Pak Economy: Development strategy in changing

economic realities
Pak Economy Add comments
May 072008

By M. Sharif

Ground realities on the economic front have changed radically, domestically as well as globally
during the past couple of years. The changes have had far more deepening effect on economic
development strategy pursued in the country during past few years. It has directly affected all
segments of the society except the affluent people and has given rise to a host of fiscal management
problems currently faced by the government. The economic policies did not show enough resilience
to rescue either the people or the economy. In order to address current economic issues, hard
economic decisions mostly pro-poor people is necessary and focus on higher economic growth of
around 8.0 per cent of the GDP per year will have to be planned and tight management policies to
achieve this goal will also be necessary. All this is not going to be an easy task for any government.

Economic realities and priorities

Political uncertainty that has prevailed in the country for more than a year has affected economic
growth and the macroeconomic indicators adversely. The budgetary targets fixed for current fiscal
year seems to be a far fetched goal. Economic growth has already been reduced to around 6.0 per
cent from 7.2 per cent, fiscal deficit so far has been estimated at Rs557 billion that is likely to be
more than 6.0 per cent and is likely to increase by the end of the current fiscal year. Pak rupee has
depreciated to around Rs65 per US dollar against a stable parity of around Rs60.0 per US dollar
maintained for quite a long time and inflation has already hit 10.0 per cent mark against a target of
6.5 per cent. Other macroeconomic indicators such as public debt and the cost of servicing, exports,
trade and current account deficit, revenue collection, forex reserves and non-development public
expenditure do not make a happy reading.

Fiscal issues have emerged in the midst of a number of challenges faced by the economy primarily
because of the structural imbalances that were let to stay during the past eight years. There are a
number of fiscal and monetary issues that the government and the SBP are to address at the same
time, a short, medium and long term goal oriented development strategy has to be implemented.

Challenges faced by the economy and people of Pakistan can be prioritised thus: energy crisis, high
food and non-food inflation and structural imbalances in the economy. Allied problems faced by the
power sector include high cost of electricity for commercial and domestic consumers, electricity theft,
minimum three years time required to bridge the existing gap between demand and consumption,
arriving at national consensus to build mega hydro-electric dams.

The core issue about addressing inflation is reducing food inflation that has taken quantum jump
because of neglect of agriculture sectors not over the years but over the decades. There are three
specific problems of the sector that need to be addressed judiciously and as early as possible.

One cost of inputs like fertilisers, electricity, seeds, pesticides and labour has gone up whereas
increase in the price of farm commodities has moved at the snail pace to the disadvantage of
farmers. It needs to be reduced. Wheat and sugar-cane are the two often quoted farm products that
create a lot of problems for the consumers, farmers and government alike. Their low prices at the
time of harvesting tend to be devastating for the growers and every year the problem comes up with
full intensity to the disadvantage of growers and to the advantage of market players.

The yield of farm products per acre is perhaps the lowest in the region. It is intrinsically linked with
modernising farming in the country, making farmers more knowledgeable and ensuring adequate
irrigation water supply during rabi and khareef.

Water management is a real big challenge in view of shortage of water that is now a reality. The
issue simply highlights the need to build water reservoirs at the earliest. Three, provision of
adequate facilities and opportunities to farmers to contract loans from the banks and market their
products at competitive prices. They should not be left to the market forces and players like investors
and middle men because their approach is quite detrimental to the interests of farmers and
agriculture sector.

Another issue is about improving structural imbalances that were relegated amidst the glare of
consumption based high economic growth and macro-economic stability achieved after 2003. One
has to appreciate efforts of the previous government for achieving twin objectives of high economic
growth and macroeconomic stability. But, the moot point is about sustaining them, making economy
self-reliant and enabling the people to benefit from economic growth. These objectives could not be
achieved because of structural imbalances that have existed in the economy during past many
years.

Some of the issues are: increasing revenue by collecting taxes within capacity of stakeholders
belonging to different segments of society, increasing domestic savings from current rate of 17.0 per
cent to around 22.0 per cent, levying tax on real estate, stocks and agriculture income, striking
balance between income and public expenditure by reducing non-development expenditure. Going
further, documenting economy, keeping current account surplus, contracting loans for development
of such projects that would give impetus to economic growth and development and rationalising
expenditure on different stakeholders in the state. It is an exercise that not only needs down to earth
planning but it also needs a strong will power to bring an effective change. Can the coalition
government demonstrate acumen and will power to opt for radical changes that might hurt the
interest of many of their supporters? Irrespective of any such consideration, the essential point is
that unless structural imbalances were removed, the economy would keep facing the crisis of
sustaining itself time and again and government will have to look outward for financial assistance as
is happening at present.

Immediate measures by the government

The government has taken a few immediate measures to bring certain degree of fiscal discipline in
the economy. These measures include reduction of Rs70.0 billion in public sector development
expenditure to reduce fiscal deficit, increase in the price of petroleum products to pass on increase
in price of oil in international market to consumers that is likely to fuel inflation further and to improve
supply side of agriculture products particularly wheat by taking certain administrative measures and
importing around shortfall of around 1.5 million tons in production. It is also trying to raise forex
reserves by around $3.0 billion to beef up the reserves that have depleted to $12.65 billion as on 24
April, 2008 and are under much pressure because of high trade and current account deficit. SBP has
also intervened to stabilise a depreciating rupee.
Current account deficit has swelled to $10.3 billion during first nine months of current fiscal year
against $6.41 billion during corresponding period of last fiscal year, showing an increase of 60.0 per
cent. In view of limited time for which the government has been in power, there is not much that it
could do but keeping in view the challenges that the economy faces it will have to work on strategies
that make use of energy efficiently, use public expenditure judiciously in the best interest of public
and should prioritise public expenditure for different state stakeholders according to the services
they provide to the state and public.

Budget proposals for FY2008-09 to be announced by the government a few weeks later will clear the
clouds about the strategy of economic developed that the government is to adopt. It has to be
radically different from the past and hopefully it would be.

Conclusion

The issues faced by the economy are multi-faceted and are a result of partially inadequate economic
policies and partially because of recent trends in global economy. The solution to these problems
lies in adopting multi-pronged policies through transparent democratic governance that should not
only address woes of stakeholders but should also hold them accountable. Only such a system will
ensure public participation in economic development, enable equitable distribution of national wealth
and create environment for benefits of economic growth to trickle down to lower strata of the society.

Pak economy approaching depression from constant

recession
Pak Economy Add comments
Jan 062009

By Mansoor Ahmad

LAHORE: The incapability of the economic planners to act discreetly in time is pushing the Pakistan’s economy from

recession to depression calling for out of book strategy to keep the economy moving.

Economists point out that both the government and central bank have been ineffectively fighting to hold the inflation
for the last 15 months by raising the interest rates. They point out that the country suffered from stagflation and

required altogether diverse approach to keep the economy sailing.

The simple description of stagflation is a sluggish economy coupled with price inflation says senior economist Naveed

Anwar Khan, FCA. He said in stagflation the prices go up while the economy goes down. He said under normal

circumstances inflation heats up the economy, adding that in a heated economy the central banks are warranted to

increase interest rates to cool it down to rational level but in stagflation the usual method of raising interest rates do

not help the situation. The only reason it helps in times of high economic activity is because it slows the “velocity of

money” or the speed at which it changes hands, he added.

Naveed pointed out that when the economy is sluggish inflation usually is also low and standard remedy overseen by

the central banks is to lower the interest rates to stimulate the economy. Regrettably he added it is unfeasible to

stimulate the economy by lowering rates while concurrently fighting inflation.

He said the plan for economy during stagflation is different. He said during course of stagflation the government and

central banks know that interest rates are not the problem but it is the money supply that keeps inflation high in slow

economy. It has to decrease the money supply and get the economy back on a firm footing. He said the central bank

unfortunately failed to force the government to reduce its borrowing to contain money supply.

The inflationary pressure created during the decline in economic activity was partly due to high borrowing of the

government from the State Bank of Pakistan and partly due to unbridled money creation, and rupee devaluation

compared to the other currencies, says Asif Ali Shahid, Canada based charted accountant.

This he added has caused prices for food and energy to skyrocket. He said on the deflationary side we have the

industrial downturn, energy and power crisis which is plummeting liquidity for banks as well as causing real estate

prices to fall.

There is no doubt that Pakistan’s economy is in depression since the start of 2008 says Faisal Qamar a Dubai based

chartered accountant. He said the recession has now got out of hands and by all counts Pakistan is now facing

economic depression. He said technically a country is in depression when the decline in its real GDP exceeds 10 per

cent or a recession that lasts for more than three years.

He said Pakistan is close to its third year of recession calling for evolving depression specific economic policies. He

said non-depression economics shuns fiscal policy, on the grounds that central banks’ tools are powerful enough and
their decision-making more effectual and technocratic than that by legislatures. But in today’s customary conditions,

we cannot afford this perception. The economy needs fiscal incentive that could be provided by first taming inflation

by curtailing huge government borrowing.

A swift response to the changing economic

realities…
By

zschuler
– February 15, 2009Posted in: Uncategorized

By: Zack Schuler, CEO, Cal Net Technology Group

The unfortunate part of being 34 years old, is that I’ve never had the privilege to live through an economically challenging
time.  I call it a privilege, because I like to view every change as an opportunity, and change is upon us.   The fortunate part
of being a “thinker” is that I know that I don’t know what I don’t know, therefore, I learn, and learn frequently.  If there is one
thing that I’ve learned recently, it’s that when the tide moves out this quickly, you have to respond quickly, by moving your
mooring, your anchor, and then your boat.  If you don’t, the rocks that the high tide (read: good economy) covered up for so
long will expose themselves, and will sink your ship.  This means you have to change, and change swiftly.

At Cal Net, we’ve been blessed by a steady flow of consistent clients, most of whom have been with us for a very long time,
and most of whom we “own the network” for.  This means that I.T. is our responsibility, our job, and our duty.  Over the
course of the past year, we’ve seen some of these clients react swiftly to what they’ve seen looming, and other not react so
quickly, and they sank.

I commend those business people who took action.  In many cases, the business people said “How can we reduce, or make
better use of our headcount.”  After all, for most companies, salaries are one of the largest expenditures out the door, and
you get the most immediate bang for your buck when you reduce them.  On the flip side, because we are dealing with
people and emotions, it is no doubt one of the hardest changes to make.  We have been fortunate not to have to make these
changes, but most of our clients haven’t been as lucky.

Our biggest opportunity at Cal Net, is when a company is forced to make that decision, we are there for them to provide
better I.T. services, using less time, less resources, and therefore, less cost – I.T. Outsourcing at it’s best.   We have an
uncanny ability to “take over the network” seamlessly, in turn enabling our client’s to make sales happen, without having to
worry about I.T.

So, in summary, and so this entry doesn’t sound like too much of a sales pitch, make sure that you react “swiftly” to the
changing tide.  It isn’t waiting for you to do anything, it’s moving out, and you’re best off not getting caught in the rocks.

Chomsky on Global Myths and

Realities
We live in the era of the global free market. Or do we? And now that the Cold
War is over, why are the arms manufacturers still looking so prosperous?
Political theorist Noam Chomsky thinks he knows why, as Mike Fuller explains.

Here’s one widely accepted version of how things stand in the world today, expressed as
three propositions.

Firstly, the contemporary world operates more and more on a free market, free trade
agenda which emphasizes market forces of supply and demand and competition. State
planning and state intervention in the economy are minimal and protectionism is frowned
upon.

Secondly, as economic models, state planning and Keynesian-style state intervention in the
market have been discredited as being variously inefficient, inflationary, low in productivity,
unjust or tyrannical. Such ‘rolling back’ of the State’s activity leaves the way open for a
purer form of market activity. The free market model is the best way forward. Some
dissidents such as the financier George Soros and the political theorist John Gray reject this
second proposition, arguing that because the free market is so volatile and dangerous and
socially destructive, we badly need more ‘global governance’. However, even they accept
that the contemporary world is in fact dominated by less and less regulated market activity.

Thirdly, since Keynesianism has been discredited, it follows that ‘military Keynesianism’
does not exist. ‘Keynesianism’ means state intervention in the economy to stimulate and
manage demand by such things as government spending on public projects; ‘military
Keynesianism’ simply means that the public projects in question are military. In other
words, it means spending on arms and the defence industry for purposes, principally, of
stimulating and managing the whole economy through a ‘multiplier’ effect. Crudely, defence
contractors buy steel and plastics, which enables steel workers and plastics workers to buy
cars and holidays, which enables … and so on. J.K. Galbraith puts it well:

All candid economists concede the role of military expenditures in sustaining the modern economy.
Some have held that expenditures for civilian purposes would do as well. The transition would be
rather easy … [But] there is the problem of magnitude. For the price of a smallish fleet of manned
supersonic bombers, a modern mass transit system could be built in virtually every city large enough
to have a serious bus line. What would be built then?

(J.K. Galbraith, The Age of Uncertainty, BBC/Andre Deutsch, 1977, p.255).

The denial of ‘military Keynesianism’ means that governments no longer invest massively in
the arms and defence industry for the purposes of Keynesian-style economic stimulation
and management. Rather, the booming arms industry is driven firstly by the need for
security in a volatile world that some claim is actually more dangerous than during the
relative stability of the Cold War ‘balance of power’ era, and secondly by the profit motive.
The world has a crying demand for arms; developed nations have the technical edge and
know-how in supplying them; therefore it makes economic sense for developed nations to
concentrate on exploiting their comparative advantage in such a lucrative export market.
Chomsky’s Version of Things

Noam Chomsky challenges the truth of all three propositions. Firstly, he holds that the story
of ‘a world of free markets’ is something of a myth. It isn’t a complete myth; it is just that
the reality is more complex: a tangled mixture of free trade, planning and protectionism.
For instance, he points out that a vast amount of world trade is internal to corporations.
Where planning is concerned, he does not just mean that big corporations have to plan their
investment and production and sales campaigns if they are to avoid expensive mistakes. He
means that, often, research and development costs are paid for by the government out of
the public purse while the benefits eventually accrue to private corporations as part of what
Chomsky calls the ‘public funding, private profit’ syndrome. An example of this to which he
frequently returns is the development of the Internet: a state-funded military project
ironically lauded as an achievement of the superior efficiency of free markets. Where
protectionism is concerned, Chomsky again points out with irony that there is some bitter
truth in the free market rhetoric: the poor and weak must sink or swim according to market
forces; but the rich and powerful must be protected against the cold winds of the market by
the State. ‘Welfare for the Rich’ takes various forms: corporate bail-outs, government-
funded research schemes, tax cuts for the wealthy, government aid and tax relief for
business, and so on.

Secondly, Chomsky argues that no one in the know really believes that the free market and
free trade are the best way forward. He seems to believe that both government and
business, whatever their official free market rhetoric, tacitly accept the Keynesian truth that
the State must intervene in the market to alleviate economic and social problems. In a
national economy, there is need for a national government with the power to do this. But in
today’s global economy, a global political structure is required for this purpose. It is
commonly held that, since the global economy exceeds the control of any national
government, it must be out of control. Not so, says Chomsky; unelected international
bodies like the WTO and IMF actually represent what he calls “a de facto world government”
who all too effectively plan and control the world economy for us. Or, more correctly, not for
us, but in the interests of the ‘prosperous few’ at the expense of the ‘restless many’. So
whereas commentators like Gray and Soros argue about the need for ‘global governance’,
Chomsky claims that we already have it!

Thirdly, he says, ‘military Keynesianism’ is very much alive and well, since the ‘Pentagon
System’ – Chomsky’s name for the military-industrial complex – constitutes a crucial
internal dynamic to keep the economy sweet. In a world dominated by one superpower, the
US, there can be no genuine security or strategic reasons for massive spending on defence
and arms. Further, the domestic and global demand for arms is largely a created one,
driven by business and economics and taking full advantage of the built-in obsolescence
factor to generate continual profits and economic health.

Critical Comparison

Chomsky has been called the most important intellectual in the world today and certainly
few would deny the acuteness, informed care and frequent originality of his analyses of
world structures and events. As one might expect from someone whose early fame rested
on his work in linguistics, the use and abuse of language is a dominant theme. Chomsky
tries to expose the ways in which supposedly truthful accounts of things are actually
ideological fictions concealing more unsavoury truths, which are sometimes almost the
opposite of the ‘official’ version. His notion of ideology is very like that of Karl Marx: to see if
what passes for truth is really a mask for vested interests.

We have already seen him at work in this way in the three propositions mentioned: (1)
Under the ideological rhetoric of ‘the global free market’ lies a more complicated reality
which in some ways negates the free market. (2) Rather than being beyond anyone’s
control, the global economy is all too well controlled by a de facto world government. (3)
Under the official ideological fiction about the need for upgrading security in a dangerous
world lies military Keynesianism, powerful lobbying and ‘jobs for the boys’. Further, the
arms trade, rather than supplying an independently existing demand, to a large extent
creates the demand which it supplies.

Let’s critically consider Chomsky’s first proposition – that the free market, free trade agenda
is something of a myth. There are certain obvious ways in which he is correct. ‘Oligopoly’
means ‘restricted competition’ and, in a world of relatively few vast multinational
corporations, competition will be more restricted than in the utopian theoretical market
model of many smallish competing firms. Further, the prohibitive cost of entry into some
kinds of market restrict the competitive free market model still more. Again, oligopoly, in
the sense of restricted price competition, is one of the most rational and riskfree ways for
big corporate ‘competitors’ to behave. Also, due to the enormous costs of some research
and development, cooperative joint ventures between competitors are quite common. Also
quite common is the practice of owning stock in rival companies.

Concerning free trade and protectionism, it seems there are again ways in which Chomsky’s
analysis is correct. While tariffs may be frowned upon, so-called ‘non-tariff barriers’ (NTBs)
have by no means disappeared. Also, a free trade agenda may itself constitute a kind of
protectionism, since it aims to protect the interests of those with a competitive edge or
comparative advantage against barriers.

Another of Chomsky’s contentions, associated with protectionism, is his claim that, in spite
of the ideological rhetoric disparaging state intervention in the market, such intervention is
the norm. Chomsky does not even necessarily disapprove of this, since he feels it is the only
practical way to run complex modern economies. What he disapproves of is the way that
the USA, in particular, tries to hide its interventions through the ‘Pentagon System’ and
through an official ideology of self-help and free markets. He also disapproves of the
particular form of such interventions – frequently military and frequently geared to the rich
– no doubt feeling that interventions in such things as health, housing, education and
welfare would be of greater social benefit.

Where I feel that Chomsky overstates his case, or is perhaps inconsistent in presenting it, is
in his failure to highlight that in recent decades many state interventions have taken the
form of enforcing a free market agenda. John Gray makes the interesting point in his False
Dawn: the Delusions of Global Capitalism that, since it is the natural tendency of societies to
curb the excesses of market forces for social reasons, it takes a particularly strong
interventionist government to force through a pure free-market agenda – and that this is
largely what happened in the Thatcher-Reagan era. In the 1930s and again in the 50s and
60s, the Keynesian orthodoxy promoted a policy, broadly, of ‘being kinder to labour at the
expense of capital’ because it was felt that this was the only way to restore capitalism’s
viability in the face of Communist and Fascist alternatives. By the 1970s it was felt that all
was not well, and in the 1980s there was the growing body of opinion that now the only way
to restore capitalism’s viability was by ‘being kinder to capital at the expense of labour’.
Hence many of the state interventionist policies instituted at that time, the consequences of
which we are still living with, were specifically designed to unfetter market forces, as the
orthodox version of things insists.

True, as Chomsky seems to feel, instead of Keynesian welfare for the poor to stimulate
demand, we now had what in effect was New Right welfare for the rich to stimulate supply –
a whole raft of measures designed to shackle labour and to reform union law and both to
protect and unshackle capital and finance.

The overall conclusion, then, concerning the first proposition, seems to be rather
paradoxical: the orthodox version is correct in claiming that the world has moved to more of
a free market agenda, but Chomsky is correct in claiming that the move towards this
agenda is inextricable from state intervention and ‘welfare for the rich’ and that,
furthermore, more orthodox forms of state intervention continue unabated in various
‘publicprivate partnerships’ and in the ‘Pentagon System’.

The second proposition stated that market forces ruled the world and that this was the best
way forward. Some, like Gray and Soros, agreed that market forces ruled but argued that
this was not the best way forward, and that the global market needed more ‘global
governance’. Chomsky’s rejoinder was that market forces did not rule and that we already
had a ‘de facto world government’.

The question about free markets and state intervention has already been addressed.
Perhaps the most interesting question about the second proposition is the nature of the
global economy. Here, we can usefully distinguish four different interpretations.

The first is that the global economy is out of control. This seems quite a popular view,
conjuring up images of a blind monster thrashing chaotically around, wrecking havoc and
threatening global financial crisis and collapse as well as great social injustice and ecological
damage. There may be truth in this contention but, more soberly stated, what it amounts to
is that the global economy exceeds the control of any one nation, and so to some extent
weakens the power of national governments to frame economic and social policy.

A second quite popular interpretation is what we might call the ‘conspiracy theory of the
global economy’, and it is here to some extent that we can locate Chomsky. Such
conspiracy theories are various and constitute some odd bedfellows. What they all have in
common is the claim that the global economy is run by or in the interests of an elite. For the
Leftish anarchists and eco-warriors of anti-capitalist protests, the elite is largely composed
of multinational corporations, international financiers and investors and their political
flunkeys (what Chomsky, who is close to this view, calls the ‘prosperous few’). For those on
the far Right, the conspiracy is conducted more usually by ‘the world conspiracy of Jews’.
Finally and famously, in the case of David Icke, the conspiracy is organized by blood-
drinking alien lizards.

Chomsky’s own thoughtful and informed version of conspiracy theory goes something like
this: (1) Due to the complexity involved, all modern economies require a large amount of
intervention by governing bodies for effective functioning. (2) A national economy requires a
national governing body which at least has the advantage of being democratically elected
and to some extent responsive to popular pressure. (3) A global economy requires a global
governing body; this is Chomsky’s ‘de facto world government’ in the shape of institutions
like the WTO and IMF, freed from elected democratic control and run almost entirely by and
for the ‘prosperous few’. (4) As Chomsky has put it, this is a degree of ideological
mystification where it is not simply that most people don’t know what’s going on (which is
usually the case) but now they don’t even know that they don’t know! Presumably, too, for
Chomsky, the popular ‘out of control’ interpretation of the global economy is a useful
ideological smokescreen for absolving the ‘prosperous few’ from responsibility.

A third interpretation returns us to the first ‘out of control’ interpretation with a twist. This is
the argument, straight out of orthodox economic theory, that the whole point about free
markets is that they are self regulating, obeying Adam Smith’s law of the ‘invisible hand’ of
competition. On this view, then, what we have is a self-regulating global free market. True,
no one is controlling it, but this does not mean that it is out of control because it is
controlling itself.

A fourth interpretation revisits this third interpretation with another twist. This is the view of
commentators like John Gray that the primary purpose of institutions like the WTO is to
control the global economy by enforcing a free market, free trade agenda on it. As Gray
points out, free markets don’t just happen of themselves; they need controlling bodies to
enforce them. Gray is unhappy with this development for two main reasons. Firstly, he
worries about whether free markets are selfregulating; self-regulation can all too easily
topple into being out of control. Secondly, even where free markets are functioning the free
market agenda does not work to maximize human welfare. Hence it stands in need of a
different kind of ‘global governance’, one that is more responsive to the various forms of
unfairness, damage and unrest caused by market forces. Can we make any sense out of this
welter of interpretations? Rather hesitantly, I think we can, by suggesting that there is truth
in all of them if we see them in their right relations to each other.

The global economy is ‘out of control’ in the following two senses: it is out of elected,
democratic control (a major point of Chomsky’s), and also, since by their nature, self-
regulating market mechanisms are volatile and imperfect (a point made by Gray, Soros and
Chomsky), it forever threatens to be out of control.

Chomsky’s version of conspiracy theory in terms of a ‘de facto world government’,

represented by institutions like the WTO, is, as Gray insists, largely dominated by a free
market agenda: its control consists largely of trying to free up controls on global market
activity. This is a point which it seems that Chomsky always rather understates in his efforts
to show that things are not really as they seem or as the official ideology holds. But it is a
point which can fit in well with his general slant on things. Free markets are not ideologically
neutral things; they suit some people – the ‘prosperous few’ in the strongest position to
take advantage of them – better than others – the ‘restless many’ for whom the damage
caused by market forces can exceed the benefits from them.

It seems, too, that there is no real disagreement between Chomsky and Gray on the
question of ‘global governance’. I suggested earlier that Chomsky’s rejoinder to those like
Gray and Soros who spoke of the need for more global governance was to more or less
accuse them of being slow on the uptake, since we already had such a ‘de facto world
government’. But, stated more carefully, Gray isn’t denying that we do. He is merely saying,
like Chomsky himself, that we stand in need of a different kind of global governance – one
less destructive of democracy, of stability, of human happiness and the environment.

The third proposition revolved round the issue of ‘military Keynesianism’ and the role of the
arms industry in the global economy. According to the orthodox version, ‘military
Keynesianism’ no longer exists. Instead, the imperatives dictating massive state investment
in the arms and defence industry are the need to upgrade security in a dangerous world,
and giving state support to arms research and development as one of the developed world’s
most lucrative export markets.

Chomsky, for his part, finds the ‘need to upgrade security’ argument frankly ridiculous in a
world dominated by one superpower and its NATO allies. He therefore concludes that,
beneath the rhetoric, the real agenda (of the USA in particular) is something as follows: (1)
The ‘Pentagon System’ is used as a cover for the Keynesian-style process of stimulation and
management of the economy through the defence and arms industry. (2) Government is
influenced in this by lobbying and pressure from the military and business, who are just not
interested in any possible ‘peace dividend’ following from the end of the Cold War. (3) Of
course government is happy to invest massively in one of its most lucrative export markets.

Chomsky, however, adds another twist to this story. The arms export industry will be still
more lucrative if a built-in obsolescence factor encouraged foreign buyers to always want
the latest model of missile, tank and plane in order to ‘keep up with the Joneses’. This itself
gels beautifully with the insistence on continually upgrading domestic defence, since one’s
foreign buyers (who may also represent potential enemies) now constitute a greater threat
since they are better armed. Thus the whole process is one largely of the arms and defence
industry creating its own demand – both in terms of foreign exports and upgraded domestic
security.

Chomsky sums up this dynamic as follows:

The US share in arms sales to Third World countries has reached almost three-quarters. We must
therefore provide them with even more advanced weaponry, so that we can tremble in proper fear.
The sale of F-16 aircraft with taxpayer-subsidised loans allows the Air Force to pay Lockheed to
upgrade the aircraft and to develop the F-22 to counter the threat they pose.

(Noam Chomsky, Powers and Prospects, Pluto Press, 1997, p.124).

If the expression ‘insane merry-go-round’ comes to mind, we have to admit that, from a
strictly economic point of view, it also makes a beautiful kind of sense: the arms industry
represents a kind of perpetual ‘cash-cow’ which, due to its elements of built-in arms racing
and obsolescence, seems capable of being milked endlessly. Further, it enables
governments to kill several birds with a single stone. In the same stroke, it can address: (1)
real or imaginary security and strategic issues; (2) foster a lucrative export market with
apparently endless potential and help it maintain its position as market leader; (3) be used
to generate civilian spin-offs (as in the case of the Internet); (4) be used as a tool for
stimulating and managing the economy; (5) be used to placate powerful business and
military lobbies.
In the absence of any alternative ‘cash-cow’ that can do all these things simultaneously, it
would be a very unpragmatic government that did not put the arms industry near the top of
its agenda.

Even if it is conceded that Chomsky is too cavalier in dismissing the real security and
strategic worries in today’s world, and that superpowers do not maintain their status by
resting on their laurels, I think it has to be admitted that the security worries are being
inflated as an ideological cover for other agendas, such as ‘subsidising the rich’, responding
to pressure groups, aiding export markets, stimulating the economy and generating civilian
spin-offs in research and development. This would seem particularly true of President
George W. Bush’s decision to proceed with the ‘Son of Star Wars’ defence programme – an
immensely expensive initiative with a question mark hanging over its effectiveness.

Chomsky is surely right, too, that the arms industry largely creates the demand which it
supplies. He is also right in maintaining that the USA, in particular, is coy about admitting
its state interventions in the market.

I end on a cautiously hopeful note. Is there not perhaps an equally lucrative ‘cash-cow’
waiting in the wings that would respond to a real global demand even more than the arms
industry? And one that would also fulfil many of the functions that the arms industry
presently does – keeping business happy, stimulating and managing the economy, providing
export (and domestic) markets, and even helping to resolve certain strategic and security
problems? I refer to a serious investment in environmental technology. The assembled think
tanks of governments and business can hardly be blind to this possibility. Maybe some such
initiative is already being explored, however tentatively, under the very umbrella of such
things as the ‘Pentagon System’.

Bright Future for Asia

New Horizon, August 1994, 12-14
- By Staff Writer

Islamic banking is set to flourish in Asia, encouraged by governments of the region and international
Islamic banking Groups such as the Dar Al Maal Al Islami. This was the message of the seminar on
‘Islamic Banking and Allied Subjects’ organised by the Asian office of the International Association of
Islamic Banks (IAIB). Asia was identified as the region which would enjoy the fastest growth of Islamic
banking over the next ten years or so.
Asia’s large Muslim Population would also ensure a growing demand for the alternative system.
Islamic banking groups are speeding up the process by making available information on the system - a
crucial task since Islamic banking has suffered from a lack of reliable information.
More importantly, the Groups are playing a key role in setting up Islamic banks across the Asian
world, including Sri Lanka; Pakistan, Bangladesh and Brunei.
Making it clear that there is nothing new about the region’s commitment to Islamic banking, Mr S.A.
Haqqani, Chief Executive of the Karachi-based Professional Modaraba Company, pointed out
however, that Asia needed to be independent politically before it could put this commitment into
practice.
Describing how the arrival of imperialism in Asia had put paid to the Islamic system of finance, Mr
Haqqani said that the entire system was put on hold whilst Western modes were introduced. ‘The
Islamic economic system remained dormant for at least two to three centuries, as the imperialist
powers replaced the Islamic system with either capitalism or socialism.’
Not surprisingly, these systems remained in place long alter the departure of the Imperialist powers.
In tact, it is only n the last ten years or so that any serious attempt to replace this system with the
Islamic system of finance has been made. What Islamic bankers are now witnessing is a very gradual
move back to the original system. Perhaps inevitably, the Islamic economic system has by no means
enjoyed a smooth ride, presenting Asian governments with a whole new set of problems - of the sort
that one would associate with such a move.
Said Mr Haqqani ‘these countries are now facing the challenge of switching over to their own economic
system and the consequent conflicts arising Out of that prevalent system.’
Mr Muazzam Ali, Vice Chairman of the IAIB also made it clear that in the Field of banking as well, the
path to Islamisation is strewn with difficulties. Cautioning that takes a bank more than just removing
element of interest for it to become Islamic as is commonly believed - he said that Islamic banking
system has its own unique value oriented system.
As such Islamic banking’s approach different from the conventional in all aspect ‘be it behaviour,
dealing with customed modes of Financing, accounting or distribution of Zakah.’
Mr Haqqani also pointed out that up until now the approach adopted by the Pakistan government
towards Islamisation has b evolutionary rather than revolutionary. He described how some Islamic
instruments have been introduced to Pakistan’s commercial industrial activities with a view to
ultimately transforming the economy of the instruments used to do this Modaraba - basically a
partnership of financial and management. Modarabas are approved of and controlled by a religious
board to ensure that Islamic laws are compiled with. A legal definition has been provided in the form
of the Modaraba Companies and Modarabas control Ordinance of 1980. But, Mr. Haqqani said, so far
lack of information about the instrument has proved itself to be a major stumbling bloc.
Perhaps inevitably, the Islamic economic system has by no means enjoyed a smooth ride, presenting
Asian Governments with a whole new set of problems - of the sort that one would associate with such
a move.
This has made the task of Pakistan’s Islamic economists even more difficult. Commenting the fact that
in the early stages of its introduction at least, there was little or no response to the instrument, Mr.
Haqqani said that ‘as long as the economy remains interest-based, it is unlikely that Islamic financial
instrument will be a great success.’
Mr. Haqqani described how Pakistan’s private sector has shown itself to be reluctant to venture into
the unchartered Modarabas. The solution he put forward was that because similarities between the
Islamic and the capitalist system are few and for between, only a overhaul of the system will solve the
problem.
Since both the Islamic and capitalist systems are entirely different and infact are in conflict with each
other, the private sector in Pakistan have continued to use interest-based facilities rather than
venturing into an area not yet tried and tested.’
Adding that because the Islamic system is based on economic justice and the distribution of wealth,
Mr. Haqqani pointed out that ‘it holds little or no attraction for the die hard capitalist.’
Mr. Haqqani also said that the task of Islamic economists is being made much harder through lack of
public confidence in the instrument. Unfortunately, many of Pakistan’s entrepreneurs, failing to find
finance through conventional banking sources turned to Modarabas as an alternative - and easy source
of financing.
During 1991, 15 Modarabas were launched, mostly by little known companies.
Not surprisingly, this caused widespread public concern. In a bid to protect the public interest, Mr.
Haqqani said, the State Bank of Pakistan began monitoring and controlling Modarabas, leasing
companies and other non-bank financial institutions. At the same time, the Corporate Law Authorities
has restricted permission for the issue of multipurpose Modarabas.
But, Mr. Haqqani concluded these regulations seem to be having the desired effect and confidence of
investors is gradually increasing. At present there are 47 Modarabas listed on the stock exchange with
a paid up capital of Rs. 6558.6m. Other countries intent upon Islamising their own economies are
becoming increasingly convinced that Modaraba’ scan play a useful role within the economy.
But whilst Modarabas seem to have successfully chartered a course through the minefield of Pakistan’s
economy, so far the goal of transforming the economy is proving to be another story.
It would not be unfair to say that the impact of Modarabas on the Islamising of the economy have been
limited. The problem is that the areas of the economy currently covered by Modarabas remain
extremely small. Matters have not been helped by the less than consistent attitude of the government
towards the policy of Islamising the economy as a whole.
Mr. Haqqani made it clear that this erratic approach has certainly not done the cause of Modarabas
any favours either. In fact, changes in government policies has consistently had a direct negative
impact on the market price of Modaraba certificates.
Islamic finance has shown itself capable of withstanding the region’s political upheavals as well as
keeping up with its ever-changing economic realities. Looking across the rest of Asia, support for the
Islamic banking system is assured, witness the seemingly never ending setting up of Islamic banks.
However, summing up Mr. Haqqani said that whilst there is obviously still much scope for
encouraging Modarabas to act aggressively in the commercial and industrial sectors and so play their
part in transforming the economy it was equally true that many of the more serious problems had been
successfully tackled. He was convinced that the future for Islamic banking in Asia looked bright.
The obstacles that lay in the path of the Islamic system were also stressed by the Islamic economist,
Mr. Jafery. He identified the lack of faith among a small, but nonetheless powerful clique of Muslims
as a major stumbling bloc, allowing practices such as nepotism and corruption to continue.
‘Looking around Pakistan’s economic system, as it is today, it will be seen that although it is by no
means an Islamic system, it has many good features. However these good features do not serve their
purpose because of lack of faith, which accounted for much of the corruption and nepotism.’
Warning that whilst no one expects change to the Islamic system to occur overnight, Mr. Jafery
pointed out that these practices would nonetheless hinder development especially as the Islamic
system has the added burden of keeping pace with ever-changing economic realities.
Mr. Ziauddin Ahmad, ex deputy governor of the State Bank of Pakistan also lamented the fact that
many Muslims were pessimistic about the likelihood of achieving the goal of Islamising the economy.
Concluding that hard work and patience would win out in the end, he said that such a step was crucial
if the problems of the modem economic system were to be avoided.
A more optimistic note was introduced by Muazzam Ali. Citing the establishment of Islamic banks in
Indonesia, Bangladesh and elsewhere as evidence of Asia’s commitment to the system, he said that as
one of the major Muslim continents, it had a bright future.
His optimism was not limited to Asia but also to the West. Mr. Muazzam Ali congratulated the major
commercial banks which had been operating Islamic banking windows successfully for many years.
Praise was also awarded to leading international Islamic banking groups by Mr. Ziauddin Ahmad, for
their role in contributing to the Istamisation of the banking system through research and publications.
Overall the conference pinpointed the many obstacles that Islamic finance has had to face but
demonstrated how in a relatively show space of time much has been achieved. In Pakistan, real change
is being affected and Islamic finance has shown itself capable of withstanding the region’s political
upheaval as well as keeping up with its ever-changing economic realities. Looking across the rest Asia,
support for the Islamic banking system is assured, witness the seemingly never ending setting up of
Islamic banks. Over the next ten or twenty years the region will certainly one to watch.
A promising economic outlook for Pakistan – by Anas Muhammad

As the government gets ready to present its third annual budget (2010-2011), reports and
estimates for the next fiscal year is the talk of the day for economists and politicians in Pakistan.

Besides all the buzz created by media commentary and the editorials, which is mostly negative,
Pakistan’s economy is said to be stabilizing for which there is very tangible evidence. Most of
which were presented in the latest economic survey report.

The economic report has showed stability in today’s economic indicators compared to last few
years’. Some of those indicators presented in the Economic Survey (2009-2010) are as listed
below.

 The economy grew by 4.1% during 2009-10 after a modest growth of 1.2 % in 2008-09.

 The industrial output expanded by 4.9 %, with Large Scale Manufacturing posting a 4.4 % rate of
growth.

 The services sector grew by 4.6 % as compared to 1.6 % in 2008-09.

 For 2009-10, the fiscal deficit is aimed to be kept in check at 5.1 % of GDP, despite the absorption of
larger-than-budgeted security-related spending.

 The external current account deficit was contained to 5.6 % of GDP (US$9.3 billion) in 2008-09 from a
high of 8.3 % of GDP in 2007-08 (US$13.9 billion). The current deficit is expected to decline to under 3 %
of GDP in the current year.

 Foreign exchange reserves have been rebuilt to nearly US$15 billion, from their low of under US$6
billion in October 2008.
 Inflation declined from 25 % in October 2008 to a recent low of 8.9 % in October 2009, though it has
accelerated sharply of recent and is showing persistence.

 The total installed electricity generation capacity has increased to 20,190 MW during July-March
2009-10 from 19,780 MW during the same period of last year

 The number of villages electrified increased to 147,038 by March 2010 from 133,463 by March 2009,
showing an increase of 10 %.

 Overall exports recorded a positive growth of 8% during the first ten months (July-April) of the current
year against a decline of 3% in the same period last year.

 Trade deficit improved by 13.9% from $14,218 million in July-April 2008-09 to $12,238 million during
July-April 2009-10.

 Social safety nets have been strengthened. Benazir Income Support Program is being streamlined.
Pro-poor spending is significantly rising over recent years

 2009-10 started with a recovery in the Capital Markets following the global financial crisis. The KSE-
100 Index crossed the 10,000 points barrier on 12th March, 2010, however it could not be sustained.

 Net inflow of foreign investment in Pakistan from July 2009 to March 2010 was US$431.9 million
which was a large increase  considering the negative foreign portfolio investment in the  last financial
year.

Economic Survey 09-10

While projecting Pakistan’s economic future, by analyzing the next budget, these figures should
be kept in mind . As these reflect the present foundations which can undermining any skepticism
about the future of Pakistan’s economy and what the next budget is capable of delivering.