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Monday, 20 May 2013 9:58 am
High 14 oC - Low 7 oC
Profit Column
Rewriting economic theory
Travelling up on the small mountain train to take a good view of Hong Kong from the Victoria Park is indeed a very thrilling experience. Milton Friedman aptly remarked that if you wanted to observe capitalism at work then go to Hong Kong. There were no restrictions of the financial flows in or out of the territory. The international financial centers were abuzz with calls for exploring the Eastern markets. The nineties were good times when the experts around the world would give advice to the Wall Street and other international investors to head for the Asian markets. But in the ensuing years the entire gains made through decades of international negotiations would start crumbling and begin a vicious circle of turmoil in the international economy.
The market principle of business flowing to better lucrative environment is a time tested rudiment of economic realities. The thriving market economies of the region are a testament to that truth. But then the economic tumult of recent years in the world ought not to have happened. The economic theory has always managed to catch up with the shifts in archetypical models in the known history of the economic eras during different times. It is indeed surprising that suddenly all the answers that should be coming from the quarters engaged in the process are somewhat quieter or not forthcoming with an eagerness that should be a part of the exercise.
An entrepreneur would take his savings to a bank to raise a loan and then launch his business venture. It is after this initial preparation involving some significant steps of putting to make use of your business acumen that the final approach to raise further finances in the securities markets was made. Somewhere along the line the whole process got convoluted in a way that its essentials were lost to the urgency to not only shorten the distance from the first to the second but eliminate totally the formal distance that was always maintained between the two very important steps. It was when the investment function of the financial market got amalgamated with the side of the financial market that had traditionally been involved in taking care of the deposits by the customers the economic realities of the market economy began to slip through the fingers.
Development of the economic theory between the two sides of the Atlantic did take care of going along the economic problems or issues that arose from time to time. At the time of the oil crisis of the seventies many significant developments had taken place in the international economy. The gold standards had been earlier given up by the international community and the economic activity at the western side of the Pacific Rim had begun to send ripples in to the world markets. This was when the specific economic realities of the Asian markets should have been taken on board to revise and rewrite economic theory.
There has been a misjudgment about the specific nature of make-up of varied markets in the Asian region. The recent experience in the eurozone has amply exemplified the fact that all indigenous markets function and act in their own specific environments. Any attempt to push them under one umbrella or label is likely to hinder a better understanding of individual economies. Gathering a few general statistics about an economy does not give out a complete picture of its performance. When the world economy was divided into two broad regions of economic systems through the major part of the last century the economic thinking around the world continued to hover to find better solutions to the economic woes. The events of the last two decades have narrowed down the space that is required for the interplay of a vast number of variables that are important to be taken seriously. The economies in the Asian region are taking a dimension where their influence on the international economy would continue to grow in the days to come. They need to be watched closely at the macro and micro level of performance.
The writer has served as a consultant to the United Nations and other developing economies on the issues of trade and development and can be reached at amjadriazzz.com
Questioning the delusion of prior knowledge
Can the present generation avert an economic armageddon by questioning the economic paradigms they were taught?
Economic policy making has failed us. The global economic recession is a glaring example of the failure of economic fundamentals that were once deemed infallible. We were told that the systems formed marked the end of a new era where a recession like the great depression of the 1930s would be a thing of the past. It was therefore ironic when the markets collapsed in 2008 and the debt bubble formed through imprudent policy making finally burst. The people wanted answers. They stood divided. Uneasy, guilty tortured, holding on to what they were taught when they went to schools, and what they saw, which defied everything that they were taught. They stood divided, trying to reason but their delusion of pre-knowledge hindered them. They started anew, and decided this was unacceptable.
Only last month students at one of the most prestigious university, Harvard, staged a walk out of their economics course. Their reason for the protest was simple. They said that their course on economics propagated a conservative mindset in the guise of what was said to be economic science. The theory, they argued, was consistently perpetuating social injustice and breeding socio-economic disparities.
This marked merely a beginning of a string of protests against modern economics as it is being taught in some of the leading institutions of the world. The global economic crisis has reinforced the mistrust of people in theoretical economics. And they have a point. Economic paradigms are formed with the knowledge of the known and not the unknown. It is common knowledge that the real market revolves around a string of intangible factors that are not taken into account. Let’s take for instance the example of the black market economy, let’s talk about legalised versions of corruption, let’s talk about financial embezzlement, and let’s talk about vested interests. A simplification of economic policies without in effect suggesting policy decisions that eliminate these intangibles from functioning is fallacious to say the least. It is a façade, one that is bound to crumble.
Capitalism is a tale of individuals seeking self interest. Why then are we taught in our economic classrooms that the free market will effectively eliminate public goods that will be underprovided due to the lack of self interest and profit maximization? There is the problem of free riders. But what is to determine who should deserve a particular commodity, while others will be excluded. Our text books tell us that the government will have to provide these facilities for the common man. Have they done so? That is highly questionable given the extent of protests that have been witnessed in more than 900 cities. The fact that people in developed nations have been forced out on the streets, points to the growing divide in socio-economic disparities. Why have policy makers insisted upon a free market mechanism in the presence of knowledge that without government intervention such a system is bound to fail.
The fact that those people responsible for the global economic crisis went to some of the leading institutions of the world, points towards the blatant failure of these institutions. The students have realised this and a movement has begun where the clamour for a just human centric economic system has gained currency. Can the present generation avert an economic armageddon by questioning the economic paradigms they were taught, remains to be the million dollar question.
The writer is Chief Manager SME bank, and a leading banker with over 30 years of experience
All Day iDream About Capindalism
Hello my friend, capitalism, we meet again and this time, luring ADIDAS to India
Seems like now Adidas has a lot more in store to dream about other than sports, ever since it tasted the fruit of bringing capitalism to developing countries, like India. Many believe that just because the capitalist world is losing money on the other side of the world, it is diverting its focus towards rapidly developing countries. Through an insightful observation, it has also been deemed that whenever multinational companies go out of the way to accommodate their customers or cut down their costs to lower the price of their goods; there is always a catch. Surprisingly, Adidas recently launched trainers for only $1 in India, and to my surprise, they looked good and expensive.
For any envious layman – envious because getting a pair of Adidas trainers for just $1 is not even funny for it tinkles one’s buying taste buds – the purpose of coming up with such a scrumptious deal would seem like an act of social work. But the actual reason for the wise move, as also highlighted by the country head of Adidas, is to capitalise on the country’s soaring population (rightly put as Corporate Social Responsibility). The country head also added that, “Adidas can sell its trainers for $1 and can still make money”. Now, let’s unravel this mystery of possibility. Even if Indian labour’s basic pay is $1 per day, based on piece rate system, then also the company is not making ‘any money’ at all. There is no doubt that per unit cost to the company of producing these trainers must be low, depending upon the sourcing; the product must also be of low quality or the efficiency of the production unit must be giving a great benefit of economies of scale. Well, whatever the case, money making is only achievable if the company sells high volumes of these trainers because then only can it cover the costs and make profit.
The above mentioned analysis is just one side of the picture. The import taxes are so low and foreign investments policies in India are so welcoming that multinational brands are genuinely attracted towards the country. India is totally tuned into the incentives, rewards and profit motives of capitalism that it now accounts for at least four-quarters of India’s GDP.
The thought that India is expected to surpass China in the next few years might sound wishful to many of us, but this is what India is actually heading towards. India's economy emerged from the global recession in better shape than China's, despite its slightly lower growth rate. And, no matter what anyone says or believes, capitalism does provide answers to restore economic balance, if used in a right and constructive manner.
Today, interestingly, India is inventing its own form of capitalism, where the major dominance is of family owned businesses like Tata, Birla, Reliance, etc. Earlier, Tata had also launched the world’s cheapest car for $1200 in India. Similarly, Reliance also sold low-price cell phones to street hawkers and rickshaw pullers. I would reckon Indian capitalism as ‘Capindalism’, which is more of capitalism with Indian characteristics; in which profits are controlled not by institutional shareholders, but mainly by the state, or by entrepreneurs and their descendants. But that doesn’t imply that the MNCs are forbidden fruits; they still continue to enjoy their tasteful experience of bringing home, capitalism, just because Indian government is now focusing on cutting down on the ownership of the traditional family-run businesses that have taken over most of the market share for more than a decade now. So, hello my friend, capitalism, we meet again and this time, in our neighbourhood.
The writer is Sub-Editor, Profit. She can be reached at [email protected]
Unequal development and negative affirmation
I invite the good readers to think quickly about the wonderful city of Lahore
The fact is well-known that capital accumulation gives rise to unequal development. Unequal development is a condition in which certain regions, given specific natural, economic, social, cultural and technological endowments, on one hand, and political utilisation of these endowments on the other, tend to become more developed and powerful than the others. A classic case is the division of the world between more developed parts and less developed ones appearing geo-politically as sovereign nation-states which attempt to maximise their power and influence against each other. But the ambit of this law is not limited to inter-state relations alone. Several layers of this phenomenon can be identified such as: continental unequal development, between continents; regional unequal development, between various regions in a national economy; local unequal development, between neighbourhoods; and household-based unequal development. Since this structural asymmetry functions at so many levels, it comes to be accepted as the natural state of affairs, as how things have always been since time immemorial.
This eternalisation of a specific historical outcome, and its factitious maintenance in the form of the contemporary free market-based international order, tends to elude the critical cognitive grasp of most people. Negation by affirmation, defined in my last article for these pages as a pre-emptive strategy to manage dissent, neutralising resistance, and containing social change, plays a special role in promoting the misrepresentation of reality that sustains the law of unequal development. This is how they work together:
Objectively, unequal development assumes the form of a peculiar historical Darwinism and is represented as a case of neutral historical evolution favouring those who adapt well to epochal transformations by means of efficient resource allocation. This historical Darwinism has the effect of flattening all historical diversity on the plane of the theory of the survival of the fittest and blocks from vision the historical manufacturing of the fittest.
Inter-subjectively, the fact of unequal development lurks behind and is reinforced by the formal declaration of the fundamental equality of human beings and the constitutional enshrinement of universal human rights meant to show that this formal principle also exists substantively. Once this formal principle comes to be seen as the basis of human civilisation, unequal development is redeemed through a disingenuous emphasis on the natural difference of ability and talent amongst human beings. In other words, the idea of equality props up the brute fact of inequality. This means a constant struggle goes on between entities populating the various levels of unequal development. This struggle gives birth to networks of domination and collaboration across and within these levels but not without ideological disguise.
Whole cities are planned on the basis of the multiple circuits of capital which, through the division of labour, are inscribed in our bodies and psyches. To bring home this flow of capital through our lives, I invite the good readers to think quickly about the wonderful city of Lahore. A marvel of the beautiful blend of the traditional and the modern, it is also a place criss-crossed with myriad practices of inequality and domination. Urban capital accumulation in the city works by creating differential zones of capital concentration. These zones are articulated through discrete channels of capital circulation. The sites of the creation of capital are spatially distanced from the foci of consumption. These zones of capital concentration are legitimised through urban planning policies and manifested in the practices of urban housing.
As one goes from the north to the south of the city, there is a marked spatial shift from the older less privileged spaces like Shahdara, Sant Nagar, Sanda etc., to relatively new affluent neighbourhoods like Gulberg, DHA, Bahria Town etc. Middle to lower-middle class colonies like Samanabad, Iqbal Town, Gulshan-e-Ravi reflect their desperate desire for social climbing in their mock-palatial residential facades. Progressive colonisation of the semi-rural belt surrounding the city continues apace. The stark difference between the triad of consumption like the Liberty Market, Main Market, and Mini Market-cum- M. M. Alam Road, and those like Ichhra and scores of makeshift Sunday bazaars scattered across the metropolis, is a direct outcome of a sharp income apartheid enabled by the so-called natural phenomenon of the varying purchasing powers of different urban social groups inhabiting the city. The access to public utilities and civic institutions follows the same social lines of force as do the differential circulation of capital in the city. However, the remarkable fact is that we live with this quotidian creation and consolidation of inequality, exploitation, marginalisation, and exclusion in our midst mollycoddled by a sincere belief that all human beings are fundamentally equal and that there is no difference between the rich and the poor except that ordained by nature or the prudent utilisation of something called the freedom of opportunity.
The writer is a professor of economics at LUMS
Islamic banking windows
For Pakistan, it is recommended that no new conventional banks be allowed to start their Islamic operations through an Islamic Window model
An Islamic window is a separate department within a conventional bank, which operates under strict guidance by an independent Shari’a Advisory Board to develop and offer Islamic financial products to the clients that demand such products. An Islamic Window may offer its products and services through conventional branches or dedicated Islamic branches of the conventional bank. There are three notable examples of countries where banking regulators do not allow setting up Islamic Windows.
Malaysia is perhaps the best example, though the prohibition is limited to the offering of Islamic retail banking services through Islamic Windows. Conventional investment banks, however, are allowed to offer Islamic investment banking services in the country. Consequently, major conventional banks have now set up fully-fledged Islamic banks to tap the Islamic retail banking market. The likes of CIMB, RHB, Hong Leong, Maybank have set up separately licensed Islamic banks. Similarly, Lebanon does not allow conventional banks to offer Islamic financial services. Qatar has also introduced a ban on conventional banks to set up Islamic Windows. Ethiopia, on the other hand, provides an interesting example of a country that allows Islamic banking only in the form of Islamic Windows. In other words, the existing legislation in the country does not allow the setting up of dedicated Islamic banks.
In Pakistan, there are five full-fledged Islamic banks, and another 12 conventional banks offering Islamic banking services using an Islamic Window model. The total number of Islamic branches owned by conventional banks is 268, which is more than half of the number of branches of Islamic banks in the country (524). This shows that Islamic Windows are significant in terms of their market share of Islamic banking in Pakistan. While the role that conventional banks are playing in Islamic banking in Pakistan is laudable, it must be emphasised that conventional banks take Islamic banking as a purely business proposition.
The following are some of the major concerns that people have with Islamic Windows:
1. Islamic windows are seen to have in general contributed to the development of what is known as Shari’a-light products,
2. Shari’a governance regimes in conventional banks tend to be weak. While the likes of Dubai Islamic Bank, Abu Dhabi Islamic Bank, Kuwait Finance House and Al Rajhi Bank have very strong Shari’a compliance departments, conventional banks with Islamic Windows tend to be light in terms of Shari’a governance.
3. As mentioned above, conventional banks lack real commitment to the development of Islamic banking. The managers of Islamic Windows always face a daunting challenge, as the main management tends to fear cannibalisation of their conventional business.
4. Many conservative Muslims believe that segregation of Islamic funds within conventional business is merely an accounting trick. A simple requirement for segregation of Islamic funds within conventional banks is that at any point the value of Islamic liabilities of the bank should be equal to its Islamic assets.
Given this, it is important for banking and financial regulators in the OIC countries to discourage Islamic windows. For Pakistan, it is recommended that no new conventional banks be allowed to start their Islamic operations through an Islamic Window model. This kind of protectionist approach to Islamic banking will allow the existing Islamic banks to expand their businesses. On the back of their growth, the incumbent Islamic banks must be asked to increase their capital base, which in many cases will be possible only through attracting more capital from the Gulf countries. In this way, Islamic banking can be used to attract more investment into the banking sector in Pakistan, which is indeed a very lucrative business.
The writer is a Shari’a advisor to a number of banks and financial institutions and can be contacted at [email protected]
The 1 per cent
The main reason behind the current Occupy Wall St. protests and others like it is the idea that societies have become far too unequal. Whilst inequalities between countries may be falling-thanks largely to the rising average incomes of the two most populous countries, China and India, over the last decade-it remains true that people are more concerned about inequalities in their own countries and communities.
Recent evidence by economist Nancy Birdsall suggests that income inequalities between households and regions have, for a large number of countries, actually been increasing. For example, in the U.S. the top 1 per cent now own 40 per cent of the nation’s wealth and their incomes have increased by nearly 20 per cent over the last decade whilst that of other groups has stagnated. A similar story holds for U.K. and Japanese salaries and for many other countries across the world as well. In Britain, for example, the average pay of the CEO in a top 100 company is nearly eighty times that of the average salary of a full-time employee.
Of course, it may be that inequality per se isn’t what we’re interested in. After all, if everyone has enough to lead a decent life then inequality isn’t a very forceful concept of justice. The problem is that everyone doesn’t have enough and one reason why they don’t is because the 1 per cent have been exploiting the system for themselves.
If we look in our own context we see the same type of pervasive inequalities that are found in many developing countries. Fairly large income inequalities (though not as skewed as those in some Latin American countries), hold across households, regions, city and village, and within households themselves. To give one stark example of the levels of inequality: in comparison with countries of a similar per capita income Pakistan has 20 per cent fewer children in elementary school (the figure rises to 40 per cent if we just look at girls). What that suggests is that in more developed countries there is less inequality between those who get an education and those who don’t, and there’s less gender inequality in education attainment levels as well. Some of these patterns are shared by countries in Latin America and East Asia, where by the age of 24, children from the richest 20 per cent of households have at least six more years of formal schooling than the poorest 20 per cent.
Of course, inequalities in income are just one of the many types of inequality we should be concerned about. Inequalities in happiness, well-being, and opportunities give us an idea of how well a society is doing, whether it is ‘flourishing’ or not. And unequal distributions of land, assets, educational attainment levels, and nutritional status mean there’s less chances of a society flourishing. But why is that so?
One of the most important things to think about is how inequalities reinforce one another, so that disadvantages in one area (lack of education, say) can sustain or reinforce disadvantages in another: wages, or health status. But inequalities in different areas can interact in other ways. Some of the most relevant for Pakistan are the ways in which inequality is related to market and government failures.
In societies where markets are not working very well it is possible that even those people with some innate skills and assets don’t get the opportunity to invest and they, therefore, remain poor. This could happen for the simple fact that because of poor information (market failure) these people, relative to others, don’t get loans.
But even if markets did work better, even if the poor could invest, inequalities might still be a problem. One feature of poor, unequal societies is that public investment in the social sector is weak. And here we come to a crucially important feature of unequal societies, namely: inequalities in income can be related to inequalities in power. An unequal distribution of income might mean that the elites (the 1 per cent), the rich and powerful, subvert the political, regulatory, and legal institutions for their own benefit. This might be inefficient and lower overall income growth, but since they’re concerned about their relative position in society that’s not a problem.
It is no surprise, then, that the elites should not care about subsidising and improving the public sector, or have any notion of ‘the common good’, since they are only concerned about their own private gains. But if history has taught us anything it is that such extreme inequalities end up destroying the fabric of social life and the possibility of democratic politics. At the very least, the elites should realise that in a time of revolution the 99 per cent comprises an awful lot of people.
The writer is a professor of economics at LUMS
Carpe diem – Sieze the day
The last few weeks were more of a seesaw at the bourses – a little surge here and there, followed by a small dip or a serious plunge and vice versa again, with bears dominating overall. Between profit-taking and panic-selling, the recovery, whenever it came, barring an odd occasion, was quite feeble – such as on Wednesday by 23 points to make the KSE-100 index stand at 11,300.
This is quite steep, but this shrinkage is understandable. The abrasive political climate and the relations with the US on a brink were enough to cause their own tremours. In the thick of it, as is the wont in these winter months, the load-shedding of gas has brought its own havoc by choking two critical industries – fertiliser and textile.
Deprived of gas for four days in these peak production weeks when winter and spring inventories in the west have to be catered to, the textile barons are up in arms at turning off the gas tap for four straight days and threatening street protests. And since gas is one of the ingredients in fertiliser production itself, and not merely an energy resource, scrips in this otherwise highly profitable sector too have taken a pasting of sorts.
The confidence of the foreign investors was not that high in the first place, reflecting in the net inflows being far less in size and volume than the outflows – which have been quite abrupt on occasions, creating their own seismic waves. The geo-political situation, more precisely the latest standoff with the US, is also not making them go bullish on our markets.
For the Average Joe Investor this is a period of some anxiety, for witnessing erosion in the value of ones holdings does cause pain. He must be asking, how long will this situation prevail? The depression that a depressed market causes among its patrons is nothing new. What needs to be kept in view is that the situation is not nearly as bad as it was during the meltdown that commenced in the later part of 2008, causing it to lose more than two thirds in value to hit rock bottom at 4,600 points by January 2009.
And unless something dramatic, something really adverse, happens, there is not much cause to worry or panic. Keeping a close watch though is a must.
Mian Nusrat-ud-Din, who by the way handles my insignificant portfolio, is a canny, vigilant and scrupulous operator. The first two attributes, and a few others, you’d find in many in the markets all over the world, the last in a select few. He is also an irrepressible optimist. With the KSE-100 index having lost 700 points in 10 trading sessions, which translates into value diminishing by a whopping three per cent, there is still a hint of gleam in his eyes. For the Average Joe, he sniffs an opportunity here.
“The market is at a low. There are options out there for the taking. These would not be there in a month’s time. This is the time to go for it, if you have cash to spare”, says MND. But as is his wont, he wouldn’t make a statement without a rider. “I always say that those who have done their buying right, checking out on all the fundamentals, wouldn’t remain in the doldrums for long even if they hit them occasionally.
“What I see is good dividends and capital gain in the fertiliser, oil and the banking sectors. Some companies have been exceptionally good. Look at Fauji Fertiliser, it is right now paying out 50 per cent interim dividend from its third quarter earnings alone. What more do you expect? After its board meeting somewhere in February 2012, more moolah is likely to be there”, says MND.
He sounds right. In recent weeks, the FFC has lost around Rs30 in value, but it is going to make that up in the weeks to come when the year-end, new-year buyers get engaged as they do around this time. Another way to look at it is that the FFC had gained around Rs80 in value this year. So even after the recent downturn, it is still Rs50 up. Not a bad bargain for an investment of Rs100 apiece! The point here is, buy the right ones, and the odd cloud aside, one would mostly be a winner.
The writer is Sports and Magazine Editor, Pakistan Today
Criminalisation of aviation disasters
Who is to blame for aviation disasters in Pakistan and does justice survive behind walls of silence?
Aviation history of Pakistan is replete with the worst air tragedies. Investigation reports of aircraft accidents have long been shrouded in mystery. Inconvenient truth is obfuscated by deep-rooted corruption. Perhaps covering up is a smaller lie for the well-intentioned conduct of the Civil Aviation Authority (CAA). Who is to blame for aviation disasters in Pakistan and does justice survive behind walls of silence?
Following an aircraft accident two parallel investigations are conducted, one is technical and the other is a judicial investigation. According to ICAO’s Manual of Aircraft Accident and Incident Investigation the primary object of the technical investigation is to establish the facts related to an aircraft accident by making use of the specialised knowledge and practical experience of the participating individuals with respect to construction and operation of the aircraft involved in the accident and to examine the facilities and services that were provided to aircraft prior to the accident.
In addition, Standard 3.1 of ICAO Annex 13 (Aircraft Accident and Incident Investigation) stipulates that the sole objective of technical investigation of aircraft accident or incident is to prevent accidents form reoccurrence and not to apportion blame or liability.
On the other hand, judicial investigation is conducted by the courts of law. It goes several steps beyond the technical investigation and utilizes other tests to evaluate the results of the investigative process. Basic object of judicial investigation is to apportion blame for criminal and civil liability on the concerned parties that have been at fault.
Based on the findings of judicial investigation pilots, air traffic controllers, aircraft maintenance engineers and other aviation professionals have been criminally prosecuted throughout the world with multiple charges of breach of duty, criminal negligence and involuntarily manslaughter. From 1956 to 2010 in over 60 cases only officials of the aviation authorities and management of airlines were criminally investigated due to breach of contract on part of their employees and agents. In some cases, aircraft manufacturers were also held responsible for aviation products liability for manufacturing and design defects.
In December, 2010 the French Court ruled that Continental Airlines and one of its mechanics were guilty of involuntary homicide for their role in the crash of an Air France Concorde Flight 4590 outside Paris on July 25, 2000 in which all 109 people on board were killed.
Globally, aircraft accidents are investigated by independent bodies without interference of aviation authorities and airlines. In Pakistan the Safety Investigation Board of Civil Aviation Authority (CAA) is responsible to investigate all civil aircraft accidents and incidents. It is indeed unfortunate that 185 people lost their lives in the event of three fatal aircraft accidents of Airblue Flight ED 202, JS and Sun Way in 2010. Now it has been over one and half year since the air mishaps but the victims’ families are still waiting for the findings of investigation report. Pakistan is party to the Chicago Convention, 1944. Of the 190 ICAO Contracting States, why are investigation reports of aircraft accidents only secret in Pakistan? Probably one of the major reasons is that the investigation reports of aircraft accidents serve legal basis for criminal action against aviation professionals.
It is incumbent on every ICAO Contracting State in which an aircraft accident occurs to institute an inquiry into the circumstances of the accident in conformity with Article 26 of the Chicago Convention, 1944. This obligation can only be met when appropriate legislation on aircraft accident investigation is in place. Such legislation must establish an independent statutory accident investigation authority for the investigation of aircraft accidents. Similarly, Standard 5.4 of ICAO Annex 13 also requires that the accident investigation authority should have independence in the conduct of the investigation and have unrestricted authority over its conduct, consistent with the provisions of this Annex. Further, Standard 2.1.2 of the ICAO Manual of Aircraft Accident and Incident Investigation Part I (Organization and Planning) First Edition— 2000 also requires that the accident investigation authority must be strictly objective and totally impartial and must also be perceived to be so. Many States have achieved this objective by setting up their accident investigation authority as an independent statutory body.
Effective and transparent investigation makes a positive contribution to sustainable air transportation services. Investigation reports of aircraft accidents should be made public in order to serve one of the fundamental purposes for the administration of justice. Secondly, there is also a need for the establishment of an independent statutory authority in Pakistan for the investigation of aircraft accidents and incidents.
The writer is an Aviation Lawyer. He can be reached at [email protected]
The power of social media
With 2.2 million internet users in Pakistan, is social media transforming the fundamental tenets of marketing?
They say ‘customer is the king’ and yet the amount of work and effort that the online audience of news sites does is quite like a kings minion. In this time of information overload, the job of sifting through news and reports to get the required data is a herculean job reserved only for this royalty. Smartly cashing in on the opportunity, all online news agencies offered the facility of conveniently checking boxes for one’s area of interest and all news related to your desired subject will be delivered in in your inboxes, a facility greatly appreciated by those who want to avoid news clutter. The demand of those who want hard and fast facts for news rather than opinions also divert their interests online where it’s easier to find information in a much more orderly fashion which is efficiently updated.
The debate of influence of social media in Pakistan is being established by the 22 million internet users within the country. The magnitude of that population can be estimated by the fact that the total population of Singapore is 4.5 million and the facebook population of Pakistan is 5.7 million. Online business networking is also on the rise, as is shown by 0.08 million people connected through Linked In. This reflects the increase in digital immigrants from 1 per cent to 3 per cent in the last decade. For a layman, digital immigrants are those that worked well even before the internet revolution and the digital natives are those that had email addresses before they left the hospital nursery. The power of digital natives is constantly redefining the potency and potential of social media within Pakistan. Cloud computing, if not so reliable for official date storage due to power crisis, is definitely catching speed for telecom users. ‘Syncing’ contacts and other directories are options available to even those that seldom use the internet.
All this technology in the reach of every other individual greatly enhances the wildfire effect of news reporting. The culprit for the Halal/Haram controversy for Lays chips in Pakistan was found to be a single text message and a blog post. Similarly Indian bloggers clarifying Ajmal Shehzads non-relation with ISI was also the result of a Pakistani satirical article going viral online. These new and nippy methods of news reporting also call for an inbuilt check and balance system. When a recent Indian newspaper published photos of Pakistan’s fighter jets parked on their Naval ships, ‘celebrating Indian Navy day’ took an almost comical u-turn. Where foreign news agencies put great stock in individual journalism, Pakistani agencies still lack in timely news deliverance. Bbcnews.com still credits guppu.com for the live reporting on the attack on the Sri Lankan cricket team in Lahore. Immediately following the unfortunate Airblue crash tragedy in July 2010, where Pakistani news channels were still repeating the idea of five survivors, international channels picked up tweets and live updates from volunteers on the crash site who started sending pictures and feeds establishing the magnitude of the catastrophe and no chance of survival, news that in the end turned out to be facts based on evidence. It should come as no surprise that the man who live tweeted Osama bin Laden’s death is now the most popular Pakistani on twitter with over 90,000 fans. This on ground reporting is a powerful tool for establishing credibility for any news agency. What it requires is for anybody to be in the right place at the right time reporting the right content.
Encouraging street and photo journalism is a cost efficient option for news channels. It allows for not only non reliance on news agencies but also aims to rectify many news glitches that the audience catches time and again. Utilising the power of social media for on the dot news reporting or advertising/marketing is a resource that if harnessed can greatly contribute to build credibility for the channels. It is a tool that an uneducated ‘Asif Hussain Shah’ successfully exploited to attract customer to his Taxi service, its infiltration in the Pakistani market cannot be underestimated.
The writer is a freelance journalist and a business student at NBS
Banking on the bigger bully
Being a vulnerable little kid, wedged in the intricacies of school life, is no mean task. From the pocket money mugs to the lunchbox grabbers, there is a wide array of bullies that you encounter on a daily basis. You want to stand up against the unwarranted status quo, but your bony excuse for an anatomy doesn’t allow your innermost desires to materialise. So, during every recess you dutifully acquiesce to the demands of that fat final year bully who weighs quadruple as much as you do and towers twice as high. Even though it’s none of his business, but once you’re told that he doesn’t like you taking gym lessons from that bloke from the west, that’s the curtain call on your nascent friendship. And of course your knees begin to tremble whenever he articulates ‘that’ rhetoric, “You’re either with me or against me” – that’s when you realise that it is difficult to stand up against someone against whom you’d need to stand up on a stool just to look directly in the eye. However, there’s a kid in the class next door who has the aforementioned bully in his pocket. He’s a bully in his own right; but his browbeating is not the ‘in your face’ or ‘twisting your arm’ kind – he dragoons with the wherewithal in his wallet not via the fat in his thighs. And now, with you desperate for the gym lessons to improve your physique, hobnobbing with this little tycoon seems the logical thing to do; especially since the fat bully continues to cross all limits in throwing his weight around.
The Iran-Pakistan (IP) pipeline has been under the shroud of US bullying for ages. US has been trying to coerce Pakistan into shelving the project, owing to the scores of problems that it has on the Iranian front. Nevertheless with nearly 5,000 MW of power shortage in Pakistan, an affordable source of natural gas to bolster the power generation is the unmistakable need of the hour. And now with NATO’s airstrikes adding fuel to the fire, the news that the government is likely to appoint a Chinese bank lead consortium as the financial advisor for the $1.2 billion worth Iran-Pakistan gas pipeline means only one thing: we’re banking on the bigger bully. With the Chinese consortium we’d be sure of warding off the unwarranted American pressure that stands between us and the solution to our power predicament. And this isn’t merely a case of hobnobbing with a magnate; a segmented approach towards the project ensures that both the parties – Pakistan and China – are now responsible for the construction, operation and transportation networking of the pipeline in their assigned territories. Hence in this little school life analogy; not only are we asking that affluent kid to join our gym classes and hence keeping the bully threat at bay, he’d also be in charge of ensuring that we put enough muscle weight on by supervising an allocated weight training routine.
Iran-Pakistan pipeline project is touted to bring in 750 mmcfd of gas flow by 2014. With the power shortage being prognosticated to rise up to 11,000 MW in the coming years and the estimated gap between demand and supply forecasted to increase from 1.6 bcfd, as things stand, to over 2.5 bcfd in 2014-15; the IP pipeline is more than a glimmer of hope. Couple the aforementioned daunting numbers with the escalating price of fuel alternatives like furnace oil, LNG and coal, and the gas obtained through the IP pipeline becomes a veritable bargain. All in all, we need a lot of bulking up to do and pounds of muscle to gain before we can even think about standing up to any bullying on our own. The boy from gym has been a nuisance for the fat bully and the little tycoon has been downright intimidating; about time we took a leaf out of their books.
The writer is Sub-Editor, Profit. He can be reached at [email protected]
Capital quantum requirements
Here we go again. In a seemingly arbitrary move, so claimed in the name of promoting capital market development, the regulator has put forward a proposal calling for enhanced Minimum Capital Requirement (MCR) for brokerage houses. From a market participant perspective, this new regime has come at a time where the economic situation is not favorable, capital markets are lacking interest, and several businesses are closing down due. In my mind, the new regime has, instead of helping in improving the situation, has facilitated the fall. Sorry sir, the timing has been severely off on this one.
For those not familiar with this term, Minimum Capital Requirement (MCR) is a regulatory requirement which is required to be held for a certain level of assets. Banks are not unfamiliar with this as regulations in this regard have been in place since 2005. Now it seems that regulators want brokerage firms to get used to the idea as well. Initially proposing Rs400m capital requirement for eligibility of brokerage license, raising it exponentially and suddenly from the current Rs20m, has scared brokers and investors alike. And so it should. The concept paper proposes that a minimum of Rs400m should be kept in paid-up capital at all times for any broker who wishes to indulge in trading and clearing activities. In a time where business is already really hard to come by, this is another burden – and a serious one threatening going concern status – added to an already long list of depressive issues faced by brokers.
There is effectively a one-point rationale for imposing this requirement: to protect brokers’ clients in case the former is declared bankrupt or defaults. The concept behind this is that brokers, like banks having a substantial capital base, would be in a position to absorb losses in case they occur, thus protecting their client/depositor base. However, does this take into account the number of brokers which will be forced into default because of this requirement? Why would management want to over-invest in a business which is already lacking attractiveness when they know a portion of the capital is going to be lying idle given the liquidity crunch in the market? Why is it that a set quantum of capital requirement is found only in Pakistan, where under the Basel II accord, each institution is allowed to set its own capital according to the riskiness of its own assets? This move lacks economic justification, is prone to compliance issues, and is accompanied by a severe case of bad timing.
Basel II mentions Capital Adequacy Ratio (CAR) at 8 per cent of the financial institution’s capital to its risk-weighted assets. It makes sense in so much that it ensures a certain level of shareholder money is always at stake in the business so that the management does not take totally undue risks, at least theoretically. In reality, the global events seen recently may have proved that this is not enough for institutions to make irrational and absurd decisions, but those have been due to a myriad of other reasons beyond the scope of my writing here. There is no mention of minimum amounts of paid-up capital which are a must for a company to operate, like we have in Pakistan. Does it actually help? Learning from banks, almost half of them are in violation of their MCRs. In such times, it has forced them to get sold or merge, thereby increasing concentration in the banking industry. How has less competition in any industry ever been helpful to the consumer? It wouldn’t come as a surprise if the same is observed in brokerages.
The important difference that needs to be made is between Capital Adequacy and Minimum Capital; they are two distinct concepts often confused together. Having a minimum capital requirement does not enhance an institution’s risk absorption capability. This is because that money is not available to absorb losses and only the capital which is above the minimum specified amount can absorb loss. Minimum capital does not take into account the distinct need of individual houses as well as the risks they take which are unique to themselves. Capital adequacy on the other hand tells you if a bank has the specified amount of capital given the risks it has exposure to. Practically, it is only this which can provide confidence to an investor while minimum capital just puts pressure on the viability of business, results in over-capitalisation in some cases, hence is an inefficient regulation.
Ironically, the regulator itself recognizes that MCR does not substitute other means of addressing risk, such as strengthening risk management, applying internal limits, strengthening the level of provisions and reserves, and improving internal controls. Maybe, no definitely, these are the areas where regulation is required.
The writer is a financial analyst
and freelance journalist
State of competition in Pakistan
To meet the challenge of maintaining a buoyant economy and well being of consumers, promotion of the concept of free economy is a must. Domestic markets which form the basis of the economy must be ready to compete at home for integrating effectively in global markets. Ironically, factors limiting competition in domestic markets are growing in size thus the case of effective enforcement of competition laws in this setting becomes more important in Pakistan. Broadly speaking, in the absence of effective competitive environment, Pakistani firms are apparently slow to adjust, yield low levels of productivity, lack energy to innovate and are painfully highly concentrated ones which have led to anti-competitive behaviours on the part of firms.
In the recent past, the Competition Commission of Pakistan (CCP) has conducted a number of investigations into alleged cases of anti-competitive behaviour on the part of firms. These cases mostly belonged to firms operating in sugar, cement, vegetables ghee, poultry, aviation, banking, automobiles and telecom sectors. If Pakistani firms want to be sturdier, they must demonstrate a high level of efficiency, innovate aggressively and improve firm-level productivity. These are all prerequisites to prepare for global competition. Large sized private firms and SMEs represent the seeds for growth for the Pakistan economy and hence should be the centerpiece of every policy framework.
That being said, government’s role becomes even more important if Pakistan wants to compete globally. Policymakers’ primary focus should be on increasing efficiency of factor markets, market governance and infrastructure services. As a consequence, we expect thriving markets which reward innovation and punish inefficient firms engaged in anti-competitive behaviour. To deepen the competition level in Pakistan, active policy formulation and its implementation along with institutional reform is the need of the hour. Government’s role should become limited to facilitating rather than regulating the markets. The robust and modern structure of the CCP in partnership with active and independent judiciary can help ensure protection of competition. The flaws in judicial system should be improved which is a major barrier in punishing the culprits and creasing out market irregularities. The CCP claims to have imposed fines of up to Rs7.3b on various firms for violating anti-competitive laws but they are yet to receive single penny due to flaws in our judicial system. The alleged firms are given stay-orders by courts when they are fined by the CCP; hence around 140 cases are pending in the courts.
The era of heavy protection regime (for example automobile, aviation and textiles sectors), subsidies and tariff concessions has to go if Pakistani businesses want to compete both nationally and internationally. Indeed much has been said and written about giving MFN status to India but I think if Pakistani businesses were efficient, innovative and able to produce at lower costs, then the huge market of 1.2 billion Indian consumers awaits us. To be able to compete in the Indian market, cost of doing business at home has to be lowered in the first instance. A World Bank survey of ‘Ease of Doing Business’ placed Pakistan at the 96th position (out of 183 economies) in 2011 which has now slipped to the 105th rank in 2012. Higher barriers such as dealing with construction permits (104), getting electricity (166), paying taxes (158) and registering property (125) are some kick-starters which need to be improved to enable the entry of new firms easier and markets competitive.
Pakistani businesses can only compete globally if domestic markets encourage competition and innovation; businesses demonstrate high level efficiency and equal opportunities are provided to all the players. The author is an Islamabad based freelance contributor, researcher and a trainer. He can be reached at [email protected]
Of plight and provincial disparity
It seems that the terrorism smog has successfully subdued separatist sentiments. Or maybe the terrorist coterie has provided an umbrella to all those with grievances, with a promise to satiate once the bigger ‘war’ is won. In any case, no one complains about Punjab hegemony these days; like all energies eventually converge into one energy, the enemy now is also a consolidated mass. The ironic bit is that the hate although strongly targeted is towards an intangible, unnamed unknown demigod.
In an effort to deconstruct, re-examine and open all the knots like many martyrs before, the first and the most important woe is the inequity in everyone’s take-home, disposable return. All understand that the provincial brawl is historically centered on the distress pivot of “why am I poor when you are not”? If unofficial numbers are considered good approximations, then Punjab’s share in the country’s GDP stands at about 56-59 per cent, Sindh’s at a little more then 30 per cent, KP generates 10 per cent and Balochistan about 4 per cent for about the last two decades.
If money is the centre of everyone’s problems, then it must be understood that the solution only lies in increasing the supply of money! If the government is to be brought under scrutiny first, then with a tax to GDP ratio of about nine per cent, about six per cent of the GDP, or two-thirds of the government’s revenue amounting to Rs1.2 trillion was budgeted to be shared with the provinces. Of this amount, 48 per cent was deemed to be transferred to Punjab, 27 per cent to Sindh, 16 per cent to KP and 9 per cent to Baluchistan.
The essential problem lies with the fact that public spending in sectors, localities, etc, acts as a catalyst for confidence creation, reduction in uncertainty and hence risk. Low levels of formal financial sector’s penetration in Baluchistan and KP, where infrastructure deficit quite eminently prevails, prove this. According to data by the SBP, out of Rs3 trillion disbursed under credit to the private sector, Rs1.6 trillion and Rs1.4 trillion were bagged by Punjab and Sindh respectively. With the major chunk gone, the non-existent and unheard of private sector in Balochistan and KP were advanced Rs14 billion and Rs49 billion respectively. This is lower than advances to the questionable private sector in Islamabad only which was able to borrow more than Rs240 billion as of Dec-10. The numbers have not changed much since.
Moreover, in terms of public spending, Balochistan is the worst hit, as in real terms, the government has in fact been divesting from the province; the budgeted transfer for FY12 was 11 per cent higher on YoY basis whereas inflation is expected to go up by 12 per cent during the year. And so to say, this is perhaps the most resource rich centre of the country, the epicenter of the next phase of growth in the economy, if there is going to be any. Numbers for federal spending on the remaining provinces show a real increase of 12 per cent for Punjab, nine per cent for KP and only four per cent for Sindh. So one can predict where the next wave of dissent is likely to emerge from given that this trend continues.
Miners and others with some common sense of would prudently understand that to use coal or any other natural resource, one has to extract them first. The common lament of policy makers is that the economy lacks funds to invest in the extraction process. In disbelief, one may exclaim, “Reallly?”, because the last time anybody checked the government has been borrowing more than hundreds of billions rupees every quarter,which is only a ‘portion’ of what the financial system has to offer.
If the most corrupt are the richest in this country, then let’s concede to giving them a large cut. But let’s progress…it’s about surviving this time!
The writer is an economic researcher and freelance financial journalist. She can be reached at [email protected]
Ufone, ‘Teri mehrbani’!
If Ufone were to put up a comedy show and charged a ticket of Rs500, I would definitely have paid more. But If, I were to buy a Ufone sim for more than the actual price, I would probably think twice.
Ufone advertisements have been the talk of the town for more than two years now. Truly, Ufone has set a perfect example of how simple and tasteful humour can catapult an advertisement into the realm of entertainment. Who can forget the popular ‘Teri mehrbani’ advertisement that made headlines and even took over ‘Zubaida Apa’s’ jokes. However, the point to ponder is that even though, we all have a brand recall for Ufone, does that really matter? Has it stimulated the majority of us to change our networks or brand loyalties?
The statistics are indeed startling; with Mobilink still leading the market and Ufone ranked as third among the telecom service providers. When you come to think of it, no connection has a comparative advantage over the other. Trust me, there is no special difference between charging Rs3 per minute or Rs1.5 per 30 seconds. Even if a connection is charging less for a call, it will somehow manage to suck the blood of its customers through the Value Added Services or an asterisk at the top of every call rate, which would require reading glasses to notice.
Are Ufone advertisements merely comic enactments or are they actually increasing the brand’s sales and market share? Ufone advertisements have a lot of viewership without a doubt. They are also one of the very few Pakistani advertisements whose print advert does not need an explanation; just a screenshot of the electronic advertisement actually speaks a thousand words for the print ad. Their popularity is such that everyone has already seen the electronic advertisement for the same ad. In fact, one of the paint companies has also started to follow their lead by stealing Ufone’s main men.
According to results of a recent customers’ perception survey result (September/October 2011) based on the performance of their respective cellular mobile operators by Pakistan Telecom Authority (PTA), Ufone finished in at the last position among its competitors. So yes, we do need ‘quality’ advertisements (like everybody says), but are they actually needed to alter perceptions of the audience?
Likewise, a typical answer to the impact of advertisement on sales is that advertising enables an organisation to enhance sales. Similarly, advertising is used to persuade and drive consumer behaviour with respect to a commercial offering i.e. products, ideas, or services. Advertising is certainly not a social service and I am sure, Ufone did not promise to keep the nation happy by feeding them with an entertainment package every now and then. Therefore, the million dollar question is, are Ufone advertisements really effective? If we take feedback as a measure of the advertisements’ effectiveness, then not only the target audience i.e. youth, but majority of the nation is responding positively towards Ufone advertisements. My grandmother does not remember her date of birth, but she proudly recalls a famous Ufone commercial.
But that is just one side of the story; the measures of advertisements’ effectiveness not only include recall, but also attitude change, and brand choice at the same time. Persuasion is there, but it does not move, affect, or determine a purchasing decision in Ufone’s case. Feedback is also there, but that is in terms of viewers’ demand for more and more advertisements from Ufone.
What we need to know is that humour in advertising does not work alone, because advertising is only a part of the total marketing effort. A product that is poorly positioned or inadequately distributed in comparison to its competitors, may not make it to the top even though, the advertising itself is well-conceived and professionally executed e.g. Mobilink does not spend much on advertisements, but has a large customer base because it reaches out to almost every town of Pakistan.
The writer is Sub-Editor, Profit. She can be reached at [email protected]
The dividend of trust
At the petrol station I’m always asked by someone who works there: “check the meter is at zero.” This is mildly irritating, but of no consequence. But it is interesting that he assumes I wouldn’t trust him to do his job properly. However, if you’re going to get your car repaired, matters become a bit more serious. Unless you know something about cars, you generally have to trust the mechanics are doing a professional job and not trying to cheat you. When you think about it, trust-or the lack of trust-is crucial for all sorts of transactions and interactions between people.
At the most fundamental level, children trust that parents will make decisions that take into consideration their well-being. Couples trust each other and citizens trust that politicians will not embezzle funds or think only in terms of their own interests. When you send your child to school you trust the teachers will be fair, open-minded, and true to the internal norms of their profession. When you go a hospital or a court of law you trust those making choices and decisions on your behalf will do so in the best possible way, and that they’re not motivated by their own selfish interests. Similarly, you trust bankers will invest your money wisely (something we’re not so sure about now, after the financial crisis) and that soldiers will do their job and not be bought off by the highest bidder.
So, we trust lots of people with things that are valuable to us, like our savings, the quality of our healthcare and the education of our children. There’s an implicit vulnerability in doing so and we all know that things can go horribly wrong if we place too much trust in other people when it’s not justified. But there’s no denying that the quality of our social fabric is enhanced by trust, or what economists call ‘social capital’. A smooth-running society needs a certain level of trust amongst its people and in its institutions.
Trust can be an important factor in the working of the economy as well. Think about the petrol station example again. What’s to stop the person fixing the meter for his own benefit? What’s to stop me from driving the car off without paying him? Would a society without trust lead to anarchy? Also, think about a lot of transactions that occur over time, like borrowing and repaying a loan. If you can’t trust someone to pay back the loan you might be less inclined to lend to that person or anyone else, and that might lead to less overall productive investments and lower growth in the economy. Or you might think: why should I pay my taxes if the government cannot be trusted to use the resources wisely? Trust matters to the economy.
At this point you might wonder if we can get along without trust. After all, there are other ways in which societies can ensure exchanges between people take place. If the police and the courts of law are functioning then people who betray the trust put in them can be caught and punished (of course, assuming we can trust those officials to act honestly). Or you might think things like reputation or competition prevent people from cheating since if they go back on their word eventually no-one will trust them and they’ll lose out as people take their ‘business’ elsewhere. Also, if the government provides information and establishes standards of quality then it’s less likely that people will erroneously (blindly) trust someone else.
However, that can never be the whole of the solution to the problem because there are lots of decisions that we make very infrequently and about which we can only have imperfect knowledge: which school to send your child to, which doctor to see, which politician to vote for and so on. Reputation and better information might help, but we’d still end up having to trust strangers. Societies without these good formal institutions and without a developed sense of ‘generalised trust’ either, end up trusting only people they know-which is why personal networks are so important in our country.
In short, it would be too costly for any society to monitor and enforce each and every transaction, or to design complete contracts. Even if it wasn’t that costly, would we want to live in a police state where every action of ours was monitored and could we trust those officials anyway to be good enforcers? Since we can’t do everything ourselves, we have to sometimes take the short-cut and trust people. Societies with high levels of general trust, it turns out, do much better economically and socially than those with low levels.
The writer is a professor of economics at LUMS
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