finance and debt policy on the micro level, it raises some important questions like why, if at all, the exchangeable bonds are more feasible than other options.

What is likely to be the impact of such a step on OGDCL’s shareholding? Are there any alternative options, which are better than exchangeable bonds? And last but not the least, is such a step aligned with the privatisation policy?

Last time, in 2004 when Pakistan ventured into the global debt market by launching Eurobonds worth $500 million, the foreign exchange reserves were at $12 billion and rising. The Eurobonds offering resulted in huge over-subscription, which was seen by the then government as a sign of confidence of international financial community in Pakistan’s economy.

The critics however, at that time, questioned the rationale behind raising money from the international capital market in the presence of such a heavy pool of foreign exchange reserves. The government was quick to defend its policy and claimed that the reasons for raising money were strategic in nature as the country was coming out of IMF’s programmes and such a step would set the tone for future capital-raising initiatives.

Unfortunately however, only four years later, the strategic premise, taken by the last government, seems to be falling apart, as the government has been advised not to float Eurobonds. Moreover, the widening current account deficit, poised to exceed $12 billion for FY 2007-08, has also raised serious questions about how much money the government is planning to raise through these bonds. The situation might be an indicator of the real story behind the widely acclaimed economic success of the last government. Evidently, the options of floating Eurobonds and ‘Sukuk’ - the two other alternatives considered by the government - have been discarded due to the global credit crunch. The international capital market is going through a severe crisis, ever since the defaults in the sub-prime loan market started sending the exposed banks into a tail spin with Bear Stearns as the most recent victim. As a result, the spread between the lowest investment grade bond and the US treasury in the 10-year segment has more than doubled from some 1.5 roughly a year ago to around 3.4 per cent more recently, making the capital even more expensive.

As a reference point, last time, the government ventured to raise dollar debt in the international capital market, its bonds were rated B+ i.e. below investment grade. More recently, the debt traded at as high a spread as 4.4 per cent over US Treasuries. This problem is further compounded by the fact that Standard and Poor’s has maintained a negative outlook on Pakistan, quoting economic and political risks facing the newly elected government. While all these reasons can be cited for not floating Eurobonds, which are a form of unsecured bonds, one may wonder why the ‘Sukuk’, the Islamic form of secured bonds offering a protection to investors against default, are ruled out given the phenomenal growth that this sector of Islamic finance has experienced over the past some six years, especially in the Middle East.

Even if the reason for global credit crunch for not floating Eurobonds and ‘Sukuk’ is accepted on its face value, one may question the rationality behind floating exchangeable bonds and not going for other alternatives. The exchangeable bonds yield lower than the bonds of comparable maturity and risk but give the holders the right to exchange their bonds for the shares of a company at a pre-specified price. They not only give the investors option to invest in a company but also offer some inflation protection, as the exchangeable bonds trade like bonds when the share price is far below the exchange price but trade like stocks when the share price is above the exchange price.

While this is a reasonably attractive proposition for investors, it lowers the cost of capital for the borrower but caps its upside gains on shares to the conversion price. One therefore, may argue that if the exchangeable bonds offer the right to bond holders to buy the shares only on the upside, i.e., if the shares are doing well, why the government instead is not considering offering Global Depository Receipts (GDR) for OGDCL instead of floating exchangeable bonds.

If, however, it was felt that the time was not ripe for such an option then one innovative method worth evaluating is increasing the leverage of OGDCL through an international corporate bond issue, the proceeds of which are paid out in dividends to the shareholders with the government as a major beneficiary.

Another possible option, which apparently the government has disregarded so far is private placement of the government bonds, which may be far better considering that only a few years ago, the Eurobond offering was more than four times over-subscribed. One final thought in this regard could be to tap foreign currency holdings of non-resident Pakistanis through attractive long-term deposit schemes, an option that India once actualised successfully. Needed also is a close examination of the ‘Hundi’ channel so as to come up with methods to route it out to improve slippage in remittances.

Coming back to the issue of exchangeable bonds, it is also not clear that how the proposed offering is linked with the privatisation policy, currently under review. Mr. Naveed Qamar, who has recently taken over the portfolio, has vowed to make the privatisation programme more popular among the people and to transfer its benefits to the common man.

OGDCL is a strategic asset for Pakistan and is the local market leader in terms of reserves, production and acreage. In an environment where industrialised and fast growing industrialising countries (e.g. China) are building stakes in the oil sector worldwide, any decision to privatise OGDCL must be critically reviewed and be made part of the overall privatisation policy.

Linking OGDCL’s shares with the issue of exchangeable bonds is likely to put OGDCL on a tight leash, as the exchangeable bonds generally ensure the holders protection against equity dilution, hindering the future privatisation efforts for OGDCL.

The decision to offer exchangeable bonds therefore needs to be critically evaluated to see if it really is the best option to raise money. Above all, the policy of debt financing and debt management itself should be thoroughly examined to make sure that as a nation, we are not chopping up the apple trees for firewood. ( The writers are faculty members of FAST-NU, Lahore campus.)

Food, fuel and fiscal crises

Source: http://dawn.com/2008/04/21/ebr1.htm

By S. M. Naseem

The sky-rocketing food prices have emerged as the new crisis not only in Pakistan, but also on the global economic horizon, eclipsing the already looming fuel and financial crises, which had been dominating the headlines.

The world is thus engulfed in a new hydra-headed crisis, with three essential components: food, fuel and finance. The three components have different geographical origins and their effect on different segments of the globe and their inhabitants is highly uneven. But the transmission of these crises in the global economy has become much easier and faster since the regime of liberalisation of trade, capital flows, deregulation and privatisation was imposed through the Washington Consensus in the early 1990s in the name of achieving higher growth and reducing global poverty.

Pakistan is affected by all the three components of the mega-crisis in varying degrees. But its economic managers have always tried to deal with such crises individually, rather than as a whole, and in an ad hoc, rather than a systematic manner.

The new government, which has yet to come to grips even with the more immediate problems facing the economy, has hardly given much thought to these issues, while the outgoing government had hardly paid any attention to these developments as it relied on the continuing aid and investment, epitomised by its parroting of the precept of a minimalist role of the government in the economy. However, with the economy once again in dire straits and these external shocks looming like a meteorite to strike any time, it is about time to be prepared for the worst and consider pro-active economic policies – both domestic and external – which can provide some protection against them, at least to those most vulnerable to them.

Although the food crisis is now a world-wide phenomenon, ordinary Pakistanis are more concerned about whether to buy an additional nan or a 10kg atta bag (the minimum size carried by utility stores, which costs as much as the daily minimum wage) or to buy medicines, shoes or books for the child or to walk five miles to work to save the enhanced bus fare than about knowing how the markets are loaded against the poor, both at home and abroad.

The government in its zeal to publicise its “stellar” economic performance and growth record, did not pay much attention to the needs of the poor. It mistakenly believed that the government could outsource to the market– through the “trickle down” effects – the responsibility towards protecting them against any calamity, such as the one stalking them now in the shape of food inflation.

The current food crisis in Pakistan is often blamed on the past government’s ineptitude – wilful or otherwise – in over-estimating last year’s wheat crop and in allowing the export of 0.5 million tons of wheat and then having to import 1.7 million tons of wheat at much higher prices, costing about $1 billion.

Plausible and reprehensible as this may be about the culpability of a discredited regime, it oversimplifies the complex issues underlying the current food crisis, which are not unique to Pakistan. From Haiti to Hanoi, the food crisis is rearing its head in all corners of the globe, especially – though not exclusively – in the developing world, where food consumption constitutes up to 70 per cent of the family budget.

A dramatic rise in the worldwide cost of food is provoking riots in many developing countries where millions more of the world’s most vulnerable people are facing starvation as food shortages grow and cereal prices soar.

It threatens to become the biggest crisis of the 21st century – a century in which poverty is supposed to become history. However, unlike the past, food shortages and famines are not the result of the Malthusian spectre of population growth – which most developing countries have managed to control dramatically in the last half-century – or even the Ricardian concern about decreasing returns, but much more the result of the inequalities of income and the growing geographical disparities – both within and across national borders – in the degree of development and incidence of poverty. Some of the problems facing these countries are structural and global, rather than cyclical or transitory and contextual or domestic, in nature. Among the structural problems on the supply side are climatic changes, natural disasters (such as tsunami and earthquakes) and the decline in productivity as a result of the petering out of the Green Revolution. These factors have had particularly adverse impact on the access to land and other income-earning assets (e.g. coastal catchment areas for fish-farmers or terraced lands in mountainous areas) of the poor, whose incomes have fallen, while average per capita incomes have shown steady increases.

On the demand side, the structural shifts have arisen from a rise in the incomes of middle classes and the shifts from food grains to cash crops and the increase in demand for processed foods, such as bakery products and fast foods, as well as increase in poultry and meat consumption. The latter has also led to increase in the acreage and production of corn used in raising livestock and poultry – it takes eight kgs of grain to produce one kg of beef – at the expense of wheat and other food crops.

As a result of globalization, there has also been considerable increase in demand for agricultural exports, especially of non-food crops, such as vegetables and fruits, reducing the acreage for and supply of food crops. Further, the rapid pace of urbanisation, especially in Pakistan, has made severe encroachments on farmlands in contiguous areas, which also results in the diversion of irrigation water to meet urban needs.

Water is likely to soon become as scarce as oil, the most important ingredient of the second major global crisis, i.e. that of fuel or energy

With the price of oil per barrel likely to remain in triple digits in dollars (if not in euros), it has also both direct and indirect effects on the pocketbooks of ordinary people. Transport costs, which feed into all other economic activities, are the main carriers of inflationary pressures from this source.

The rise in oil prices has also had the inadvertent effect of increasing corn production for the sake of producing ethanol as a partial substitute for oil, but resulting in the lower production of consumable food grains and raising corn prices.

The other main effect of the fuel crisis is the generation of electric power, which affects both industrial and home-based activities that are playing an increasing role after the introduction of computers, internet, cell-phones and other electronic gadgets. This has led to increased load-shedding with consequential loss of working days in factories and wages for the workers.

Rising transport costs, load-shedding and food inflation are conflating to produce a combustible bomb of social unrest, which may prove more potent than the terrorist threat that has preoccupied public attention.

The rising onslaught of consumerism in which Pakistan has always had a lead has further aggravated the problem and has resulted in imports rising much faster than exports and giving rise to unsustainable current account and fiscal imbalances (as much of the domestic energy consumption is subsidised).

This leads us to the third most important crisis in the global arena, which could engulf the world into a deep recession comparable to the Great Depression of the 1930s, which also started in the US, with incalculable political and economic consequences.

The present financial crisis in the United States owes its origin in the sub-prime crisis triggered by the housing bubble which started sputtering two years ago and was itself the result of the central bank’s efforts to combatan earlier recession in the wake of the bursting of the dotcom boom in 2001, through a series of interest rate reductions.

The US economy’s growth after that recession was largely jobless, and the Federal Reserve remained deeply concerned about the possibility of Japanese-style prolonged economic stagnation. What the US central failed to do, however, was to prevent the banking sector from financing the housing boom without due diligence and prescience about the consequences of indiscriminate lending.

Over the last two decades banks had lobbied in the US to get the government out of its business and to obtain freer rein for “financial innovation”, such as hedge funds and mortgage-backed securities. However, when the housing bubble burst and the banks’ losses climbed into trillions and when the likes of Citibank and Bear Stearns and UBS came on the brink of bankruptcy, they lobbied for the Federal Reserve to intervene and bail them out through an unprecedented government rescue plan.

Whether this bail-out will succeed in saving the United States’ financial system on which the global economy rests or whether it would result in a “de-coupling” of the US economy with the rest of the world remains to be seen.

The structural shifts taking place in the global economy need to be factored in to the economic management of Pakistan, along with the domestic political imperatives emanating from the 18 February elections, by the country’s new economic managers.

There is a need for new thinking and new institutions, as well as the revival and re-tooling of the old institutions, such as the Planning Commission, the National Tariff Commission and the Security and Exchange Commission, along with the country’s think tanks and NGOs to prepare Pakistan for facing the challenges of the domestic and global crises.

Prevent Food Riots by Changing Policies

By Anuradha Mittal*

Food riots are erupting all over the world. To prevent them and to help people afford the most basic of goods, we need to understand the causes of skyrocketing food prices and correct the policies that have fueled them.

World food prices rose by 39 percent in the last year. Rice alone rose to a 19-year high in March - an increase of 50 per cent in two weeks alone - while the real price of wheat has hit a 28-year high.

As a result, food riots erupted in Egypt, Guinea, Haiti, Indonesia, Mauritania, Mexico, Senegal, Uzbekistan and Yemen. For the 3 billion people in the world who subsist on $2 a day or less, the leap in food prices is a killer. They spend a majority of their income on food, and when the price goes up, they can't afford to feed themselves or their families.

Analysts have pointed to some obvious causes, such as increased demand from China and India, whose economies are booming. Rising fuel and fertilizer costs, increased use of bio-fuels and climate change have all played a part.

But less obvious causes have also had a profound effect on food prices.

Over the last few decades, the United States, the World Bank and the International Monetary Fund have used their leverage to impose devastating policies on developing countries. By requiring countries to open up their agriculture market to giant multinational companies, by insisting that countries dismantle their marketing boards and by persuading them to specialize in exportable cash crops such as coffee, cocoa, cotton and even flowers, they have driven the poorest countries into a downward spiral.

In the last thirty years, developing countries that used to be self-sufficient in food have turned into large food importers. Dismantling of marketing boards that kept commodities in a rolling stock to be released in event of a bad harvest, thus protecting both producers and consumers against sharp rises or drops in prices, has further worsened the situation.

Here's what we must do to prevent an epidemic of starvation from breaking out.

First, it is essential to have safety nets and public distribution systems put in place. Donor countries should provide more aid immediately to support government efforts in poor countries and respond to appeals from U.N. agencies, which are desperately seeking $500 million by May 1.

Second, we should help affected countries develop their agricultural sectors to feed more of their own people and decrease their dependence on food imports. We should promote production and consumption of local crops raised by small, sustainable farms instead of growing cash crops for western markets. And we should support a country's effort to manage stocks and pricing so as to limit the volatility of food prices.

To embrace these crucial policies, however, we need to stop worshipping the golden calf of the so-called free market and embrace, instead, the principle of food sovereignty. Every country and every people have a right to food that is affordable. When the market deprives them of this, it is the market that has to give.

* Anuradha Mittal is the Executive Director of the Oakland Institute, a policy think tank whose mission is to increase public participation and promote fair debate on critical social, economic, environmental and foreign policy issues. www.oaklandinstitute.org.

Sunday, April 20, 2008

A powerful parliament

Source: http://jang.com.pk/thenews/apr2008-weekly/nos-20-04-2008/pol1.htm#4

Pakistan is currently faced with a lot of challenges on the political economy front

By Zubair Faisal Abbasi

The political corridors of Pakistan seem to be resonant with the voices of a fresh and enthusiastic start towards a vibrant political milieu. The parliament is expected to be a leading institutional arrangement to counter multi-faceted challenges to the country of more than 160 million people. Of these, whose power this parliament will use under the Constitution's provisions, a vast majority still lives in zones of silence carefully guarded by a feudal and elitist cultural ethos. How to genuinely empower the parliament itself and the people it represents is a question that needs enormous political acumen, foresight, and a sense of basic commitment to the democratic governance and dispensation.

At the same time, the political economy corridor of the country also deserves a fresh and enthusiastic start. This corridor resonates with the protesting voices of regional and income inequality, both in terms of opportunities and access to productive resources. The voices in this corridor are not new. These are coming from the chambers of an ever-exploitative system of economic governance that systematically generates elitist capital accumulation, while excluding the not-so-rich and the poor alike. The system, by implication, ensures that the fruits of economic growth seldom 'trickle-down' to the people at the lowest level of economic hierarchy.

As a result, the political economy of Pakistan, at this very moment, shows the signs of social polarisation leading to a stalemate -- failing to generate momentum for a long-term equitable economic development. This is a point where Pakistan, despite trying most of the policy instruments earlier employed by East Asian economies, fails to become a tiger economy, being perpetually trapped in a low equilibrium.

In fact, East Asian economies could accumulate, use the accumulation for productive investments and execute structural transformation because of a couple of basic commitments. The commitments included that the state has to be responsible, effective, efficient and autonomous at the same time. Another basic commitment that newly industrialised countries of East Asia always kept was to acknowledge the ethnic diversity and inequality in society, and manage the 'trichotomy' of state-society-market relations in such a way that fruits of economic growth spread equitably. Their commitments delivered.

Look at the challenges of political economy for Pakistan! One can see that such challenges are no longer confined to managing the economic fundamentals and getting short-term results. Perhaps the post-9/11 situation -- which led to increase in inflow of remittances, and also brought some aid and debt-rescheduling, helping Pakistan's economy to re-emerge -- needs reassessment. This re-assessment needs to anatomise, besides using a monetary perspective, the structural causes of rising inflationary pressures, especially related to food items; worsening trade deficit; and the persistent unemployment.

In fact, the real challenges of political economy are structural in composition, and go well beyond reliance on monetary and fiscal policy solutions. They enter the domains of economic governance, asking to review the role of the state in economic change. At the same time, these challenges are related with establishing autonomy of and accountability in the state institutions. Responses to these challenges entail bringing back the state into lived experience of the people -- the experience of welfare-oriented state that was promised by the founding fathers and later enshrined in the 1973 Constitution.

So, the challenges of the political economy are to make the people believe, not by rhetoric but by action, that they can trust the capacity of the state institutions. The primary function of the state institutions is to prevent crisis, as well as protect the citizens in the case of financial and economic downturn, while facilitating people-friendly equitable economic growth and development.

These challenges are not like the ones that can be met by bringing in bankers or military personnel on commanding heights of economic governance, or increasing or decreasing the money supply. These can also not be met with dolling out loans to the elites and writing them off later in the 'supreme national interest'. In fact, the enormity of challenges asks for developing a national development framework that is manifestly in sync with the spirit of the Constitution. At the same time, it is equally important that the state institutional arrangements show basic commitment to pursue the objectives of this framework. Perhaps the economic role of constitutional provisions needs to be brought to the fore while developing any public policy.

In addition, the framework should not be about how to pursue more privatisation, liberalisation and deregulation. The sought-after should target the state institutions, making them fully functional, effective and competent to guide the markets. Pakistan needs a strong but democratic 'doctrine of state' embedded in institutional working that consistently builds social consensus for the kind of developmental policies needed to be pursued.

Interestingly, many empirical studies show that not only the now-developed countries, but also newly-industrialised countries, have had both the state and corporate agencies for industrialisation and economic development. They did it while keeping bureaucracy aligned with basic commitment to equitable development, establishing a reasonable rule of law to prevent non-productive rent-seeking in its ranks. Such economies did not always believed in the so-called virtues of free-market-based resource allocations. They could guide such allocations to create and guide markets in preferred sectors and geographical regions. This type of policy and direct intervention by the state can create room for management of conflicts over economic resources.

At the same time, the new government should realise that Pakistan does not sufficiently and equitably invest in human and infrastructure development -- required to generate and retain highly-skilled workforce to fuel the engines of long-term economic growth. Consistent investment in knowledge and technological capability, in a layperson's language, generates self-perpetuating momentum for a long-term growth. Similarly, increase in skill and knowledge level enables and empowers people to search new avenues to participate in economic development processes. Such investments, with socio-political equity in mind, can also mainstream the neglected regions and people in a society.

To conclude, history shows that the true dynamism for economic growth does not come from prescriptions of economists or international development establishment; the real dynamism comes from leaders. If leadership is able to define the challenges correctly, coordinate the vision and processes for development, and make the state simultaneously autonomous and accountable, then the people of Pakistan can stretch all the production possibility frontiers. The political economy challenge to the new government is enormous, but this is also the right time to respond by mobilising all intellectual and political resources.

(Email: abbasi.zubair@gmail.com)

Give peace a chance!
History tells us that politics of violence is embedded in the Pakistani society

By Sibtain Raza Khan

The Pakistani society is a complex one, where emotions sometimes overcome intellectual faculties and rationale. Since 1947, we have seen that political violence has not only become a part of our political culture, but has also become a hindrance in the establishment of true democratic norms and values in the society. The current wave of politics of violence is a bad omen for democracy, which demands accommodation and reconciliation among different political actors, rather than use of force.

The important issue is that which forces are instigating political violence and what long-term affects this trend is likely to have? What appears from the political history of Pakistan is that specific sections within almost all political and non-political communities have resorted to violent means in persuasion of their goals, and these violent acts have not only damaged that community's public image but also clouded its real objectives. For instance, the recent use of force by some lawyers against a former federal minister affected public impression of that community, as well as exposed differences within it.

Going in the recent past, when Lal Masjid and Jamia Hafza students turned violent, it not only brought loss of innocent lives but also brought a bad name to the religious community as a whole. The same can be said about the May 12 incidents in Karachi, where certain elements of a political party were involved in violence leading to massive killings. This brought a bad name to the party, whose leadership may not be supportive of all these actions. There is a pressing need for minimising violent conflict between different communities, because politics of violence has resulted only in economic problems, political instability and strengthening of undemocratic forces.

Motives for committing political violence can range from economic -- like poverty and inequality -- to political -- like lack of democracy, lack of openness, hate-vote syndrome and failure of the government to deliver. It is true that some political groups have exploited the multi-ethnic and multi-lingual aspect of the Pakistani society, and got popular through hate-vote syndrome. This syndrome has bred intolerant political behaviour, which, in turn, has resulted in politics of revenge and weakening of democratic institutions.

The cost of politics of violence is very high. Besides the human loss, the country also suffers, in particular in terms of economy. This, in turn, inflicts further human misery in the form of joblessness or underemployment and flight of capital due to security concerns. There is no blinking the fact that Pakistan's business hub -- Karachi -- has suffered a lot because of the politics of violence. In 2006, the Karachi Chamber of Commerce and Industries (KCCI) estimated that a one day strike deprives the city and the country of more than one billion rupees in revenues and exports. However, the current KCCI president projected the losses at Rs 14 billion (this amount includes taxes and duties, production and exports, as well as losses incurred in commercial markets. According to the KCCI's calculations, Karachi suffered corporate losses of Rs 80 billion in just five days during the mayhem that followed Benazir Bhutto's assassination.

According to a research study, political violence has significant short- as well as long-term effects on the society, in terms of physical and psychological trauma, financial losses, poor schooling and health, biased pattern of child development, migration of families, and further division of society into identifiable communities that may prolong the conflict. Revenge seeking and score-settling behaviour also results in political instability in the country. In this way, non political forces exploit this situation and democratic forces suffer losses in the form of discontinuation of elected democratic process. There is also a view that the recent wave of violence is an attempt to change the public opinion that democracy does not suit us, and the politicians are not only incompetent but also responsible for the miseries of the masses.

Pakistan is passing through a difficult juncture in its history, and it is high time that political leaderships realise this reality; and forget the differences and work collectively for the betterment of the country. Instead of paying lip-service to the virtues of non- violence and tolerance, we all have to work together to address the root causes of political violence. Pakistan needs ethnic, as well as political harmony, for the smooth functioning of democratic institutions. Besides this, when one political group tries to achieve its objectives through violent means, in the absence of justice, the other group retaliates. Consequently, violence breeds violence, and the country faces political and economic instability in the form of loss of lives and property. We have witnessed that foreign investors are leaving the country because of heated up political violence since the last year. As a result, Pakistan's economy is suffering a lot due.

This now is the responsibility of the democratic forces to collectively strive to build a law-abiding democratic society. Leaderships of political parties need to show exemplary maturity in their conduct. Instead of adopting the path of politics of violence and revenge, they need to sit together and work for the supremacy of rule of law, as well as to provide relief to the masses and mitigate their sufferings. They need to practice the politics of tolerance and adopt the path of constant engagement, rather than confrontation. Doors for reconciliation and cooperation should not be closed in the larger interest of democracy.

All the stakeholders should play their due role in strengthening democratic institutions in the country. Political leaderships have to prefer politics of reconciliation over that of revenge and confrontation, and spirit of mutual tolerance would have to be reflected in their actions. It is expected that good democratic ideals and traditions would be followed, and all energies would be devoted for mitigating the sufferings and problems of the masses. In transition to democracy, it is essential to achieve national reconciliation and consensus, as this could prove to be a major stabilising factor. Instead of indulging in the politics of hate and revenge, all efforts should now be directed towards meeting the challenges facing the country.