Thursday, September 25, 2008

Fear and Greed on Wall Street

As the US faces its worst financial crisis since the Great Depression of the 1930s, the American financial and economic leadrship has come under severe criticism by the world. Last week -- even before Wall Street's latest collapse -- 13 former finance ministers met at the University of Virginia campus and called on the Americans to fix their 'broken financial system.' Australia's Peter Costello noted that lately the US has been "exporting instability" in world markets, and Yashwant Sinha, former finance minister of India, concluded, "The time has come. The U.S. should accept some monitoring by the IMF." The Wall Street Journal reports that the turmoil in the U.S. financial sector is rippling through political debates around the world, giving ammunition to foreign officials who question American economic leadership and oppose policies that follow the U.S. model. While the U.S. has been a model for Chinese reforms, now it's clear "the teachers have their own problems," says Song Guoqing, an economist at Peking University's China Center for Economic Research. Former Malaysian prime minister Mahathir Mohamad has criticized the U.S.'s handling of the financial crunch on his Web site. "I remember well how we were told never to bail out failing companies," he wrote in his blog on Sept. 18. "But in the last one year the Fed has bailed out dozens of failing banks, mortgage corporations and other businesses."

Clearly, this crisis has presented a rare opportunity to the critics of the American economic leadership around the world, especially those who have had to listen to lectures from American officials or accept the IMF-prescribed bitter medicines as cure for their economic ills. In spite of the harsh and overt criticism by these ministers and economists, the fact remains that their own nations have been emulating the US financial system and their banks have been full participants in it. What drives the financial markets of the world today are the basic human emotions of fear an greed.

"Greed is good", said Gordon Gekko, a fictional character from the 1987 film "Wall Street". Gekko is based loosely on arbitrageur Ivan Boesky, who gave a speech on greed at the University of California, Berkeley in 1986 and real-life activist investor / corporate raider Carl Icahn. A number of prominent Wall Street figures, including Ivan Boesky, were found guilty of criminal behavior and convicted in the 1980s.

Fear and greed. These are the two main human emotions that primarily drive the world of finance and investing. Sanity prevails when fear and greed are in a state of near equilibrium. Things go badly out of kilter when one of these emotions significantly dominates investors and finance executives behavior. The years of extraordinary greed, unhindered by regulators, produced massive hedge funds, rampant speculation and AAA and AA rated questionable mortgage-backed securities and other new-fangled financial instruments such as CDSs (credit default swaps) with shaky foundations that brought enormous profits to the investment banks on Wall Street. Now, overwhelming fear is driving the big Wall Street firms into bankruptcy and the US economy toward a prolonged and deep recession. The fear is so great that the investors around the world have grown increasingly nervous and stormed into the safest investment around -- short-term Treasury Bills issued by the US government.

The behind-the-scenes nightmare scenario for US economy, painted by Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke, has scared the recalcitrant US Congress into agreeing to a massive $700b bailout of Wall Street. This large sum amounts to $2,333.33 for each American. On Tuesday, in his testimony before the US Congress, Bernanke said "Despite the efforts of the Federal Reserve, the Treasury, and other agencies, global financial markets remain under extraordinary stress". "Action by Congress is urgently required to stabilize the situation and avert what could otherwise be very serious consequences for our financial markets and our economy", he said further. "We must do so in order to avoid a continuing series of financial institution failures and frozen credit markets that threaten the well-being of American families' financial well-being, the viability of businesses both small and large and the very health of our economy," Paulson said.

As the criticism of the bailout plan on the Main Street mounts, the markets around the world are taking huge sigh of relief, confirming the pre-eminent status of the US as the epicenter of the world economy. Meanwhile, there are reports of a compromise deal in US Congress that will dole out $250b immediately, followed by a second tranche of $100b in a few months, after review by Congress. The remaining $350b is not committed but it will be considered in the future, based on the progress made by the US Treasury.

According to media reports, the plan would allow the government to buy bad mortgages and other troubled assets held by the banks and financial institutions at risk. Getting those debts off their books should bolster their balance sheets, making them more inclined to lend and easing one of the biggest choke points in the credit crisis. If the plan works, it should help lift a major weight off the sputtering economy. There reports also indicate that there will be strong Congressional oversight, new regulations, limits on executive compensation and the government will get warrants that can be converted to common stock of the Wall Street firms which accept the government's bailout offer.

As the White House and Congressional leadership try to hammer out a bailout plan, the FBI is reportedly investigating market manipulation charges against a number of leading traders and short sellers. It is alleged that speculators started and spread false rumors about many Wall Street firms to profit from the precipitous decline and collapse of Bear Stearns, Lehman Brothers and other financial institutions.

The last few days have severely tested the abilities of Secretary Paulson and Chairman Bernanke as crisis managers. Both have spent long days and sleepless nights working on their bailout plan and convincing President Bush, congressional leadership, and presidential hopefuls Barack Obama and John McCain to come together in supporting their plan with a great sense of urgency. They seem to be succeeding in spite of the bitterly contested US elections only about 40 days away. The key leaders and presidential candidates have met today at the White House and agreed to expedite the passage of the plan.

There are still many critics and many unanswered questions about the plan. The most common criticism is based on the concern, known as "moral hazard", that the bailout will encourage more reckless behavior by market participants if they do not bear the full consequences of their actions. Some, particularly conservative Republicans, are ideologically opposed to government intervention in capital markets. They consider any government-led bailout as "socialism" or even "communism". Others are proposing some form of government backed insurance plan for the troubled mortgage-backed securities rather than outright purchase by the US Treasury. However, there is broad consensus emerging that the price of inaction would be far greater than the cost of the proposed plan to the American taxpayers. It is clear that decisive action is needed by the US to stabilize the world markets and reduce the chances of a deep, worldwide recession that will likely take its biggest toll on the most vulnerable people around the world. While the deal appears close, it could still fall apart due to political rancor and powerful Republican opposition led by Sen Richard Shelby, the ranking Republican on the Senate Banking Committee.

Wednesday, September 17, 2008

Zardari Offers Pakistani Assets For Sale

Pakistan considers asset sales to bolster economy
By Heather Timmons
Tuesday, September 9, 2008

NEW DELHI: Pakistan plans to sell valuable energy assets, beginning with a major gas field, as it tries to reap billions of dollars from deals with investors in industries like banking and farming.

The move comes as Asif Ali Zardari, the widower of former Prime Minister Benazir Bhutto, is stepping in as president.

Because of a hefty oil bill and a slowing economy, Pakistan is struggling under its biggest budget deficit in a decade, $21 billion; inflation that hit a 30-year high, 24.3 percent, in July; and fast-rising unemployment that is projected to reach 6.6 percent in 2009. Government leaders are eager to raise money, quickly.

"The government is going through all their funding options," a banker advising the Pakistani government said. Financial advisers to the government spoke on the condition of anonymity so as not to alienate their client.

The Qadirpur gas field in Pakistan, a natural gas reserve of 2.9 trillion cubic feet in the Indus River flood plain, may be one of the first big-ticket sales. The field, the second-largest in the country, is valued at about $3 billion.

Bids for the field, about 260 miles northeast of Karachi, may be submitted in the next week or so, bankers say. Likely bidders include foreign companies already involved in Pakistan's energy industry, like Kuwaiti state corporations and OMV, a private Austrian energy company.

"They're testing the market with an auction," said an energy banker who asked to remain anonymous because he was pricing the deal for a client.

The selling of the Qadirpur field could be controversial because it is considered a strategic asset. Pakistan imports more than three-quarters of its petroleum and is struggling to become less dependent on imports. But a person close to the deal said there were no guarantees that the field would be sold. He characterized the bid solicitation as an informal process. He asked not to be named because he was not authorized to speak publicly about the deal.

Some investors are questioning the wisdom of Pakistan's selling valuable assets and are wondering whether sales will be conducted transparently and fairly.

But there is no question that the country needs to raise money, analysts said.

Pakistan's economic situation is "a result of rising commodity and food prices, exacerbated by a lot of pre-election spending by the previous government," said Gareth Price, head of the Asia Program at Chatham House, a research center in London, referring to the general elections held in February.

In an effort to win votes, the previous government, led by Pervez Musharraf, kept subsidies high on food, electricity and oil, helping drive up the budget deficit.

The sale of the Qadirpur field is part of a full-scale review of the biggest energy company in Pakistan, Oil and Gas Development, which owns 75 percent of Qadirpur. The review is being led by Merrill Lynch.

Pakistan's privatization commission said in late August that it also planned to offer stakes in Kot Addu Power on international stock exchanges this year and to privatize Hazara Phosphate Fertilizers. It invited bidders for 51 percent of Jamshoro Power, a long-discussed privatization deal. Salt and coal mines are also scheduled to be privatized.

The list of state assets for sale may not necessarily be followed by deals, analysts warned. "Talk of investing huge sums of money doesn't always materialize, because people are put off by the political machinations" in Pakistan, Price said.

Pakistan's "economic curse" is that the ruling elite — civil servants, politicians and the military — have worked in their own interest, not that of the wider population, limiting how much capital the country can raise, he said.

One possible source of new investment is the Middle East.

"There is a cultural and long-term affinity between the two regions," said Youssef Nasr, the chief executive of HSBC in the Middle East. Saudi Arabia and Abu Dhabi, in particular, have been strong supporters of Pakistan.

Investors from the Middle East have already bought stakes in telecommunications, banking and industrial companies in Pakistan and have been pleased with the results, he said.

One area of cooperation between Pakistan and the Middle East may be agriculture. The arid climate of the Middle East, coupled with rising food prices, has ignited fears about food security. Pakistan, meanwhile, has swaths of arable land that is lying fallow. Government officials on both sides are exploring links that could lead to joint farming ventures, Nasr said.

"It's not going to be a huge industry, by international standards," he predicted, but it could be large enough to make a difference to Pakistan's economy.

The Pakistani government plans to raise money in ways besides asset sales and joint ventures. Pakistan's central bank said on Thursday that it would sell bonds compliant with Islamic law in the domestic market and that the World Bank would "fast track" $1 billion in planned investments in the country.

Attempts to privatize and sell some state-owned assets have proved contentious. The government's plans to sell Pakistan Steel to a group of investors in 2006 were overturned, in part because the agreed-upon price was deemed to be about a third of the $1 billion value. Other sales of equity stakes have gone through with less controversy. In June 2007, United Bank Limited of Pakistan raised $650 million on the London Stock Exchange.

One bright spot for the county's economy has been remittances, or money transferred home by Pakistanis working outside the country, which are on the rise, Price said. The government is lobbying to get more permits for workers to travel to the Gulf, from which most remittances are sent.

Source: International Herald Tribune

Friday, September 12, 2008

Pakistan's Electric Power Crisis Worsens

In June 2007, the power cuts in Pakistan lasted no more than 3 or 4 hours a day. Today, in extremely hot weather, Pakistanis have to endure without electricity for 8 to 10 hours a day. Industrial production is suffering, exports are down, jobs are being lost, and the national economy is in a downward spiral. By all indications, the power crisis in Pakistan is getting worse than ever.

Extended Load-shedding:
Extended electricity load shedding in Karachi's five major industrial estates is causing losses in billions of rupees as the production activity has fallen by about 50 per cent. KESC, Karachi's power supply utility, is dealing with with a shortfall of around 700MW against a total demand of 2200MW. Almost all forms of power generation from fossil fuel-fired thermal to hydroelectric to nuclear are down from a year ago. As a result of the daily rolling blackouts, the economy, major exports and overall employment are also down and the daily wage earners are suffering. The KESC and PEPCO owe more than Rs. 10b to the independent power producers (IPPs) and paying them will help bring them into full operation and ease the crisis at least partially.

Electricity Demand:
As discussed in an earlier post, Pakistan's current installed capacity is around 19,845 MW, of which around 20% is hydroelectric. Much of the rest is thermal, fueled primarily by gas and oil. Pakistan Electric Power Company PEPCO blames independent power producers (IPPs) for the electricity crisis, as they have been able to give PEPCO only 3,800 MW on average out of 5,800 MW of confirmed capacity. Most of the IPPs are running fuel stocks below the required minimum of 21 days. IPPs complain that they are not being paid on time by PEPCO.

Per capita energy consumption of the country is estimated at 14 million Btu, which is about the same as India's but only a fraction of other industrializing economies in the region such as Thailand and Malaysia, according to the US Dept of Energy 2006 report. To put it in perspective, the world average per capita energy use is about 65 million BTUs and the average American consumes 352 million BTUs. With 40% of the Pakistani households that have yet to receive electricity, and only 18% of the households that have access to pipeline gas, the energy sector is expected to play a critical role in economic and social development. With this growth comes higher energy consumption and stronger pressures on the country’s energy resources. At present, natural gas and oil supply the bulk (80 percent) of Pakistan’s energy needs. However, the consumption of those energy sources vastly exceeds the supply. For instance, Pakistan currently produces only 18.3 percent of the oil it consumes, fostering a dependency on expensive, imported oil and that places considerable strain on the country’s financial position, creating growing budget deficits. On the other hand, hydro, coal, wind and solar are perhaps underutilized and underdeveloped today, as Pakistan has ample potential to exploit these resources.

The country's creaky and outdated electricity infrastructure loses over 30 percent of generated power in transit, more than seven times the losses of a well-run system, according to the Asian Development Bank and the World Bank; and a lack of spare high-voltage grid capacity limits the transmission of power from hydroelectric plants in the north to make up for shortfalls in the south.

Gilani Government's Response:
Neelum-Jhelum hydroelectric project, first formally announced by former Minister Omar Ayub on June 10, 2007, is finally starting in earnest under the PPP government of Prime Minister Yousaf Raza Gilani. This hydro project is expected to add 963MW power generating capacity at a cost US $2.2 billion, according to Business Wire. Prior to this project, the new Pakistani Prime Minister signed a deal with a Chinese company, Dong Fong, for setting up 525 MW thermal power plant with an investment of $450 million at Chichoki Mallian (Sheikhupura). Both of these projects are expected help partially close the 3000 MW gap that exists today between supply and demand in Pakistan.

Renewable Energy Opportunities:
In response to the warnings of energy crisis in Pakistan, President Musharraf's government recognized the need and the potential for renewable alternatives and, in 2006, created Alternative Energy Development Board to pursue renewable energy. In particular, AEDB is focusing on wind and solar as viable alternatives. AEDB is facilitating setting up of small renewable energy projects in line with government’s policy of promoting the use of renewable energy in the country’s power generation mix, says the board’s chief executive officer Mr Arif Alauddin. AEDB has recently issued Makwind Power Private Ltd (MPPL) a Letter of Intent for the setting up of 50MW wind farm at Nooriabad in Sindh, as part of its efforts to facilitate 700 MW wind energy by 2010.

According to data published by Miriam Katz of Environmental Peace Review, Pakistan is fortunate to have something many other countries do not, which are high wind speeds near major centers. Near Islamabad, the wind speed is anywhere from 6.2 to 7.4 meters per second (between 13.8 and 16.5 miles per hour). Near Karachi, the range is between 6.2 and 6.9 (between 13.8 and 15.4 miles per hour). Pakistan is also fortunate that in neighboring India, the company Suzlon manufactures wind turbines, thus decreasing transportation costs. Working with Suzlon, Pakistan can begin to build its own wind-turbine industry and create thousands of new jobs while solving its energy problems. Suzlon turbines start to turn at a speed of 3 meters per second. Vestas, which is one of the world's largest wind turbine manufacturers, has wind turbines that start turning at a speed of 4 meters per second. In addition to Karachi and Islamabad, there are other areas in Pakistan that receive a significant amount of wind.

In only the Balochistan and Sindh provinces, sufficient wind exists to power every coastal village in the country. There also exists a corridor between Gharo and Keti Bandar that alone could produce between 40,000 and 50,000 megawatts of electricity, says Ms. Katz who has studied and written about alternative energy potential in South Asia. Given this surplus potential, Pakistan has much to offer Asia with regards to wind energy. In recent years, the government has completed several projects to demonstrate that wind energy is viable in the country. In Mirpur Sakro, 85 micro turbines have been installed to power 356 homes. In Kund Malir, 40 turbines have been installed, which power 111 homes. The Alternative Energy Development Board (AEDB) has also acquired 18,000 acres for the installation of more wind turbines.

In addition to high wind speeds near major centers as well as the Gharo and Keti Bandar corridor, Pakistan is also very fortunate to have many rivers and lakes. Wind turbines that are situated in or near water enjoy an uninterrupted flow of wind, which virtually guarantees that power will be available all the time. Within towns and cities, wind speeds can often change quickly due to the presence of buildings and other structures, which can damage wind turbines. In addition, many people do not wish for turbines to be sited near cities because of noise, though these problems are often exaggerated. Wind turbines make less noise than an office and people comfortably carry on conversations while standing near them.

As is painfully evident in summers, Pakistan is an exceptionally sunny country. If 0.25% of Balochistan was covered with solar panels with an efficiency of 20%, enough electricity would be generated to cover all of Pakistani demand. In all provinces the AEDB has created 100 solar homes in order to exploit solar energy.

Solar energy makes much sense for Pakistan for several reasons: firstly, 70% of the population lives in 50,000 villages that are very far away from the national grid, according to a report by the Solar Energy Research Center (SERC). Connecting these villages to the national grid would be very costly, thus giving each house a solar panel would be cost efficient and would empower people both economically and socially.

Coal Power and Hydroelectricity
In addition to high winds and abundant solar potential, Pakistan has the fifth largest coal deposits in the world. The negative environmental effects of coal burning can be be mitigated by making use of the latest clean coal technologies that limit noxious gas exhaust into the atmosphere.

Pakistan also has some deposits of natural gas in the Potwar Plateau region and near the border between Balochistan and Sindh, but these are likely to disappear within 20 years.

Because of the presence of many rivers and lakes, it makes sense for Pakistan to build dams to support water management and electricity generation projects. However, it must be done with care to avoid damage to the environment or loss of farmland.

Financial and Policy Incentives
Despite the fact that Pakistan is so well endowed with wind and solar potential, only a few projects such as those mentioned above have been completed. One of the reasons why this has occurred is that Pakistan does not have major financial incentives available for those who want to install wind turbines or solar panels. Let us look at the case of India, Pakistan's neighbor. Despite having less potential for wind, India now has the world's fourth largest number of wind turbines installed at 7,093 MW, according to India: Renewable Energy Market report. Ahead of India are Germany at 21,283 MW, Spain at 13,400 MW and the US at 12,934 MW. In Germany, Spain and India, those who install wind turbines and solar panels are guaranteed a certain rate per kilowatt hour. In India, this varies according to the technology and the area. The Ministry of New and Renewable Energy, India reports that in most areas, between 2500 and 4800 rupees are guaranteed for solar panels, and for wind turbines, between 250,000 and 300,000 rupees are awarded.
Because of the above incentives, the cost of wind in India is between 2 and 2.5 cents per kilowatt hour while in Pakistan, the cost is 7 cents. In December 2006, President Musharraf announced a national renewable energy policy. This policy means that small projects do not need approval and that any person can put up their own project. However, there are no financial incentives for doing so. At the moment, all renewable energy equipment has no sales or income tax and is free of custom duty, but these incentives are not enough to stimulate major growth in the renewable energy market where ROIs and other financial ratios have a long gestation or breakeven period. In certain situations, such as the textiles and other Karachi industrial units losing production and export opportunities due to power cuts, it may make sense for the owners to join hands and build power generation capacity they can rely on.

In addition to coal and hydro electricity generation, Miriam Katz argues that it is clear that Pakistan is a suitable country for the installation of wind and solar: due to high winds near cities; the presence of rivers and lakes as well as the availability of wind turbines from nearby India. There are also other reasons for installing renewable energy. It is quite normal for extended power outages to happen on a daily basis in the country, but this cannot continue if the Pakistani economy is to grow. In March 2007, President Musharraf stated that renewable energy should be part of the push to increase energy supplies by 10 to 12 percent every year. The government also set a target of 10 percent of energy to come from renewables by 2015. If the new PPP-led government follows through with aggressive renewable energy push, Pakistan could be an Asian leader in renewable energy given its natural resources of wind and solar as its strategic endowments.

Related Links:

Renewable Energy Businesses in Pakistan

Pakistan Council of Renewable Energy Technology

Renewable Energy for Pakistan

Pakistan Policy on Renewable Technology

Sugarcane Ethanol Project in Pakistan

Community Based Renewable Energy Project in Pakistan

Tuesday, September 9, 2008

Uncle Sam Saves Fannie and Freddie

The US Treasury Secretary Henry Paulson announced the weekend seizure of Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac). While some have criticized the US regulators' handling of the mortgage crisis, there is almost unanimous agreement that the bailout of the two mortgage giants was absolutely necessary to prevent a major, worldwide financial markets collapse. The cost of this bailout to the US taxpayers is estimated to be at least $200b.

Who are Fannie and Freddie? Both are government sponsored enterprises (GSEs) that guarantee or own more than $5 trillion of mortgages, about 50% of all the mortgages in the United States. Both have suffered heavy losses in the ongoing real estate bust in the United States. Both have suffered heavy losses in the ongoing real estate bust in the United States. Home prices have been falling and many homeowners have lost most or all of their equity in their homes. In many cases, the outstanding mortgage balance is greater than the reduced value of the homes. There have been many mortgage defaults and rising number of foreclosures. The major banks and financial institutions in the US and Europe have had to mark down or write off hundreds of billions of dollars worth of the US mortgage-backed securities. What started as a sub-prime crisis of problem loans obtained the less credit-worthy has now spread to the entire market. Even though the interest rates are fairly low, the banks are unwilling to lend even to the individuals and institutions with good credit. Fannie's and Freddie's ability to raise funds in the bond market has been severely impacted because of concerns about their viability. The latest action by US government is to restore confidence in both organizations to help revive the housing market.

But why are they so important to the US and the world economy? To understand the answer, let us look at the role the US government has played in creating a large middle class and a highly productive economy that is still considered the engine of the world economic growth.

During the second world war, the US economy was essentially geared to mass production of military hardware to support the war effort. Consumer economy was starved of the resources and rationing of essential items was widespread. As the war ended and a large number US soldiers (GIs) started to return, the US Congress passed the GI bill which paid for their free education. At the same time, the US government used Federal Housing Administration (FHA) and Fannie Mae to offer home loans on easy terms to help the GIs purchase their first homes and start their families. With the availability of skilled labor and consumer demand from new homeowners, the US industry transformed itself from military production to consumer production to create a consumer boom.

Ever since the 1940s, the US policy makers have considered home ownership a cornerstone of US policy. Not only have the successive US governments supported the funds availability for home loans with the addition of Freddie Mac in 1970, but they have also continued tax deductibility of mortgage interest to promote home ownership. Growth in home ownership has helped Americans build equity, increased their net worth, and stimulated consumer demand to drive economic growth. Housing has become so important to the US economy that the monthly housing data is eagerly awaited by the policy makers, businesses and markets as a leading economic indicator.

In spite the recent mortgage problems and the current housing crisis, the US policy of promoting home ownership has been a great success. Along with the implementation of GI bill and various student loan programs, these policies have significantly expanded the US middle class and the US economy and created tremendous employment opportunities.

The strong US consumption has turned the US economy into the engine of worldwide growth and a major export market for countries in Europe and Asia. The recent explosive growth of emerging economies such as China and the Asian tigers would not have been possible without the insatiable consumer demand in the United States for their products.

Taking a leaf from the US housing policy to stimulate Pakistan's economy, former Prime Minister Shaukat Aziz encouraged borrowing by introducing low-rate mortgages in 2003. This initiative led to a construction boom and expanded housing for the growing middle class in Pakistan, contributing significantly to new jobs creation and rapid GDP growth.

In terms of Bhutto's Pakistan People's Party's promise of roti, kapra aur makan (food, clothing and housing), Fannie and Freddie have been largely responsible for makan (housing) in the richest and most powerful economy of the world that produces more than a quarter of the world's GDP. A genuine emphasis on makan (housing) and education by US policy makers has created lots of jobs and helped produce or buy a lot of roti and kapra (food and clothing) as well as electronics, TV sets, computers, cars, and other consumer goods and services.

Friday, September 5, 2008

Zardari as a Steward of Pakistan's Economy

As Pakistan finds itself in the midst of arguably the worst economic crisis in its sixty one year history, the recent accounts of Mr. Zardari's understanding of the economy and decision-making are not particularly encouraging. It is certainly a huge letdown after Prime Minister Shaukat Aziz, whose expertise on economic matters is well known. Here are the relevant excerpts from a report in the New York Times:

Two recent decisions by Mr. Zardari showed a disregard for Pakistan’s alarming deficits, they (sources) said, speaking anonymously because they did not want to publicly criticize the next president.

In April, Mr. Zardari told Ishaq Dar, the finance minister at the time and a member of Mr. Sharif’s party, which has since broken with Mr. Zardari, that he wanted the price the government paid farmers for wheat to be raised substantially as a way of rewarding an important constituency in Punjab Province, the nation’s most populous, according to two participants in the discussion with Mr. Zardari. The government would then have to heavily subsidize the cost of wheat to the consumer.

When Mr. Dar asked Mr. Zardari how he thought the government would pay for the subsidy, Mr. Zardari replied, “Print the notes,” according to the two participants, a government official and an associate of Mr. Zardari’s. In an effort to solve the impasse over the subsidy, it was suggested that Mr. Zardari form a committee of experts.

“ ‘I am the expert,’ ” Mr. Zardari said, according to his associate.

Farahnaz Ispahani, a spokeswoman for Mr. Zardari’s party, denied the account.

The two officials described another episode in May as the budget was being prepared. Mr. Zardari decided to scrap a proposed capital gains tax after a visit from a group of influential stockbrokers from the Karachi stock exchange, they said. The revenue from the capital gains tax, and from an income tax proposal on the rich, would have paid for an income support program for the poorest Pakistanis, they said. More than half of Pakistanis live on less than $2 a day, according to the World Bank.

In Mr. Zardari’s defense, the finance minister, Naveed Qamar, said that political stability would be restored to Pakistan once Mr. Zardari was president, and that the unsettled economy would benefit from the new political order.

Others were not so sure.

“Zardari will wield unprecedented power for a civilian president,” said Maleeha Lodhi, who was appointed as Pakistan’s ambassador to the United States by Ms. Bhutto and then by Gen. Pervez Musharraf when he was Pakistan’s leader. “But he may lack authority in view of his checkered and controversial past.”

Indeed, Mr. Zardari, who is expected to be chosen in Saturday’s election by the Parliament and four provisional assemblies, is the unintended beneficiary of sweeping powers accumulated by President Musharraf, including the right to dismiss the army chief of staff and dissolve Parliament.

Given Mr. Zardari's past record of economic mismanagement as privatization minister in his wife's cabinet, the hopes in his stewardship of Pakitan's economy have not been great. While some measure of political stability will return to Pakistan with President Zardari in office, these latest disclosures are not going to help restore consumer, business and investor confidence in Pakistan, an essential requirement for its economy to start growing again.

Thursday, September 4, 2008

World Economy Worst in Sixty Years

In a candid interview in late August with Guardian Weekend magazine, British Finance Minister Alistair Darling warns that the economic times faced by Britain and the rest of the world "are arguably the worst they've been in 60 years". To deepen the sense of gloom, he adds: "And I think it's going to be more profound and long-lasting than people thought."

While Mr. Darling's candor is rare for such a senior government official, what he revealed are off-the-record feelings shared by many top economic officials around the world. The dramatic impact of a severe, worldwide credit crunch, and sharp rise in the price of basic commodities, including food and fuel, are taking an unprecedented toll on the world economy. Economic growth has either stopped or slowed to a crawl, major stock markets have crashed, unemployment is on the rise, and the increasing world hunger and poverty are threatening global security and stability.

South Asia's economy is no exception. Economic growth and stock markets are down and unemployment and inflation are up. In Pakistan, the KSE-100 has lost 34.6% of its value this year, as investor confidence has been been hurt by political uncertainty and a long list of economic troubles, including skyrocketing inflation, disappearing foreign exchange reserves, declining rupee and a soaring deficit. Putting it in perspective, India's Sensex is down 48%, Shanghai has lost 44 percent, Russia is down 25 percent, and Brazil, 36 percent.

Since the takeover by the PPP-PML(N) coalition, there has been a sharp decline in Pakistan's economy. While Pakistan's GDP is expected to grow at 5% or higher this year, with Pakistan's annual population growth rate of 1.8%, it is important that the GDP growth continue to be at least 1.8% a year just to stay even. Summing up the current economic situation, the Economist magazine in its June 12 issue says as follows:" (The current) macroeconomic disarray will be familiar to the coalition government led by the Pakistan People's Party of Asif Zardari, and to Nawaz Sharif, whose party provides it “outside support”. Before Mr Sharif was ousted in 1999, the two parties had presided over a decade of corruption and mismanagement. But since then, as the IMF remarked in a report in January, there has been a transformation. Pakistan attracted over $5 billion in foreign direct investment in the 2006-07 fiscal year, ten times the figure of 2000-01. The government's debt fell from 68% of GDP in 2003-04 to less than 55% in 2006-07, and its foreign-exchange reserves reached $16.4 billion as recently as in October." Please read "Pakistani Economy Returning to the Bad Old Days".

The rapidly rising unemployment and skyrocketing inflation together have dramatically increased hunger and poverty among the most vulnerable in Pakistan. At 33%, the sum of unemployment rate and inflation, known as the misery index, stands at its highest level in Pakistan's history, and it is likely to increase social strife and hurt the chances of recovery.

While the worldwide economic slowdown and commodity inflation partly account for Pakistan's current economic meltdown, the biggest indigenous problem for Pakistan is the absence of any economic leadership. Pakistan has not even had a full-time finance minister for several months, since PML(N) withdrew from the coalition. With the expected election of Asif Ali Zardari as powerful president, and his hand-picked prime minister already installed, let us hope that the PPP will seriously begin to tackle the challenges of Taliban insurgency, deteriorating economy, and political instability.

Tuesday, September 2, 2008

Google Joins the Battle of the Browsers

"The Web has clearly evolved to where people are running complex applications in the browser," said Google's Sunder Pichai. "It's not just a window where you show a Web page."

Pichai, vice president of Product Management at Google, describes Chrome, Google's newly released Web browser, as a new platform for Web development. As the Web becomes a powerful platform for complex applications development and deployment, the browser wars are becoming more heated. The holy grail for the Web based companies such as Google and Yahoo is to offer Web applications to achieve the look and feel as well as the power and performance of desktop applications. A powerful Web browser will help in this pursuit but it won't be sufficient. Ubiquitous, reliable, high-bandwidth, always-on connectivity will be essential. Significant improvements in mini browser software and reliable, broadband, wireless connectivity will also help spawn a mobile Internet revolution.

Google claims the software is designed to make it faster to browse the Web and easier to run applications without downloading software to a computer. The product will be offered on an open-source basis. It will launch initially for Windows machines in 100 countries including India and Pakistan, with Mac and Linux versions to come. Here's Google's Chrome download link.

Companies such as Google see the control of the browser as the key to controlling development and delivery of a new generation of faster, richer, and more capable, advanced business and consumer applications that will eventually make the desktop operating systems irrelevant. This new effort by Google will be seen as an attempt to go after Microsoft's jugular. At a minimum, this move by Google will spur more innovation in the Web browser technology.

According to media reports, Chrome has been designed with features that resemble a traditional operating system like Microsoft Windows or Linux. One feature, for example, allows users to create desktop buttons that launch their favorite Web applications, like email, in a special window that looks more like the screen of a typical software program, not like a Web page. Chrome's navigation bar—the space where you type in an Internet address—will serve a dual purpose. Users can either enter a URL address into the space or type a search term that will be processed through a search engine. Another feature borrowed from the operating system is a "task manager," a window that keeps track of the performance of each Web application. Chrome, which is open-source, is based on WebKit, open-source software that Apple Inc. used to develop its Safari Web browser.

In terms of Google's efforts to establish its Web services APIs such as Google Maps, the company can now make the execution of its APIs better and faster when used with its web browser, giving an incentive to users to switch. Early reports indicate that Javascript does execute faster in Chrome browser.

According to the Wall Street Journal, Doug Anmuth, an Internet analyst with Lehman Brothers, said while Google's browser carries some cool features such as technology designed to prevent Web pages from stalling or crashing, those alone aren't likely to drive users to change their browsing habits. Internet Explorer has a built-in advantage over Chrome and other competing Web browsers because it's pre-installed on the hard drives of most computers running on Microsoft Windows. Anmuth predicts that Google's brand -- and various revenue-sharing distribution deals of the sort the company has struck for its toolbars -- could help Chrome capture 15% to 20% of the U.S. browser market in two years.

Here's a video from Google about Chrome browser:

Monday, September 1, 2008

Declining Economy Hurts Pakistani Workers

Pakistan has a diverse economy that includes textiles, chemicals, leather products, food processing, financial services, telecommunications, retail, automobile manufacturing, light and heavy armaments, agriculture and other industries. It is the 45th largest economy in the world in terms of official exchange rates ($144b GDP) and 25th largest based on purchasing power parity GDP ($410b PPP). Its service sector accounts for more than half of its GDP.

As the economies in the US and Europe slow down, Pakistan's key exports of textiles and leather products are experiencing a slowdown in growth as well. This is particularly painful at a time when the country's import bill has skyrocketed due to rising oil and food prices. Textile exports in Pakistan grew from 8.92 billion USD in 2004-05 to 10.11 billion USD in 2005-06, reflecting a growth rate of 18%. As against this, in the current year, export growth has been only 5%. For all leather goods excluding footwear growth was 24.05%. Of the total leather sector export target of $1.135 billion, the tanned leather, in particular, achieved excess export by $38 million till April 2008. However, the new target of $1.5b by 2010 is proving to be difficult to achieve. Reliable figures are hard to find but the closure of a large number of textile units due to power cuts during the last three months has led to job losses for more than 15 percent of the textile workforce, according to Karachi's Business Recorder newspaper.

Textile industry represents the biggest exporter and the largest industrial employer in Pakistan. According to most recent figures, textile exports fetched $7.805 billion of total export of $13.476 billion during the first nine-month. The sector lost considerable share in overall export of the country as it dropped to below 58 percent in July-March of current fiscal year, which used to be around 65 percent in the past. The textile exports declined by three percent from the export figures of the corresponding period last year and they missed the target for this period with a huge margin of $979 million or 11 percent.

Leather industry is the second largest exporter. The industry employs about 200,000 people directly, producing fine quality finished leather for export as well as for home consumption, according to Pakistan Tanners Association.

In Asia, Pakistan is the 8th largest exporter of textile products. The contribution of this industry to the total GDP is 8.5%. It provides employment to about 15 million people, 30% of the country work force of about 49 million. However, the proportion of skilled labor involved in textiles is relatively small as compared to that of unskilled labor. Agriculture still the largest single employer with 44% of the country's work force but it only contributes 21% of the GDP.

In addition to continuing political instability and power cuts in Pakistan, the worldwide economic slowdown is causing concerns and hurting the textile and leather industries and employees. According to a report by Gregory Warner for American Public Radio's Marketplace program, the leather industry is not growing like it used to and unemployment and crimes are on the rise.

The Marketplace report talks about the young, mostly Pashtun workers, who come from their villages to seek unskilled, low wage jobs in Karachi and other urban centers in Pakistan. It singles out one young worker, 17-year old Momin from Pakistan's north-west frontier province (NWFP), who makes $68-$88 a month transferring skins from a cart to a conveyor belt in a Korangi tannery in Karachi. When asked if he ever visits his village to see his parents, Momin tells the reporter, "How can I go home? If I have to keep paying somebody? I keep paying what my family owes." On top of that, his father wants him to pay for his Hajj, a journey to Mecca that costs at least $3000.00.

A recent BBC report talked about an unemployed textile worker, Gul Rehan, also from an NWFP village, who says he has never depended on charity to cope with hunger and poverty before. But now he sits in a line outside a restaurant in Karachi, waiting for free food. First, his crop on a little piece of land in NWFP failed, and then the towel factory where he took a job, like most knitwear industries, closed down last year.

According to the BBC report, three times a day, hundreds of men, women and children queue up outside dozens of Karachi hotels for meals which are paid for by philanthropists and charity donors.

The rapidly rising unemployment and skyrocketing inflation together have dramatically increased hunger and poverty among the most vulnerable in Pakistan. At 33%, the sum of unemployment rate and inflation, known as the misery index, stands at its highest level in Pakistan's history, and it is likely to increase social strife and hurt the chances of recovery.

These reports highlight the deteriorating economy in Pakistan and its disproportionate impact on the poor migrant workers. Unless the current leadership finds a way to stabilize the economy, the workers suffering is likely to add to greater political instability in Pakistan.

There are many Pakistanis who argue that we must give democracy half a chance to cope with the challenges even if it means going through a slump in exchange for sustainable power of the people to govern themselves. Unfortunately, people like Gul Rehan and Momin, who can least afford it, end up bearing the brunt of such sacrifices. The "civil society" and the "fearless pro-democracy leaders" usually do not forgo their meals to achieve democracy.

I am all for sacrifice, I just wish that the sacrifice be shared more equitably by all of the people. We should all help however we can through various charitable institutions. But I think the "pro-democracy leaders" such as Aitazaz Ahsan, Nawaz Sharif, Asma Jahangir and others who have contributed to the current economic decline have a special responsibility. They can and should use their celebrity status to raise awareness of the issues of poverty and joblessness. They should help organize efforts to build a safety net for the most vulnerable. This would demonstrate their sincerity of concern for the poor and the disenfranchised.

Here's a video clip about skyrocketing inflation in Pakistan and its impact on the poor: