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Wednesday, 22 May 2013 8:50 pm
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Profit Column
Siamese twins: Economics, politics
Politics is the continuation of economics by other means and vice versa. Economics is the practice of production, distribution, exchange and consumption of the sum total of tangible and intangible assets existing in society. Politics is the art of communication engaged in systematically and purposively to enable the collective social existence of a territorially, and, with the advent of the modern nation-state roughly in the mid-seventeenth century, ideologically delimited community of a people. One needs the other to exist and work. So we can safely assume that society, in a nutshell, functions by means of the inherence of economics as communicative production and politics as productive communication. The Keynesian legacy stands as a telling proof this unity; even the more recent prominence of the Chicago economists represented most powerfully by Milton Friedman, is a proof-in-reverse of the self-same mutual immanence.
The concept and practice of power is born out of the distributive outcomes of the political-economic practice. This practice is both generated and constrained by the existence of uncertainty as a permanent feature of human life, embodied most powerfully by the phenomenon of the market. The theory of probability as a branch of mathematics, with relevance for economic and political behaviours in the form of game theory, tries to make sense of the unmitigated certainty that characterises human practice in the world understood in the broadest terms. The ease with which a coin, which also acts as money, as a medium of exchange, and as an object of commerce, lends itself to act as a figure for uncertainty of human actions in terms of the odds of its being head or tails when tossed alludes to the necessity of the state’s regulation of money supply directed at controlling the uncertainty of market embodied in money.
Just as money in economics functions as the universal equivalent for all commodities, so is the political practice founded on the recognition of the concept of fundamental equality of all human beings. The importance of politically enforced equitable distribution is heightened when we come to think that money which equalises all commodities, when concentrated asymmetrically, can also undermine the political practice of equality in society in the form of asymmetrical concentration of power. This clarifies why the uncertainty of the market, appearing as cycles of booms and busts caused by the disturbance of the relations of equivalence between money and all the other commodities, needs governmental corrective actions to remain beneficial for the continued welfare of society. Similarly the uncertainty of human relations arising out of the innate differences and clashing desires of human beings is modulated by means of the practice of democracy as a consensual enforcement of the political notion of equality. When it does so, the notion of political equality becomes the universal equivalent to regulate the natural diversity of human beings.
We can say that money as the commodity of universal equivalence preserves the diversity of goods by allowing them to be traded for each other. Equality, on other hand, serves not only as the universal political equivalent that maintains the diversity of humanity by allowing everyone an equal chance to participate in the making of a common world of happiness and freedom but also as a lever to prevent money from becoming an obstacle to the construction of this common world. Seen from this perspective, the entire enterprise of politics as democracy exists, among other things, to make sure that the incessant circulation of commodities does not result in the creation of a world where the concentration of assets has become a barrier to the practice of equality across the whole social spectrum of human existence.
It follows therefore that the nature of economics practiced in a society holds valuable clues for knowing the nature of politics of that society. Inequitable economics cannot co-exist with democratic politics and an equalitarian politics cannot exist in the same social space with economics of inequity. All political and economic creeds that say they these two can live together on an absolutely equal footing are philosophical nonsense passing as serious theory. However, there are transitional moments or periods in the life of society when it so appears that political equality can in fact co-exist with economic asymmetry. The fact of the matter is that such moments tend to be those when either politics as equality or economic of the concentration of wealth has become victorious and is about to completely overpower the other and the one is about to put the other in relations of subordination. So next time we need to see how people are faring politically in any society we should quietly go through the national household survey of that society with a quick analysis of the income differentials amongst the five quintiles and from there proceed to the study of the inverse relationship between democracy and uneven distribution of assets. This, I am sure, would do more good than going through a dozen books of theory proclaiming the separation of powers and freedom of market as undeniably objectively existing facts.
The writer is a Senior Policy Analyst working for the OIC’s Standing Committee on Scientific and Technological Cooperation
The employment element
Employment generation is the biggest challenge facing the economic managers of the country and will have to form the backbone of the growth strategy if the current stagflationary and poverty cycle is to be overcome. A good 60 per cent of the 180 odd million population is below 25-years of age, giving Pakistan one of the youngest potential workforces in the world. This demography translates into roughly three million new entrants in the job market every year. However, the current low growth and resulting stagnation has compromised absorption of this workforce, increasing poverty and retarding the output and production cycle. Improving employment is not only necessary from an economic and financial perspective, but also has a direct bearing on the country’s social and security situation. The present wave of terrorism owes in no small part to disgruntled youth unable to afford basic subsistence. Creating jobs, therefore, will have a direct impact in the war against terrorism.
The young population base has to be converted from a demographic bomb into a demographic dividend that Pakistan needs to capitalise on. Our working-age population distribution is much younger than regional contemporaries like India and China. The segment above 60 years of age is only five per cent, compared to more than 20 per cent in Japan. Our youngsters will retire many years after their Indian and Chinese contemporaries retire from the workforce. Thus, they will fuel growth in our economy for the next 50 years. Incorporating this youth potential in the productive process through effective job creation will be a virtuous cycle that will reduce poverty on the one hand and a be an engine of growth for the overall economy on the other hand, by increasing demand for goods and services as these new workers earn and consume.
Our medium to long term growth strategy should aim at making Pakistan the workshop of the world. But the exercise will require careful planning and coordination. We are confronted with two major trends of globalisation and urbanisation that can be harnessed by us to give our economy a big boost forward. We can build a large and growing human resource base capable of exploiting the fruits of urbanisation and the globalisation process. The first step should be directing the excess working youth from agriculture towards manufacturing and services based in new urban areas. This would need that in addition to our traditional comparative advantage in agriculture and textiles, we need to diversify our production capability in sectors like engineering, chemicals, oil and gas, biotechnology, construction, retail and wholesale commerce and IT.
Employment generation should focus on sectors where targeted investment can bring economic as well as political windfalls. The oil and gas cluster, for example, was tapped to be established as a vast processing zone between Karachi and Gwadar. At the mouth of the Gulf, Gwadar will not only receive shiploads of oil tankers from the Arabian Peninsula but pipelines from Iran and Central Asia will also culminate there, making it a big transshipment hub. Pipelines to china and logistics chain northward into Central Asia will generate immense wealth for Baluchistan and jobs throughout Pakistan. It will be the centre of regional trade and shipping activity. Our signing in 2007 of a joint venture $5 billion oil refinery with UAE at Khalifa Point in Baluchistan was the first step in this direction.
This is all the more important considering the regional race to establish oil and gas hubs. The new Port of Salalah in Oman will route oil and gas from Arabian sources to the Indian Ocean from where it would be shipped globally by bypassing the Straits of Hormuz. India is establishing a similar port in Gujrat which will be India’s answer to Gawader and its hub for oil and gas processing and reshipment. No doubt it would prefer that it becomes more reliable than Gawader. This sector undoubtedly represents huge potential, power and wealth for the nation.
We must also consolidate our resources and natural endowment to provide jobs in sectors that stand to bring most benefits. The engineering sector is one such sector. There is enormous potential for example, in the shipbuilding industry. Pakistan can fill a growing void between Korean and European shipbuilders, boosting production and exports. Two sites at port Qasim and Gawader had been selected by our government for shipyard establishment that could manufacture and repair super tankers. The industry is labor intensive and ideally suited for our coastal areas. Similar inroads need to be made in automobiles, electronics and especially the high-tech industry. The engineering industry spawns a huge vendor industry comprising the SME;s that create enormous employment opportunities. We simply cannot continue to rely on our traditional export mix to snap out of low growth and high unemployment. There must be a coordinated effort in which the government demolishes the hurdles in the way of industrialisation by deregulating the economy and initiating long-term infrastructure projects that open job opportunities and eventually materialise the second round multipliers.
To confront this tricky issue, though, prime focus must be placed on the country’s investment climate. A simple three-step program can enable considerable investment in viable areas. Firstly, the interest rate regime needs revisiting. Our monetary authorities must bring the rate down to single-digits, more in line with regional partners like India and China. Secondly, the government needs to provide fool-proof security to special investment zones so issues of terrorism can no longer keep needed funds away. Thirdly, and perhaps most importantly, the government must immediately launch projects to enhance and improve infrastructural requirements, especially with regard to energy and logistics.
Large public works programs like large dams and logistics through public private partnerships are perhaps the best policy to counter economic downturns, especially when high interest rates compromise private sector industrial investment. These programs not only erect productive social overhead capital, but also provide immediate employment relief, with the obvious uptick in consumption.
To develop our competitive edge, the issue of dams needs to be taken up urgently. The government must muster the political will to start work on the Kalabagh project. If it is initiated now, it will be completed by 2016, immediately reducing energy prices to about 10 percent of current cost and providing a big push to industrial competitiveness. Moreover, the additional water reservoir will bring a revolution in value added agriculture particularly in Sindh province. The past record shows that biggest beneficiaries of dam water are new rural farm and non farm workers even more that land owners. Financing such high return projects is not an issue as demonstrated by the financing of the Neelum Jhelum power project.
A direct attack on unemployment can be made by supporting 99 per cent of Pakistan’s industry establishment that comprises small and medium enterprises, a sector in continued and almost criminal neglect. In Pakistan we spend about one cent per capita on SMEDA whereas Brazil, a country as big as Pakistan spends seven dollars per capita on its SME agency. The neglect is obvious. To make a start we must spread the SMEDA network to every district in Pakistan, providing help in terms of ideas, consultancy, technology, finance and marketing to small entrepreneurs. This promises better results than some projects recently initiated. One yellow cab, for example, benefits one person at the cost of Rs500,000. In the SME sector, Rs100,000 investment stands to benefit approximately 10 people. Complementing skill development workshops should concentrate on short programs aimed at vocational training, so most of the youth population can become part of the productive process.
Pakistan’s problem is more of vision and policy than resources and constraints. By undertaking an orderly and targeted focus on employment generation, we have the potential to unlock growth enough to snap out of the lingering downturn.
The writer is a former finance manager
Do not sell what you don’t have
A friend recently asked me if he could buy a piece of land in the new Phase VIII of Defence Housing Authority (DHA) Lahore from someone who had won one-kanal of land in a draw. The current owner paid four installments of the price that was due, in quarterly payments over a period of five years. I asked for more information before giving my opinion in light of shari'a. The following information was provided.
1. The current owner had an allotment letter stating that DHA Lahore had allotted a specific one-kanal piece of land to him, which was shown on a future map of the Phase VIII of DHA Lahore. On actual visit to the site, it was found that Phase VIII had yet to be developed and there was no demarcation of plots.
2. The owner's file also had a copy of the list of the other winners of the draw that was conducted by DHA to pick up buyers of different sizes of the plots.
3. He also had a payment schedule for the price, which showed payment dates over a period of five years (2010-2015). 4. The possession of the piece of land was going to be affected after all the remaining scheduled payments were made. The current owner was asking the same price as he had already paid in the four quarterly installments because he wanted to exit from the transaction. The question that arises is whether it is permissible in shari'a for so-called owners to sell pieces of land before taking possession.
This case may provide an example of the prophetic prohibition of selling something that someone doesn't possess or own. Shari'a does not allow anyone to sell something that they do not own, or rightfully possess by way of agency. Thus, it is not permissible for a son to sell his father's house without the father’s explicit permission and/or instructions.
In the present case, the prospective seller legally owns the plot of land and the development plan clearly shows the distribution of land into small plots of which one is clearly marked as owned by him. The actual possession is subject to the owner paying all what is due in terms of the price and the development charges.
The Shari'a maxim of "Do not sell what you do not have/own" seems relevant to the current problem. The seller, however, clearly demonstrates that a plot of land has been allotted to him for which he is required to pay quarterly for a period of five years. Apparently, the prospective seller is in the process of buying a specific piece of land. What is the shari'a view on such a spatial sale and purchase of land?
A valid sale contract in shari'a requires:
1. Two willing transacting parties (buyer and seller)
2. Existence of object of sale and agreement
on delivery
3. Agreement on price and payment schedule
4. Offer from seller and acceptance from buyer
(or vice versa)
In the current case, the price is being paid over time and the delivery takes place at the end of the payment schedule. In other words, both the price and delivery are not on spot. This type of arrangement is not recognised as a valid sale in shari'a. At best, it could be considered as an "agreement to buy and sell subject to the agreed payment schedule." If during the "agreement period" the land remains in the possession of the seller (in this case DHA), the sale remains incomplete and both the parties have a right to walk away, subject to the return of the price to the buyer.
Therefore, it seems as if the prospective seller is trying to sell a piece of land that he does not fully own as yet. From a shari'a viewpoint, onward sale of land that has been allocated to someone who has yet to pay the full price to take its possession is not a valid sale.
There is a need to look into the sale and purchase of land and property through housing societies and schemes to determine if such sales are valid. Shari'a rules are comprehensive enough to safeguard the interests of transacting parties, especially buyers. In the absence of shari'a scrutiny, a housing scheme scandal is imminent, which will be yet another blow to the already fragile economy of Pakistan.
The writer is a Shari'a advisor to a number of banks and financial institutions and can be contacted at [email protected]
The cheapest call in the world
One fine morning I opened my eyes and looked around. To my surprise there were now five GSM Operators offering Telecom services in Pakistan. The monopoly had broken and the war had begun. It’s hard to say who delivered the first blow but every few days, each operator came out with a new package trying to outdo its competition. Supported by an aggressive media campaign of mudslinging and direct attacks on each other; the war raged on. All we saw were billboards from different companies claiming the same thing: “The cheapest call in the world”. There was one major difference between a conventional war and this guerilla type urban warfare, which was that the casualties were non-civilian. The consumer remained unscathed and turned out to be the eventual winner of this scenario. In an attempt to increase the subscriber base, the operators fought furiously with each other and the eventual victor turned out to be the end user. As shocking as it may seem, you, me , we were the ultimate winners of this war and the operators became mere casualties of this conflict. Let me explain this phenomenon in a little more detail. By reducing their call rates, the operators wanted to gain more market share. ‘Cheapest call in the world’ was the tagline that each operator wanted to make its own. At the turn of the century, both incoming calls and outgoing calls were charged at Rs10 by the only GSM service provider in Pakistan. Now, incoming is free and most operators offer outgoing call tariffs as low as Rs1/min. One could argue about the greatness of this but there is a catch. Just like any other business, the mobile operators are here to make money. By waging this price war, they shot each other along with themselves in the foot. With such low call rates, the Average Revenue Per User (ARPU) fell from $9 per month in 2003 to around $3 per month in 2007, and it is forecast that there will be no increase in this for the next five years. This reduction in ARPU is a direct result of this price war. Pakistan is one of the only markets in the world where the traffic of the telecom networks is increasing but the revenue generated is decreasing. This great achievement can be owed to slogans such as ‘Duniya kee sab sey sasti call’, Rs70 per day and unlimited calls, etc. This low ARPU market is a resultant of the hyperactivity of the telecom operator’s price war and the lack of activity and governance by PTA . This brings us to our current scenario. Operators have already spent an arm and a leg in obtaining the GSM license; then spent a fortune in infrastructure cost and operational expenditure. After serving seven years in the telecom industry, I can humbly say that our operators are already bleeding financially and it may not make business sense to invest in 3G license and network modernisation. If the investment in this high potential industry is not made, we will surely not be able to experiment with other technologies which are sweeping the telecommunication arena globally. 3G and LTE will remain words that we will keep hearing about but never get to experience. Video calling and high speed internet on the phone will remain science fiction for us. But one thing we can be proud of is the fact that we can melodiously sing the song “The cheapest call in the world”. In a country where the literacy rate is optimistically reported at 50 per cent, teledensity is 66 per cent, cellular traffic increases daily but revenue does not. It’s like living in the Bermuda triangle of the Telecommunication World. The writer is a telecom industry executive
Buying spree around payout time
The last week of June is on us, and with a significant number of companies (of course, going by the size of our market), about to declare dividend, some dishing out bonus shares too, the activity at the bourses was bound to be relatively hectic. No wonder, other than the occasional correction that inflicted the odd dip now and then, the market has mostly been buoyant – quick to recover from overnight losses.
There is a very good reason for this. This being close to the payout time, most investors big or small, including the institutional fund managers with pockets deep and wide, would naturally want to hang on to their holdings and actually buy more – licking their lips, waiting for the announcements to come.
Since in this seller’s market, there are fewer sellers than buyers, the prices of most companies with a decent record maintain an upswing.
According to the bylaws of Security and Exchange Commission of Pakistan – SECP its acronym, all companies quoted on the bourses have to call in a board meeting within 40 days of the close of the fiscal and announce financial results for the preceding year.
Since a very sizable number of companies (all, except the large taxpayers – such as companies in insurance, banking, fertilisers sectors and Lever Brothers, etc, as for them the closing date is December 31) are June-closing, including the leaders oil and gas, the market is generally upbeat around this time.
Another reason why the upward movement on the graph is maintained is because the companies that have pledged their shares as collateral with the banks too wouldn’t desire a fall in their prices. So, keeping them on a high, even if artificially, is of serious import to them, for if they fall to below the agreed collateral, the banks concerned are likely to come calling on June 30, asking for enhancing the collateral to cover the gap.
All this combines to keep the price closer to the upper range in this period, till the announcements start coming thick and fast, most of them in August.
That is why it is slightly late for the Average Joe to get into the swing, as prices of most good scrips have already inched upward in the last 12 weeks or so. For the uninitiated, around the first or second week of March is the ideal time to get stuck into the June-closing shares.
For example, the two top companies on the basis of their last year’s record, Millat Tractors Limited (dividend an exceptional 650 per cent, meaning Rs65 per share, and bonus at 25 per cent of one’s holdings) and Attock Petroleum (dividend 300 per cent, meaning Rs30 per share, and bonus at 20 per cent of one’s holdings) were priced at Rs515 and 354 respectively on March 3 last.
The two had by Wednesday (yesterday) moved up to 570 and 382 apiece.
That means that in less than three months the capital gain on these two is already substantial, though still lower than their 2010 high of 585 and 401, respectively. Since the earning-per-share (EPS) of both these companies (worked out on the basis of their nine-monthly reports) is better in 2010-11 by an identical six rupees apiece, the payout this time round could be higher. And this is bound to reflect in their floor price, which means that by the time the announcement is around, the high rate of 2010 would have been well surpassed.
So as I mentioned while it may not be the ideal time to make the most hay, but there still are pretty decent opportunities to make your money work for you and book profit – around 20 to 30 per cent is not bad by any means. And remember since you would be investing late, the tie-down factor of your investment, and the exposure too, would be for a far short period – around six to eight weeks.
I do not want to make it sound dense, but the likely measure of profits in the range of 20 to 30 per cent can be worked out by sitting down with a good broker, who should be able to tell you as close to as possible how much of an income an investment of say Rs100,000 would bring.
Well, this is how it works. On March 3, Rs100,000 on the aforementioned price would have bought 194 MTL shares. If the company didn’t pay any more than what it paid out last year (though there is a possibility that it may, for its reported EPS for nine months is higher by Rs6), these would (194 shares by Rs65 dividend come to Rs 12610, the yield from bonus at 25 per cent another Rs24,977) make up a total gain of Rs37,587, or a neat 37.5 per cent. That is if you wait till then, and not en-cash and get the capital gain by the time of board meeting.
I could give more examples, but suffice it to say that finding some 10 to 20 potential entities to invest in safely even at this date should not be too difficult. But please do remember the fundamentals that were mentioned in the first two pieces.
In my previous offering, I had mentioned sharing the tinkering that I have done with my small portfolio. But having overshot the word count, that will have to wait.
The writer is Sports and Magazines Editor, Pakistan Today
It’s the economy, stupid
As we grapple with load shedding, intermittent bomb blasts and public spankings of our national self-esteem in the global arena, let us not forget the silver lining: the sweltering heat means that we should be expecting an exceptionally sweet crop of mangos this year.
Unfortunately, we may not be able to afford them. A recent survey jointly conducted by rozee.pk and YouGov revealed that one quarter of our professional workforce did not receive any increase in salary over the past year. The remaining three quarters that were fortunate enough to get salary bumps, reported an average increase of 12 per cent.
However, their cost of living increased by more than 30 per cent according to the majority of survey respondents. This means that our workforce saw a net decline in purchasing power this year. The survey revealed that food and petrol costs by far dominated the increase in living expenses.
I’m sure most of us are not surprised by the finding that inflation has outpaced wage increases. Data from the State Bank of Pakistan suggests that food prices, which dominate the inflationary bellwether Consumer Price Index, increased by almost 90 per cent over the last three years. In 2007, the price of a 10kg bag of wheat was Rs120 -- today it has more than doubled to over Rs260. Similarly, fuel costs which tend of drive prices of almost everything else saw a steep rise. In 2007, a liter of diesel could be had for just Rs38, again more than doubling.
High inflation is not necessarily a bad thing, especially when coupled with a growing economy. But sadly, our well-below-target 2010 GDP figure of 1.2 per cent indicates that the economy is struggling. Businesses are suffering from an increase in operational costs and in many cases, unavailability of essential resources such as natural gas. They simply cannot afford to give salary increases to their workers. The situation is not sustainable.
It is times like these that we look towards the enlightened hand of government. Straddled by huge cash deficits and shaky relations with our foreign sugar-daddies, the government’s seemingly insatiable appetite for borrowing has starved the private sector of working capital – our banks are busy making easy money by lending almost exclusively to the government. The stock of outstanding borrowings of the government from the State Bank is in excess of Rs1.5 trillion today compared to Rs53 billion in 2007. Unavailability of private sector credit has a huge impact on the future productive capacity of the economy. To make matters worse, the government is determined to increase taxes on the current tax base instead of focusing on widening the net. Yes, that should do it.
All hope is not lost for our mango farmers and their juicy harvest. Pakistani diplomats, understanding the need of the hour, have been working feverishly in Washington. In a major diplomatic and trade victory, this will be the first season of Pakistani mangos in the US. It is expected that over 500,000 metric tonnes of mangos from Pakistan will be consumed this year in the United States, shattering perceptions that the land of the pure only exports terrorism.
The writer runs rozee.pk, the leading online job portal connecting five million professionals with employment opportunities across 40,000 businesses. He can be reached at [email protected]
Profit Column
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