Friday, May 2, 2008

Can the World Survive US Downturn?


Wednesday, Apr. 30, 2008
By Michael Schuman

Finding an empty table at a Starbucks in Hong Kong on a Sunday afternoon these days feels like winning the lottery. So does getting a reservation at a good dim sum restaurant or renting an affordable apartment. While the U.S. suffers the convulsions of an impending recession and massive wealth destruction, here the malls are stuffed full and the streets bumper-to-bumper with BMWs. The good times keep rolling, and not just in Hong Kong, but across much of emerging Asia, from Shanghai to Mumbai. Sure, the U.S. turmoil has had some impact — jittery investors have knocked back stock markets from last year's lofty heights — but in general, the story of America's economic woes has been confined to the morning newspapers.

Recession? What recession?

In the past, any downturn in the U.S. economy would send Asian policy makers, businessmen and workers into cold sweats. The reason is that Asia has been so dependent on exports to the U.S. that any slowdown in demand in the American economy inevitably dragged down Asian growth as well. In recent months, however, there has been a debate raging among economists over whether the forces of globalization have weaned the rest of the world off its heavy reliance on the U.S. The hope has been that the global economy can continue to grow quite nicely even if the U.S. fell into recession.

So far, that seems to be true, at least here in Asia. Though the exact extent of America's downturn is still uncertain, the early signs tell us that Asia isn't as reliant on the U.S. as it once was. "Economies in Asia will see potential to grow at reasonably fast rates" says Robert Horrocks, head of research at fund management firm Mirae Asset Global Investments. Nigel Richardson, chief investment officer for Asia at AXA Investment Managers says that "the U.S. is still the driving force of the world economy" but "Asia is probably far more resilient than it would have been in the past."

Why is that? One theory is that the region has enough centers of growth of its own — mainly, the roaring economies of China and India — that trade within Asia can drive the region's GDP onwards even if the U.S. economy wanes. The idea is called decoupling, as if the continent has just extricated itself from an unhappy relationship. By this reckoning, America just isn't as important to the region as it used to be.

But can that possibly be the case? Can the U.S. really become economically irrelevant?

On the surface, decoupling seems outright fantasy. The U.S. economy is three times bigger than the next largest (Japan), and 15% to 20% of the exports of most Asian countries head to the U.S. The Asian development bank, in its recently released 2008 outlook on Asian economies, showed there is a clear link between retail sales in the U.S. and other industrialized countries and Asian exports, since Asia manufactures and ships so many toys, shirts, TVs and other consumer items to America. Any retrenchment of U.S. consumer spending will, therefore, take a bite from Asia's export growth. Though trade within Asia is increasing rapidly, the goods shipped between Asian countries tend to be components or raw materials for final products, which eventually get sent off to the U.S. or Europe.

Asia, then, is as coupled to the U.S. as it always has been, perhaps even more so. Signs that a U.S. slowdown is rippling through Asia are already apparent. In March, growth of Taiwan's export orders slipped under 13% from a strong 18% in February. Keeping Asian economies bubbling without a thriving and spend-happy U.S. looks like trying to win the Super Bowl without your MVP starting quarterback.

Yet the ADB's growth estimates for 2008 are nevertheless pretty perky. Overall, Asia's economies are expected to surge 7.6% In 2008. The U.S. slowdown is dampening Asia's prospects — last year, Asian economies grew 8.7%, the fastest rate in nearly two decades — but not enough to create anything close to a major downturn. China's GDP growth is projected to clock in at 10% and India 8%.

Maybe we don't need that MVP after all.

It's not that the U.S. and Asia are somehow more loosely linked. With increasingly interconnected global manufacturing and financial systems, the influence of the U.S. isn't going to just vanish. However, Asia's developing economies are becoming so advanced that they can generate their own growth. It is domestic demand and investment that are protecting Asia's economies from the U.S. recession. Asians simply have more money to buy the TVs, cars and houses to keep their own economies roaring on. Wages in China's urban areas, for example, jumped nearly 19% in 2007. "It is the internal dynamics that are giving Asia its dynamism," says Ifzal Ali, chief economist at the ADB in Manila.

This is a good thing. Eventually, consumers in China and India will begin to compete with those in America for the title of engine of world growth. This might mean that the U.S. economy doesn't play the dominant role it has in the world over the past six decades, but it does mean a healthier global economy. With more sources of growth, a sick America can no longer send the rest of the world into the hospital ward.

Common Currency is a column on global economics by Michael Schuman that appears weekly on

Thursday, May 1, 2008

Pakistan among top for doing business: WB

Source: The News

Thursday, May 01, 2008
KARACHI: Pakistan has been ranked as one of the top favourable economies in the world, states “Doing Business 2008”, a recent report released by the World Bank.

According to the report, Pakistan ranks second compared to other South Asian countries, based on certain economic indicators such as ease of doing business, dealing with licences and protecting investors as identified by the analysts.

The following countries are Sri Lanka, Bangladesh and Nepal. Pakistan has a comparatively better business environment in terms of paying taxes and registration of assets, the report adds.

The report evaluates business activities based on regulations affecting the 10 stages of a business life, which are starting a business, dealing with licences, employing workers, registering property, getting credit, protecting investors, paying taxes, trading across borders, enforcing contracts and closing a business.

It is pertinent to note that in the overall global rating of 178 countries, Pakistan is rated 76th, as compared to India at 120. With Pakistan’s fast-paced IT industry, it is emerging as a powerhouse in the South Asian region due to the government’s friendly policies.

These include 100 per cent foreign equity ownership, 100 per cent repatriation of profits for foreign investors and tax exemption for the sector till 2013.

The availability of a large pool of English-proficient skilled professionals, affordable connectivity rates, competitive infrastructure and operational costs are some of the other benefits that Pakistan enjoys. Due to the same, an increasing number of foreign IT companies prefer Pakistan for their outsourcing operations and setting up development centres.

“Doing Business 2008” is the fifth in a series of annual reports that evaluates the regulations which directly impact economic growth, provides objective measures of business regulations and their enforcement. The data is collected across 178 countries and selected cities at the sub-national and regional level.

Tuesday, April 29, 2008

Economic experts for equitable taxation

Source: The News
Sunday, April 27, 2008
By By Mansoor Ahmad

LAHORE: The economic experts have advised new economic managers to stop the blame game and take some concrete steps to correct the inconsistencies in economic policies that tend to benefit the rich and burden the poor.

They warned that the common man is not prepared to pay heed to the oft-repeated slogan of trusting the government and bear some pains for his future well-being. Economic decisions at the expense of the poor to generate more revenues are the same that were recommended by the IMF about two decades ago, only after it failed to convince the rulers to generate revenue from the rich.

Pakistan, the economists added, is facing a resource crunch. The governmentÕs expenditures are higher than its income. There is a need to increase the income in a sensible manner by plugging the loopholes in the tax machinery and this can only be possible if there is 100 per cent transparency in governmentÕs affairs.

The economists pointed out that Federal Finance Minister Ishaq Dar, immediately after assuming charge, vowed that resources would be generated according to the capability of each segment of society. But the new economic managers have not come up with a sound and tangible strategy to ensure equitable taxation that spares the poor and targets the affluent segments of society. They said that successive governments in Pakistan have succumbed to political pressures and instead of generating revenue from those that have the capacity, opted for the easy way out by accumulating resources through indirect taxation. The time has come when each citizen should be forced to pay taxes according to his capacity and it is unlawful to generate 65 per cent of taxes in a way that they are shared equally by the poor and the rich, indirectly.

They said petrol levies, gas surcharges, sales tax, excise and customs duties are recovered from the poor by the rich, with interest. In fact, many manufacturers, they added, conceal their actual production to save sales tax and excise duty and under-file their import invoices to pay less import tariffs. However, they charge the consumers for government taxes on their own products.

They said an analysis of the income tax collected by the Federal Board of Revenue (FBR) would reveal that 80 per cent of this tax is collected from 100 corporate sector companies. The salaried class comes next, contributing over seven per cent of the total income tax while thousands of manufacturing and trading firms contribute only 13 per cent, out of which, five per cent comes from traders and transporters. This means that the manufacturers in Pakistan including cement, textile, sugar, and engineering, pay almost the same tax as that paid by the salaried class.

They said this time around instead of asking the common man to suffer any more, the planners will ensure that all tax evaders and under-filers not only pay their due taxes but also share their fortune with the workers by providing them with daily use items at subsidised rates.

They said that inflation as a result of high oil and food rates, has plagued all developing nations. However, they added that inflation is comparatively lower in nations that have a transparent system, while in Pakistan it has crossed double digits since February 2008, in India it is 7 per cent and in China, 8.4 per cent.

They said the policy makers have unsuccessfully tried to control inflation by increasing interest rates. This they added has slowed down investment but triggered high growth in non-productive sectors such as property, finance and capital market.

The government as the major borrower has ensured high profitability in the banking sector. It has also given an upper hand to the banks in sanctioning credit to the private sector. This practice they added, would have to be curbed.

POL prices to be increased again: Dar

Source: The News

Sunday, April 27, 2008

By Aftab Maken

ISLAMABAD: Finance Minister Ishaq Dar on Saturday made it clear to the parliamentarians that the POL subsidy had to be done away with and the whole brunt of the skyrocketing POL prices would have to be passed on to consumers before the end of the new fiscal year.

Responding to queries raised by a senator in the Senate Committee on Finance, Senator Ishaq Dar said the government would not further absorb Rs 18-20 per litre subsidy on POL and would pass it on to the end users gradually.

In order to bridge the burgeoning gap regarding the balance of payments, the minister informed the committee that the government was arranging $3 billion, and in this regard the Asian Development Bank (ADB) had pledged one billion dollars. However, he ruled out knocking the doors of multi-donor agencies for balance of payments.

To a question by one of the members about the economic managers of the previous government who were now part of the present economic team as well, the chairman of the committee said that those who were responsible for economic mismanagement should resign.

Giving a break-up of the total shortfall of Rs 557 billion in the upcoming budget, Ishaq Dar said the oil subsidy would eat up Rs 157 billion against the budgetary allocation of Rs 15 billion, electricity subsidy would soar to Rs 123 billion against Rs 52 billion, wheat subsidy to Rs 45 billion against no allocation in budgetary estimates; Rs 125 billion for interest rate on domestic debt with no mention in budget documents, Rs 32 billion for R&D with no mention in the budget and Rs 75 billion as miscellaneous expenditure mainly for Swat and Wana operations.

Ishaq Dar said the government would halt the development budget and also supplementary grants to the federal departments and divisions.

The finance minister, during a presentation on “bankruptcy draft law” by Governor State Bank Dr Shamshad Akhtar, objected to the reporting of media persons and asked the committee to intervene. The chairman of the committee with the consent of members allowed the media to cover the event but later decided against it, keeping the sensitivity of the issues in view.

Senator Nisar Memon of the PML-Q objected to the finance minister’s viewpoint and reminded him of his party’s stance on the issue, saying that the ruling coalition always supported the free media policy and demanded coverage of even more sensitive issues on defence and security.

Secretary Finance Dr Waqar Masood also gave a detailed presentation on the current economic situation of the country.