A Prayer

O Allah! Perish me in my attributes and resurrect me, O Resurrector, in the attributes of Your Beloved(صلى الله عليه و سلم)

O Taker of Life! Take the life of my heart and give it life, O Giver of Life, in the love of Muhammad(صلى الله عليه و سلم) and his(صلى الله عليه و سلم) Family.

O Protecting Friend! Protect this slave from his path and guide him, O Guide, in the path of the elect(صلى الله عليه و سلم) who is well-guided(صلى الله عليه و سلم).

O Forgiver! Forgive this evil soul of all its acts and open on it, O Opener, the light(صلى الله عليه و سلم) of the perfect(صلى الله عليه و سلم) lamp(صلى الله عليه و سلم).

O Knower of All! You Know that I am weak so nourish me, O Nourisher, from the knowledge of the well-informed(صلى الله عليه و سلم).

O Possessor of All Strengths! I am the least steadfast so bestow on me the honor, O Bestower of Honors, to spend my life in honoring the most honored(صلى الله عليه و سلم).

O Owner of All! Subdue this treacherous self with Your Majesty and shape it, O Shaper of Beauty, with Your Names so it could reach the Evident(صلى الله عليه و سلم) Truth(صلى الله عليه و سلم).

O All-Merciful! O All-Beneficent! O Absolute Ruler! O Pure One!

Bring my state in order, O Maker of Order!

O Responder to Prayer! O Hearer of All! O Righteous Teacher! O Perfectly Wise!

source of the picture: http://nj-behindtheveil.blogspot.co.uk/2011/09/in-name-of-allah.html

Fight against corruption

EVERY year up to $1.8 trillion in illicit funds derived from corruption, tax evasion and organised crime circle the globe, according to a Transparency International report 2010. The figure is much larger than the funds allocated for the Millennium Development Goals.

In another study by Ernst & Young, half of those surveyed estimated that corruption raised project cost by at least 10 per cent.

Apart from the direct monetary losses due to misappropriation of scarce resources, corruption not only distorts markets and creates unfair competition but also weakens institutions by nurturing and sustaining the corrupt government officials and politicians through bribery.

In a similar Ernst & Young survey, almost a fifth of more than 1000 executives claimed to have lost business due to a competitor paying bribes.

However, corruption, which takes advantage of shortcomings in transparency, internal governance and lack of oversight, is not limited to government-led businesses and institutions. Corruption within private enterprises is increasingly becoming an important subject in policy circles, especially after the 2008 recession. It constitutes: executives giving generous payouts to themselves; majority shareholders trying to influence corporate strategy at the cost of long-term profitability; and, staff abusing power entrusted to them for personal gains.

Corruption decreases FDI while FDI decreases corruption: Past studies have spent significant energies in understanding effect of corruption on FDI and mechanism with which such an effect materialises. However, only few have made an attempt to explore the possible effect of FDI on corruption and have found the relationship to be negative and statistically significant. The two main studies in this regard are Pinto and Zhu (2011) and Larrain and Tavares (2004). Larrain and Tavares (2004) use FDI inflows as a measure of openness to access the effect of openness to FDI on corruption after accounting for trade intensity. They find the relation to be significant and negative.

Mechanism of this effect: Due to limited research, the mechanism of how FDI may lower corruption also remains less understood. One way to understand this is to look at the restrictions placed on FDI inflows. With the help of a theoretical model, Krueger (1974) shows how trade restrictions are used ‘as originators of rent’. She emphasises on the role of competition for import licences as an inducement to corruption.

Moreover Ades and DiTella (1999) emphasise high level of corruption in countries where local firms have limited exposure to foreign competition. Deriving inference from trade openness, one may argue that foregoing protectionist policies towards FDI inflows will lower the avenues of corruption exploited by the agents for their individual gains.

Second, FDI itself brings positive spill-over effects through improvement in technology, better management practices and transparency in corporate governance. The increasing role being played by the multinationals in the transfer of technology has been talked about for a long time now.

Findlay (1978) was one of the first few to show this in his ‘explicit analytical model of technological diffusion’. Findlay highlighted the role of major corporations with higher level of efficiency in enabling the less developed countries to better adopt the new technologies. This higher level of efficiency of major corporations further results in the transferring of advanced management skills to domestic firms. In a case study on Russia, Braguinsky and Mityakov (2012) show that domestic firms which interact with foreign corporations in Moscow are twice as transparent as other domestic firms.

Word of Caution: Pinto and Zhu (2011) also discuss the negative consequences of FDI if domestic characteristics are not fully understood. They find FDI to be associated with high levels of corruption in less developed economies and in autocracies. This is mainly due to non-competitive markets, high custom duties (lowering the degree of openness) etc in the less developed economies.

TI report has argued that in the absence of competitive markets, FDI may very well lead to increase in corruption as foreign firms bribe the officials to gain unfair foothold in the host economy. On the bright side, this gives less developed countries a promising starting point: strengthen their competition commissions, gradually lower the custom duties, and move away from protectionist policies.

Policy Implications: As it is not in the benefit for those in power to increase transparency and accountability, increasing demand to fight corruption has often led to a stand-off between governments and people. Under such conditions, FDI as an additional tool can play an important role in a gradual advancement of a country away from corruption. By this I do not mean to say that fighting corruption should be replaced with encouraging FDI rather this mechanism must be used to augment the fight against corruption.

First Published in Dawn (3rd September 2012)

http://dawn.com/2012/09/03/fight-against-corruption/ 

Capital gains tax, high interest rates and uncertainty

BRISTOL: This is how the story goes! With capital gains tax in place, profitability will decrease and therefore much needed investment from both within and abroad will not flow into the capital market. Instead it may even force existing investors to withdraw their investments from the country’s stock exchange.

With capital outflow, growth will decrease and much needed jobs will not be created leaving the country worse-off as a whole. As such restrictions on capital flows will affect investors’ confidence in the national economy; chances of future investment will decrease hence putting country’s future growth at stake as well.

With capital flows taking such an important role, one may ask what else can be done to increase such inflows? Ask any IMF official and the answer will be to increase interest rates. It serves two purposes. Firstly, an increase in interest rates decreases domestic demand and therefore inflation by making it more attractive for people to save more. Secondly, it increases the rate of return for foreign investors who are now more likely to take the required risk and bring their money into the domestic economy which also helps in stabilising the exchange rate. Makes sense, right?

Such free inflow of capital (money) is as good for short term stability as it is for instability, with close to no benefit for long term growth of country’s GDP. Capital flows are pro-cyclical. Investors enter the market during the high growth periods to make quick money and leave when the situation deteriorates. To be more precise, ‘hot money’ enters the economy when it is least needed therefore exacerbating the inflationary pressure and leaves when it is most needed hence pushing the economy further into recession.

When the East Asia crisis hit Thailand – which had liberalised its capital market as per IMF’s advice, a complete reversal of investors’ sentiment resulted in huge outflows which amounted to 7.9% of GDP in 1997, 12.3% in 1998 and 7% in the first half of 1999. The only country to stand up to the dictates of the IMF during the East Asia crisis was Malaysia. Their policies of putting breaks to the free flow of capital (or speculative capital which is a consequence of such a policy) and not increasing the interest rates paid off as Malaysia experienced the shorter and shallower downturn relative to other countries.

Interest rates are a useful tool to control inflation, given that the reason for inflation is excess demand. However, inflation in Pakistan has been largely due to global commodity prices and supply side constraints in both agriculture (floods) and manufacturing (energy shortages). With growth rates for last couple of years already at low levels, it is unlikely that excess demand is the cause for double digit inflation.

In developing countries where equity markets are by and large underdeveloped, businesses rely on loans to expand and run themselves. In Pakistan not even a fraction of businesses are listed on the stock exchange. Under an environment with high interest rates, likelihood of default increases for businesses as they are now required to pay huge amounts to their creditors (banks).

Apart from low growth rate, uncertainty at both political and security front makes it even more difficult to attract both local and international investors to Pakistan. In the case of East Asia, high interest rates, free capital flows and everything which the IMF says did not succeed in achieving the desired results.

Two main things which come out of this discussion are imposition of capital gains tax and lowering of interest rates. In addition corporate tax should also be lowered to compensate domestic businesses for the uncertainty. While capital gains tax will bring much needed stability to the capital markets, low interest rates and decrease in corporate tax will provide much needed breathing space to businesses so they can increase their production and expand further thereby overcoming the supply side constraints to some extent. The magnitude of the change is an empirical question and should better be left to those who have access to the data.

First Published in Tribune (23rd April 2012)

http://tribune.com.pk/story/368377/capital-gains-tax-high-interest-rates-and-uncertainty/

Tracking inflation for optimal monetary policy

IN an economy inflation is often considered a monetary phenomenon which can be appropriately dealt with by using interest rates as a policy tool.

Researchers have also suggested and shown that in a general case increasing nominal interest rates by more than one unit for a unit increase in inflation produces reasonably good outcomes on average.

However, the simplicity of such rules often requires that a policymaker be aware of the underlying variables and be mindful of the judgement required on his part.

Fortunately, much more flexible models have evolved which consider variety of factors before suggesting a policy response.

One essential feature of these is the taking into account of various uncertainties or shocks (such as demand and cost shocks) which the economy experiences from time to time.

This brings us to an important step of investigating these shocks in the data followed by reconciling them with the observable events and then proposing a policy framework which may be most appropriate. Here I make a similar attempt in the case of Pakistan.

I have chosen 2008 as my starting year because it is then when international commodity prices touched their peak which was later followed by the global financial crisis. Furthermore, the data from the State Bank shows that inflation in Pakistan started increasing around January 2008 – few months after international oil prices started rising.

A detailed look at the data shows that initially commodity price shock and removal of subsidies led to an increase in food and fuel prices while the non food non energy (NFNE) group inflation did not change by much.

Gradually, with a lag of one quarter (roughly), NFNE inflation increased (due to rising marginal cost) up to 18.9 per cent in January 2009. By this time food and fuel inflation had already started declining from its peak of more than 25 per cent and had come down to around 21 per cent. Keeping in mind the earlier lag effect, NFNE inflation started declining from February 2009 onwards. In 2010 floods came and food inflation shot back up to 20 per cent while the NFNE inflation remained stable. With the
effect of floods subsiding, inflation declined subsequently.

From 13.9 per cent in Jan 2011 to 10.1 per cent in Jan 2012, year- on- year inflation has declined further. Much of the decline in the later year can be attributed to decrease in inflation for the food group (from 20.2 to 9.2 per cent over the same period) due to better crop production and sufficient levels of buffer stock. Considerable decline is also due to fall in the global food prices which saw an year-on-year increase of 29.9 per cent in January 2011 but declined by 10.7 per cent in January 2012.

Most of the fluctuations in various inflation indexes can be traced back either to the global trends in commodity prices or domestic shocks such as due to floods, energy shortages or elimination of subsidies. Other shocks are also in the form of government increasing the minimum price of major crops (such as wheat) which consequently lead to increase in prices of other crops as well. Owing to this uncertainty which underlay these events, the optimal monetary response should therefore be a cautionary one. Any attempt to aggressively reduce fluctuations in inflation under the given scenario will push the level of output further below its natural level and therefore reduce the overall social welfare.

In developing countries where equity markets are by and large underdeveloped, businesses rely on loans to expand and run themselves. In Pakistan not even a fraction of businesses are listed on the stock exchange. Under an environment with high interest rates, likelihood of default increases for businesses as they are now required to pay huge amounts to their creditors (banks).

Moreover, the risk of default also increases as investors are now forced to pursue riskier projects in an attempt to earn higher
returns required for paying back the high interest bearing loans. Banks, anticipating this increase in the risk of default, keep the interest rates at the level which may not clear the market but maximise the banks’ profits. In other words, not everyone is able to get the loan even if one is willing to pay a higher price – credit rationing.

Higher interest rates coupled with other factors has resulted in a decline in gross capital formation (an investment indicator) from 22 per cent of GDP in 2008 to 15 per cent in 2010 (World Bank data). Economic Survey 2011-12 has shown private investment declining from 15 per cent of GDP in 2007-08 to 10.2 per cent in 2009-10. The provisional estimate for 2011-12 show that the private investment has further declined to 7.9 per cent of the GDP.

Despite excessive government borrowing, public investment has also failed to keep the investment demand stable and that, on the contrary, has declined from 5.4 per cent to three per cent over the same period. However, the World Bank estimates show that the gross savings rate has declined by less and has remained close 20 per cent of the GDP. With savings running ahead of investment, it is likely that the output growth will fall over the medium run if the trend in investment is not reversed with the help higher public investment and lower interest rates.

Having looked at the trends in inflation indexes and highlighted some of the costs associated with a high interest rate policy, I now return to the question under investigation – what is an optimal monetary policy? When the benefits of any policy are not clear while the costs associated with it are obvious, ‘caution’ becomes a virtue.

As long as the process of elimination of subsidies does not get completed and sufficient electricity is not produced to allow businesses to achieve economies of scale, it will not be appropriate to target a pre-crisis level of inflation rate. Additionally, an optimal monetary response to changes in inflation must adopt a cautionary approach if the underlying factors influencing the changes in price are supply or cost shocks.

First Published in Dawn (18th June 2012)

http://dawn.com/2012/06/18/tracking-inflation-for-optimal-monetary-policy/

From Social Chaos to Social Unity: Can Imran Khan be the Glue?

After Sunday's tremendous show, what do u see common between Jinnah and Imran Khan? In short they both lacked in skills required to give a decent public speech. Perhaps a trait which only Bhutto could master in our nation's history. But despite this apparent deficiency, both have been very charismatic in their personalities - a paradox may be! Equally important is the fact that no one put much heed to them during their early phases probably due to their seemingly contradictory and in some sense complex thought process. 

Having not gone to the rally, it will be unwise on my part if I try suggesting how many people might have participated. But the figure could be anywhere between 70,000 and over 100,000, depending on the number of people standing outside the boundary. However, its very difficult to entertain the possibility of above 300,000 like some PTI supporters suggest. Anyways, in my opinion, its no more a matter of number game and PTI has definitely exceeded the maximum expectations of many analysts and crossed the minimum threshold required to set the tone of its political movement. 


One major and the most important factor which has gone unnoticed or may be noticed but unsaid so far has been the participation from not only all income groups (leaving the top and bottom percentile) but also from people loyal to inherently contradictory ideologies. For once, after a long time, men with religious or non religious outlook and women with or without headscarf all appeared in complete harmony with each other while sharing the same platform for a common cause - a cause of better Pakistan. Going back in history and studying few cases in which polarized societies successfully transformed themselves into huge empires, the causality has always run from social unity to economic prosperity and not vice versa. Early Islamic and Mongolian empires, though distinct in themselves, are two interesting and somewhat familiar case studies. 


In today's state of chaos which is only leading to increasing frustration and thus reinforcing the cycle, Imran Khan does appear to present himself as a Glue who may succeed in bridging our increasingly polarized society. With a World Cup victory up his sleeves, he has already risen beyond ethnic identification and has established himself as a Pakistani. Not many Pakistanis will be willing to forego their claim on Khan due to any political affiliations. Furthermore, having done most of his social work in Punjab, with a 'Khan' in his name and focusing all his energies campaigning against the Pakistani version of the 'war on terror' in FATA (can always be debated but not here), it becomes very difficult to pin him down to a certain region. Knowingly or unknowingly, playing national anthem in front of a huge Pakistani flag on 30th's rally organized at Minar-e-Pakistan lent further support to his Pakistani character. Each of these factors might not be very important on its own, but together they do have significant role in shaping public perception. 


It wasn't just the stage which presented an interesting show of symbols but participants themselves also looked more future oriented - another aspect which analysts have missed in pointing out. Yes, much of the crowd was frustrated at the current lot of politicians and were looking for an alternate - as was acknowledged by Imran Khan - but less energies were wasted is hooting 'Go XYZ Go'. Though this was very refreshing, it would have been even better if someone from the crowd might have talked about his/her suggestion on how to get things right? PTI supporters might turn around and say that no such question was asked by the media people or otherwise at least they bothered to leave their comfort zone for a cause unlike many other (including me) who like to be the master of their keyboards. Fair point!


Before concluding, I must say that some analysts have gone slightly overboard when critically analyzing Imran Khan's speech. Despite being all over the place, it did present a significant breakthrough when compared with traditional speeches. PTI Chairman did target political leadership of the country but he did not let it become the focal point. A very different stunt (i call it stunt because of the political risk involved) which he successfully pulled was cursing the audience for their apathy towards the state of affairs in the country. On issues dealing with governance, much of the speech was mundane except few points which need to be highlighted: 


1. Electricity Crisis. This one took be by surprise and unfortunately it went unnoticed as well. It is the first time someone presented the true picture of Pakistan's electricity generation and distribution network and proposed a practical solution in terms of improving the efficiency of the underlying infrastructure (wapda) from the current level of 25% to around 60% rather than just focusing on building new projects. The question 'How?' can never be fully answered but at least someone has got his focus right. 
2. Corruption in the Police Department. The idea of SHO being an elected represented on patterns of USA system is also a very creative one. Its effectiveness in context of Pakistan can always be debated but it is definitely a food for thought.  
3. Foreign Policy. His foreign policy statement was quite similar to that of PML-N - friendship with all. But it definitely is the only right option for this country at this point in time. 


All in all his manifesto may not yet be clear and his team not very apparent, but Imran Khan is emerging as the only leader who could unite the varying factions of our society - an achievement which will set the tone for any future progress.