Tuesday, April 28, 2009

Small Entrepreneurial Sector in Pakistan

A new class of entrepreneurs has emerged in Pakistan during this decade who, in small but significant ways, have challenged the religious orthodoxy. They present a sharp contrast to the rising wave of Islamic radicalism that the U.S. and others view as an existential threat to Pakistan. And with many well-traveled Pakistanis importing ideas from abroad, they are contributing to Pakistan's 21st-century search for itself.

The new entrepreneurial outfits range from fashion apparel and cosmetics to upscale restaurants, personal fitness clubs and places offering men's hair transplants.

The consumer-driven growth started during Musharraf years has fueled the spread of a middle class in Pakistan's biggest cities. For decades after independence in 1947, a handful of extremely wealthy industrial families dominated the economy. In the 1970s, nationalization of important industries gave the government a major economic role. In recent years, a privatization program has sought to shrink the state's hand, while introducing more investment and competition. In an effort to promote small businesses, President Musharraf's government eased credit availability for entrepreneurs in the country.

While most of the entrepreneurs cater to Pakistan's young, urban consumers, there are a few who have found highly unusual niches for export markets. For example, Integrated Dynamics of Karachi designs, builds and exports unmanned aerial vehicles used by the US for border patrol duty on its southern border with Mexico. Recently highlighted by the New York Times, AQTH offers a more shocking example of a small, entrepreneurial Karachi company that caters to the $3 billion a year bondage and fetish industry in the United States and Europe. AQTH's mom-and-pop-style garment business earns more than $1 million a year manufacturing 2,000 fetish and bondage products, including the Mistress Flogger, and exporting them to the United States and Europe.

The company sells its products to online and brick-and-mortar shops, and to individuals via eBay. The company's market research shows that 70 percent of its customers are middle- to upper-class Americans, and a majority of them Democrats. The Netherlands and Germany account for the bulk of their European sales. Company workers who assemble the handmade items — gag balls, lime-green corsets, thonged spanking skirts — have no idea what the items are used for. Even the owners’ wives, and their conservative Muslim mother, have not been informed.

Overall, the entrepreneurial class remains a sliver, just over a million people by some estimates., according to the Wall Street Journal. In addition to small export niches, much of the business is confined to pockets of urban wealth that most Pakistanis won't experience in their lifetimes. And yet, the brief business careers of many entrepreneurs show how rapidly dramatic change can unfold in Pakistan.

Related Links:

Pakistan's Foreign Visitors Pleasantly Surprised

Start-ups Drive a Boom in Pakistan

Pakistan Conducting Research in Antartica

Pakistan's Telecom Boom

ITU Internet Data

NEDUET Progress Report 2008

Pakistani Entrepreneurs in Silicon Valley

Musharraf's Economic Legacy

Should Pakistanis be Proud of Their Country?

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Friday, April 17, 2009

Resurgent India Receives Massive Foreign Aid

In spite of all of the recent news about aid to Pakistan dominating the media, the fact remains that resurgent India has received more foreign aid than any other developing nation since the end of World War II--estimated at almost $100 billion since the beginning of its First Five-Year Plan in 1951. And it continues to receive more foreign aid in spite of impressive economic growth for almost a decade.

India was the fourth largest recipient of aid (ODA) between 1995 to 2008 (US$26.1 billion), according to Global Humanitarian Assistance website.

According to OECD group of the aid donor nations, the words "aid" and "assistance" refer to flows which qualify as Official Development Assistance (ODA) or Official Aid (OA). Such OA or ODA aid includes both grants and soft loans given by OECD nations and multi-lateral institutions like the World Bank, Asian Development Bank, IMF, etc.

Britain will spend over $1.5 billion during the next three years in aid to Shining India, a nuclear-armed power that sent a spacecraft to the moon recently, to lift "hundreds of millions of people" out of poverty, the British secretary of state for international development said last November, according to the Guardian newspaper.

Douglas Alexander, the first cabinet minister to visit India's poorest state Bihar, said that despite "real strides in economic growth" there were still 828 million people living on less than $2 a day in India.

UK's Department of International Development says if the UN's millennium development goals - alleviating extreme poverty, reducing child mortality rates and fighting epidemics such as Aids - are left unmet in India, they will not be met worldwide. Some 43% of children go hungry and a woman dies in childbirth every five minutes.

British Minister Alexander contrasted the rapid growth in China with India's economic success - highlighting government figures that showed the number of poor people had dropped in the one-party communist state by 70% since 1990 but had risen in the world's biggest democracy by 5%.

After the increase of British aid to $500 million (300 million pounds) a year, India will still remain the biggest recipient of Japan's official development assistance (ODA) in the near future. Since Japan's first ODA to India in 1958, the country has received monetary aid worth Rs 89,500 crore (Rs 895 billion) so far, according to Noro Motoyoshi, Japanese consul general in Kolkata. In 2008, Japan's ODA to India was up by more than 18% compared to 2007 at Rs 6916 crore (Rs 69.16 billion).

The World Bank said recently it will lend India $14 billion in soft loans by 2012 to help the country overhaul its creaking infrastructure and increase living standards in its poor states, according to Financial Express.

At the recent G20 meeting, India has asked the World Bank to raise the amount of money India can borrow as soft loans, generally considered aid, from the bank for its infrastructure projects, according to Times of India. At present, India can borrow up to $15.5 billion in soft loans as per the SBL (single borrower limit)in soft loans fixed by the Bank.

The Indian government has estimated it needs $500 billion over the five years to 2012 to upgrade infrastructure such as roads, ports, power and railways.

"Under the strategy, the bank will use lending, dialogue, analytical work, engagement with the private sector, and capacity building to help India achieve its goals," the World Bank said on its website.

The International Bank for Reconstruction and Development would lend $9.6 billion and the International Development Association would make available $4.4 billion of funding, according to India's Financial Express.

Only 30 per cent of India's state highways have two lanes or more, and the majority are in poor condition, the bank said. Electricity generation capacity has grown at less than 5 per cent in the past five years, much slower than overall economic growth of about 8 per cent over the same period.

The funds would also be used to help reduce poverty in seven low-income states; Bihar, Chhatisgarh, Jharkand, Madhya Pradesh, Orissa, Rajasthan and Uttar Pradesh, the World Bank said.

Foreign Aid as Percentage of Indian GDP. Source: World Bank

The biggest direct aid donor countries to India are Japan and UK, as well as multiple international humanitarian aid programs supported through NGOs, in addition to the World Bank, UNICEF, UNESCO, UNDP, WFP, and a whole alphabet soup of organizations active in helping the teeming population of the poor, the illiterates, the hungry and and the destitute in India.

According to Japan's ministry of finance, India has received $33 billion in soft loans and a billion dollars in grants from Japan since 1997. In 2008, Japan gave India $2.5 billion in soft loans, and $5 million in grants. By contrast, Pakistan has received $10 billion in soft loans, and $2.3 billion in grants from Japan since 1999. In 2008, Japan gave Pakistan $500 million in soft loans and $63 million in grants.

India Top Recipient of US Economic Aid Source: Times of India
India, often described as peaceful, stable and prosperous in the Western media, remains home to the largest number of poor and hungry people in the world. About one-third of the world's poor people live in India. More than 450 million Indians exist on less than $1.25 a day, according to the World Bank. It also has a higher proportion of its population living on less than $2 per day than even sub-Saharan Africa. India has about 42% of the population living below the new international poverty line of $1.25 per day. The number of Indian poor also constitute 33% of the global poor, which is pegged at 1.4 billion people, according to a Times of India news report. More than 6 million of those desperately poor Indians live in Mumbai alone, representing about half the residents of the nation's financial capital. They live in super-sized slums and improvised housing juxtaposed with the shining new skyscrapers that symbolize India's resurgence. According to the World Bank and the UN Development Program (UNDP), 22% of Pakistan's population is classified as poor.

There is widespread hunger and malnutrition in all parts of India. India ranks 66th on the 2008 Global Hunger Index of 88 countries while Pakistan is slightly better at 61 and Bangladesh slightly worse at 70.

Indian media's headlines about the newly-minted Indian billionaires need to bring sharper focus on the growing rich-poor gap in India. On its inside pages, The Times of India last year reported Communist Party leader Sitaram Yechury's as saying that "on the one hand, 36 Indian billionaires constituted 25% of India’s GDP while on the other, 70% of Indians had to do with Rs 20 a day". "A farmer commits suicide every 30 minutes. The gap between the two Indias is widening," he said. Over 1500 farmers committed suicide last year in the central state of Chhattisgarh alone.

Among the Asian nations mentioned in an October 2008 UN report, Pakistan is more egalitarian than the India, Bangladesh, China and Indonesia. Based on all the UNDP data, Pakistan does not have the level of hunger and abject poverty observed in India or Bangladesh.

According to the new UN-HABITAT report on the State of the World's Cities 2008/9: Harmonious Cities, China has the highest level of consumption inequality based on Gini Coefficient in the Asia region, higher than Pakistan (0.298), Bangladesh (0.318), India (0.325), and Indonesia (0.343), among others." Gini coefficient is defined as a ratio with values between 0 and 1: A low Gini coefficient indicates more equal income or wealth distribution, while a high Gini coefficient indicates more unequal distribution. 0 corresponds to perfect equality (everyone having exactly the same income) and 1 corresponds to perfect inequality (where one person has all the income, while everyone else has zero income).

Violence is rising in India because of the growing rich-poor gap. Prime Minister Manmohan Singh himself has called the Maoist insurgency emanating from the state of Chhattisgarh the biggest internal security threat to India since independence. The Maoists, however, are confined to rural areas; their bold tactics haven't rattled Indian middle-class confidence in recent years as much as the bomb attacks in major cities have. These attacks are routinely blamed on Muslim militants. How long will Maoists remain confined to the rural areas will depend on the response of the Indian government to the insurgents who exploit huge and growing economic disparities in Indian society.

In 2006 a commission appointed by the government revealed that Muslims in India are worse educated and less likely to find employment than low-caste Hindus. Muslim isolation and despair is compounded by what B. Raman, a hawkish security analyst, was moved after the most recent attacks to describe as the "inherent unfairness of the Indian criminal justice system".

Ironically, there are some parallels here between the violent Maoists movement in India and the Taliban militants in Pakistan, in spite of their diametrically opposed ideologies. Maoists say they are fighting for the rights of neglected tribal people and landless farmers, as are the Taliban in FATA and NWFP. Though their tactics vary, both movements have killed dozens of people, including security personnel, in the last few weeks. Both movements control wide swathes of territory in their respective countries. Both continue to challenge the writ of central or provincial authorities.

I have always been intrigued by Kerala and I wonder if there is a Kerala model that could be replicated in the rest of South Asia. With the exception of Kerala, the situation in India is far worse than the Human Development Index suggests. According to economist Amartya Sen, who won the Nobel Prize for his work on hunger, India has fared worse than any other country in the world at preventing recurring hunger.

In addition to its high literacy rate, Kerala boasts one of India's best healthcare systems, even for those who can't afford to pay user fees and therefore depend on government hospitals. Kerala's infant mortality rate is about 16 deaths per 1,000 births, or half the national average of 32 deaths per 1,000 births.

Freelance journalist Shirin Shirin thinks Kerala's success has something to do with the fact that communists have ruled Kerala for much of the past 50 years. The CPI(M) successfully pushed for three major reforms in the 1960s and 1970s. The first and most important was land reform. While nearly everyone looks on land reform as a huge success in Kerala, the policy was controversial when it was first proposed in 1959. Land reform, after all, is an attack on one of capitalism's founding principles - the right to property. The central government intervened and effectively blocked the implementation of land reform for 10 years. But planners and unions in Kerala understood that building a more egalitarian economy required attacking the old feudal system at its roots, and small farmers weren't going to stand for anything less.

But even Shining Kerala is plagued by hunger and malnourishment, just as the rest of India. The first India State Hunger Index (Ishi) this year found that Madhya Pradesh had the most severe level of hunger in India, comparable to Chad and Ethiopia. Four states — Punjab, Kerala, Haryana and Assam — fell in the 'serious' category. "Affluent" Gujarat, 13th on the Indian list is below Haiti, ranked 69. The authors said India's poor performance was primarily due to its relatively high levels of child malnutrition and under-nourishment resulting from calorie deficient diets.

A recent issue of San Jose Mercury News has a pictorial about grinding poverty in India done by John Boudreau and Dai Sugano. This heartbreaking pictorial illustrates the extent of the problem that India faces, a problem that could potentially be very destabilizing and put the entire society at the risk of widespread chaos and violence.


Related Links:

Aid at a Glance by OECD Nations

Economic Woes? Look to Kerala

Mumbai's Slumdog Millionaire

Poverty Tours in India, Brazil and South Africa

South Asia's War on Hunger Takes Back Seat

Grinding Poverty in Resurgent India

Pakistani Children's Plight

Japans's Aid to India

Poverty in Pakistan

Japan's ODA to Pakistan

OECD's Definition of Aid

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Thursday, April 16, 2009

China's Checkbook Power

As President Obama plans to meet Latin America's leaders this weekend, China has recently negotiated deals to double a development fund in Venezuela to $12 billion, lend Ecuador at least $1 billion to build a hydroelectric plant, provide Argentina with access to more than $10 billion in Chinese currency and lend Brazil’s national oil company $10 billion. The deals largely focus on China locking in natural resources like oil for years to come, according to the New York Times.

As a result of rapidly growing ties and trade, China has already become Latin America's second largest trading partner after the United States.

Beyond locking in the natural resources for its growing industries and developing new export markets, China is also focusing on expanding its own internal consumption of products it produces. Already, China has surpassed the United States as the largest automobile market in the world. In comparison with the rest of the world, the Chinese market for automobiles appears to be relatively robust. Monthly auto sales in China surpassed those in the U.S. for the first time in January, but automakers and industry watchers say the news may tell us more about the troubles in the U.S. than about China's growing car market, says a report published in San Francisco Chronicle.

Data released in February by the China Association of Automobile Manufacturers shows 735,000 new cars were sold in China last month, down 14.4 percent from the record of 860,000 set in January 2008. U.S. sales, meanwhile, fell 37 percent to 656,976 vehicles — a 26-year low. Some analysts believe U.S. sales may fall to about 10 million vehicles this year.

Worrying about the shifting balance of power in Latin America while the US is preoccupied with crises in Afghanistan and the Middle East, David Rothkopf, a former Commerce Department official in the Clinton administration, told the New York Times, “The loans are an example of the checkbook power in the world moving to new places, with the Chinese becoming more active.”

While the Chinese have been actively engaged for years in raising their profile and influence in Asia and Africa, the rising Chinese presence in Latin America seems too close for comfort for the US.

It is estimated that the continuing trade surpluses for years have helped China amass a whopping two trillion US dollars in dollar-denominated assets. Last year alone, China added US$450 billion to its reserves at a rate of over a billion dollars a day. About half of the Chinese US dollar-based assets are in the form of US treasury bonds that fund the ballooning US deficits.

Gao Xiqing, president of the China Investment Corporation, recently told James Fallows of the Atlantic Monthly, "Be nice to the countries that lend you money". Gao was clearly hinting at this new reality of " balance of financial terror" shifting in China's favor.

If history is any guide, the power of the lender over debtor nations is not just theoretical. The key moment when the world leadership passed from Britain to the United States came during the Suez crisis of the 1950s as a result of Britain's large WWII debt owed to the United States. When Britain, France and Israel invaded Egypt to take control of the Suez canal, the US President Eisenhower warned the British that unless they withdrew, he would order the sale of the United States' currency reserves of British Pounds and Sterling Bonds; thereby precipitating a collapse of the British currencies' exchange rate. Eisenhower in fact ordered his Secretary of the Treasury, George M. Humphrey to prepare to sell part of the US Government's Sterling Bond holdings. The British withdrew and ceded the control of the Canal to Egypt.

“This is China playing the long game,” said Gregory Chin, a political scientist at York University in Toronto. “If this ultimately translates into political influence, then that is how the game is played.”

Related Links:

China Sees Opportunities Where Others See Risk

Chinese Do Good and Do Well in Developing World

Can Chimerica Rescue the World Economy?

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Sunday, April 12, 2009

The World According to Google, Hizbullah and Taliban

The three words that stand out in the popular Silicon Valley lexicon are "Risk", "Disrupt" and "Change". Almost all high-tech aficionados love to talk about entrepreneurs taking "risks" to "disrupt" the existing technologies, products, markets and systems to bring about fundamental "change" in how we live, work and play. The search giant Google is often cited as epitomizing risk-taking, disruption and change.

Some serious observers and writers are now taking this discussion a step further into the realm of violent insurgent groups such as the Hezbollah and the Taliban and how they are becoming a powerful disruptive force for geopolitical change.

Author Joshua Cooper Ramo, in his book "Age of Unthinkable" talks about how Hezbollah has become a powerful disruptive force in the Middle East. In a recent commentary, Ramo says, "...in my dealings with Hezbollah over the years as a journalist, I had found myself fascinated by their capacity for innovation, even in the pursuit of shocking ends. Their obsession with finding better ways to fight under the pressure of Israeli attack was astonishing. In 2006, for instance, fewer than 500 Hezbollah fighters had frustrated a 30,000-man Israeli attack."

Talking about Fouad, Hezbollah's Chief Technology Officer, Ramo writes in his book, "Fouad reminded me of friends of mine who had started Internet companies or people I knew managing gigantic hedge funds. This was the generation that had built the Web into something useful and revolutionary, that had assembled huge and unregulatable financial firms churning out billions in profits while creating trillions of dollars of risk. These people see destabilization of the existing order as not only necessary but inevitable. You don’t dare draw an equivalency between the crimes of Hezbollah and the innovations of Google, but you can see in each the workings of a powerful energy. These hot cells of innovation draw the very best minds of a generation: math geniuses to hedge funds, computer savants to tech startups and, well, “Our e-mail is flooded with CVs,” Fouad told me."

Then Ramo wonders out loud if the established order in the US can take on these new insurgents. He says, "When I thought of these rebels I knew in the context of other friends of mine, such as the suits working in the National Security Council or the U.S. Army or Time Warner, I realized that there was no chance those conservative places could compete. They were locked in a vision of the world that was out of date. As a perplexed Alan Greenspan confessed to Congress about his own thinking in 2008: “I have found a flaw. I don’t know how significant or permanent it is. But I have been very distressed by the fact.” The congressman questioning him asked, “In other words, you found that your view of the world, your ideology, was not right. It was not working?” Greenspan replied, “Absolutely. Precisely. You know that’s precisely the reason I was shocked. Because I have been going for 40 years or more with very considerable evidence that it was working exceptionally well.”

Recently, Texas Rep. Pete Sessions encouraged House Republicans to see the Taliban as a model for "how to disrupt and change" the control of Washington by the entrenched Democrats in both the executive and legislative branches of the US government. Here's how he is quoted by Los Angeles Times:

Insurgency we understand perhaps a little bit more because of the Taliban. And that is that they went about systematically understanding how to disrupt and change a person's entire processes. And these Taliban -- I'm not trying to say the Republican Party is the Taliban -- no, that's not what we're saying. I'm saying an example of how you go about is to change a person from their messaging to their operations to their front line message. And we need to understand that insurgency may be required when the other side, the House leadership, does not follow the same commands, which we entered the game with.

I think insurgency is a mindset and an attitude that we're going to have to search for and find ways to get our message out and to be prepared to see things for what they are, rather than trying to do something about them, I think what's happened is that the line was drawn in the sand.... We either work together, or we're going to find a way to get our message out.

It is becoming increasingly obvious that the world is witnessing the start of a dramatic change in the international order. As Ramo puts it:

What we face isn’t one single shift like the end of World War II or a financial crisis, so much as an avalanche of change. We are entering, in short, a revolutionary age. On the one hand, this revolution is creating unprecedented disruption. But it is also creating new fortunes, new power and fresh hope. Revolutions, after all, don’t produce only losers. They also produce a new cast of historical champions. If we are living in the Age of the Unthinkable now — when surprise and unimagined danger confronts us on many fronts — we are not living in the age of the unexplainable.

To master this new world, it is important for us to learn from the revolutionaries. Whether we see them as the good guys or the bad guys, they do understand the new laws of power in this new world.

Related Links:

Congressman Pete Sessions on Emulating Taliban

Learning how to navigate 'Age of Unthinkable'

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Thursday, April 9, 2009

America's Defense Budget Focus on Counterinsurgency

The $663 billion US defense budget for 2010 announced by Defense Secretary Robert Gates emphasizes higher spending on counterinsurgency weapon systems, and cuts back on expensive conventional weapon systems. For example, there is a huge increase in the budget for predator class armed drones, helicopter gunships, surveillance, cyber warfare and special (commando) operations. At the same time, it envisions deep cuts in spending on the expensive F22 Raptor stealth fighter, large navy ships and anti-missile defense shield.

Here is a quick summary of winners and losers in the 2010 defense budget:

Key Winners:

1. Intelligence, surveillance, reconnaissance (ISR): budget to be increased by 2 billion dollars.

2. Predator unmanned aerial vehicles (UAV): Fielding and sustaining 50 Predator-class UAVs.

3. Army aviation forces: recruiting and training of additional Army helicopter crews and increase the budget by 500 million dollars.

4. Special forces: increasing special operation personnel by more than 2,800 and buying more aircraft for the special forces.

5. F-35 fighters: Gates plans to buy more F-35 fighters in fiscal year 2010, raising the F-35 budget from 6.8 billion U.S. dollars to 11.2 billion dollars. The proposal is to double the number of F-35 Joint Strike Fighters the Pentagon buys next year -- to 30 from 14 in 2009. The F-35 is a cheaper, more multipurpose plane but it can't begin to compete with the F-22 as a fighter jet.

6. Littoral Combat Ships (LCS): Gates proposes to increase the purchase of LCS, seen as crucial to counterinsurgency operations in coastal regions and to improve inter-theater lift capacity.

7. F/A-18 fighter jets: Gates plans to buy 31 more F/A-18 fighter jets in fiscal year 2010.

8. Joint High Speed Vessel (JHSV): increasing the charter of Joint High Speed Vessel (JHSV) ships from two to four until the Pentagon's own production program begins deliveries in 2011.

Major Losers:

1. F-22 Raptor fighter jets: Gates said the Defense Department would complete its contract for 183 F-22 fighters and add four more, bringing the total to 187, before stopping the purchases.

2. VH-71 presidential helicopters: Gates said he plans to terminate the program, which had nearly doubled in cost to over US $ 13 billion and was six years behind schedule.

3. Transformation Satellite Communication System: Gates plans to cancel the program and buy two more Advanced Extremely High Frequency satellites instead.

4. CG-X next generation cruiser: Gates plans to scrap the program for now, which was initially planned to be based on the DDG-1000 design.

5. Aircraft carriers: Gates also envisions to reduce the number of aircraft carriers from 11 to 10 after 2040.

6. Future Combat Systems (FCS): Gates will restructure the Army's modernization program and cut costs.

7. Missile defense: Gates will cut annual funding for missile defense by $1.4 billion. The losers include the Airborne Laser, designed to shoot down ballistic missiles in the boost phase, and additional interceptors planned for the ground-based system in Alaska.

Combat Search and Rescue X (CSAR-X) helicopter program: Gates plans to cancel the 15-billion-dollar program to build new search and rescue helicopters.

8. Amphibious ship and sea-basing programs: Programs such as the 11th Landing Platform Dock (LPD) ship and the Mobile Landing Platform (MLP) SHIP will be delayed.

Gates characterized the budget shift as tailored to face the challenges of America at war with a host of players, many of them stateless and highly mobile, as opposed to the Cold War approach that long dominated the Pentagon's view of planning.

Gates acknowledged that his decisions would invite a lot of strong reaction.

"There's no question that a lot of these decisions will be controversial," he said at a press conference on Monday where he outlined his budget proposal. "My hope is that, as we have tried to do here in this building (Pentagon), the members of Congress will rise above parochial interests and consider what is in the best interest of the nation as a whole."

Going by the history of defense budget process, lawmakers on Capitol Hill are more interested in funneling money to their home states than in spending dollars most effectively. Democrats and Republicans both help themselves and their constituents' short-term interests while criticizing the executive branch for failing to make tough choices.

The announced US defense budget for 2010 is nearly $700 billion (more than half of the trillion dollars spent on defense by the entire world) while the total aid for the developing countries from all the rich countries is only about $60 billion, including about $20 billion from the United States, accounting for less than 1% of US annual budget.

Here are some facts about the US foreign aid program:

1. Less than half of aid from the United States goes to the poorest countries.

2. The largest recipients are strategic allies such as Egypt, Israel, Russia, Pakistan, Afghanistan and Iraq.

3. Israel is the richest country to receive U.S. assistance ($77 per Israeli compared to $3 per person in poor countries).

4. Even after the planned tripling of the US aid to Pakistan, it still amounts to less than $8 per Pakistani.

The planned $1.5 billion annual aid to Pakistan will be just over 1 percent of the $130 billion US budget for military operations in Afghanistan and Iraq. As Professor Anatol Lieven of London's King's College recently put it, "the stabilization and development of this country (Pakistan) is not merely an aspect of the war in Afghanistan, but a vital US interest in itself. Indeed, Pakistan in the long term is far more important than Afghanistan. The second is that changing Pakistani opinions will mean changing Pakistani society, and that is a project that will require massive, sustained and consistent aid over a generation." The professor adds, "Eight dollars per head is not going to transform anything much in the country. More over, the US statement emphasizes that the aid will be made conditional on Pakistan’s help to the US against the Taliban. This is a recipe for constant hold-ups, congressional blockages and the wrecking of any consistent, long-term programs."

The process of piling on all sorts of conditions by various interest groups and Indian lobbyists in Washington has already started as the aid to Pakistan bill comes up for debate in US Congress. According to Pakistan's Dawn newspaper, the first major condition for aid requires Pakistan to undertake not to support any person or group involved in activities meant to hurt India and to allow US investigators access to individuals suspected of engaging in nuclear proliferation if it wants to qualify for a threefold increase in US economic assistance. This is probably just one of many conditions that Pakistanis will see as an insult to and assault on the nation's sovereignty.

With Pakistan's growing population and rising expectations of its young people, it appears to me that the radical Islam is now spreading beyond its traditional home in NWFP and FATA to Pakistan's heartland of Punjab. It is also clear that the new generation of Pakistanis do not want to accept life under a feudal or tribal system that denies them basic human dignity. In the absence of significant economic growth (even the phenomenal 8% growth roughly equals 2.5m jobs), not enough jobs are being created for 3 million young people ready to join the work force each year, resulting in growing availability of recruits for terror outfits who pay them fairly well by local standards. According to Rand corporation estimates, the Taliban pay about $150 a month to each fighter, much higher than the $100 a month paid by the governments in the region. This fact has been amply illustrated by recent growth of the Punjabi Taliban who have been found recruited by terrorist groups for suicide bombings and violence within and outside Pakistan.

By adding more American UAVs and US troop reinforcements in Afghanistan, the commitment of significantly more money for greater firepower will remake neither Afghanistan nor Pakistan. On the contrary, it is certain to have major long-term negative repercussions for Afghanistan, Pakistan and the American interests in the region. At the very least, it is natural to expect more fighting and mounting American and civilian casualties during this year and the next few years, unless saner minds prevail and US changes course in favor of more political dialog and much greater use of soft power in the region.

Here's a video clip of Secretary Gates announcing his defense budget priorities:

Related Links:

Obama Seeks $ 663 billion for 2010 Defense

Pakistan's Choice: Globalization or Talibanization

Insights Into a Suicide Bombing in Pakistan

Feudal Punjab Fertile For Terrorism

Shaukat Aziz's Economic Legacy

Valuing Life in Afghanistan and Pakistan

Pakistan's Defense Industry

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Wednesday, April 8, 2009

Pakistan's Choice: Globalization or Talibanization

"Pakistan has to be part of globalization or you end up with Talibanization. Until we put these (Pakistan's) young people into industrialization and services, and off-farm work, they will drift into this negative extremism; there is nothing worse than not having a job," says Salman Shah, finance adviser to former Prime Minister Shaukat Aziz of Pakistan, in an interview published by the Wall Street Journal today.

With Pakistan's growing population and rising expectations of its young people, it appears to me that the radical Islam is now spreading beyond its traditional home in NWFP and FATA to Pakistan's heartland of Punjab. It is also clear that the new generation of Pakistanis do not want to accept life under a feudal or tribal system that denies them basic human dignity. In the absence of significant economic growth (even the phenomenal 8% growth roughly equals 2.5m jobs), not enough jobs are being created for 3 million young people ready to join the work force each year, resulting in growing availability of recruits for terror outfits who pay them fairly well by local standards. According to Rand corporation estimates, the Taliban pay about $150 a month to each fighter, much higher than the $100 a month paid by the governments in the region. This fact has been amply illustrated by recent growth of the Punjabi Taliban who have been found recruited by terrorist groups for suicide bombings and violence within and outside Pakistan.

Here's the text of the report by Paul Beckett of Wall Street Journal:

Talking to Salman Shah, Pakistan's de facto finance minister until a year ago, you are immediately struck by the similarities between his country's long-term economic challenges and India's.

Pakistan, he notes over green tea in his Lahore home, has a huge youthful population as India does: roughly 105 million out of 170 million Pakistanis are under 25 years old. It will be these people who drive Pakistan's economy in the decades ahead. "Pakistan is a mini-India," Mr. Shah declares.

Pakistan, like India, also is relatively light on exports as a part of the overall economy. In Pakistan, exports account for less than 15% of gross domestic product, he says, compared with about 25% in India and 40% in China.

Like India, Pakistan saw a domestic economic boom time until recently. Sales of cellphones, cars, motorbikes and other consumer durables soared.

And Pakistan's future, as India's, lies in the nation's ability to move workers from the fields to manufacturing plants and in engaging more with the world rather than retreating from it.

But India has done a better job with that global engagement, led by its technology companies and through tapping international markets and international investors.

Pakistan made some headway in the last few years by successfully selling global depositary receipts of state-owned companies and issuing bonds and convertible bonds on international financial markets. International investors were taking heed, which in turn projected Pakistan's industrial potential to the wider world.

But recently, as with so much else in Pakistan, it's gone awry. The current administration nixed the international money-raising program, even before the seize-up in global markets could do the job for it. The government – Pakistan's first democratically-elected in a decade – decided it was akin to giving away the "family silver," Mr. Shah scoffs.

International investors, not surprisingly, also have bailed: Pakistan by almost any measure fails to meet the definition of a low-risk investment that is attracting money today. As a result, its economy is slowing dramatically. In part that's because the central bank has kept interest rates in double digits, hemmed in by the strictures of its IMF package.

Where India and Pakistan's paths diverge dramatically is in the consequences if their governments fail to do what is necessary now -- stimulate their economies, bring foreign investors back, and create employment for all those youth.

In India, where about 12 million people come of working age each year, commentators frequently warn that if sufficient jobs aren't created, there could be social unrest.

The important phrase here is "could be social unrest." It's a possibility, not a definite. It is very vague.

Not so in Pakistan. Pakistan, by Mr. Shah's estimate, needs to create 3 million jobs a year to employ those coming of working age. Growing at 8% a year creates up to 2.5 million.

The central bank recently forecast growth in the year ending June 30 of 2.5-3.5%.

Shaukat Tarin, Pakistan's new finance minister, recently was quoted in Pakistan's Daily Times as saying growth could reach 8% over the next three years.

But the World Bank recently predicted Pakistan's economy would grow by 1% in 2009. Mr. Shah calls 1% "suicide for Pakistan."

Unlike in India, the consequences seem all too predictable if Pakistan fails to reengage with global commerce and do what's needed to get things rolling again.

"Pakistan has to be part of globalization or you end up with Talibanization," Mr. Shah says. "Until we put these young people into industrialization and services, and off-farm work, they will drift into this negative extremism; there is nothing worse than not having a job."

You just have to hope it's not already too late.

—Mr. Beckett is the Wall Street Journal's bureau chief in New Delhi

Related Links:

Insights Into a Suicide Bombing in Pakistan

Feudal Punjab Fertile For Terrorism

Shaukat Aziz's Economic Legacy

Valuing Life in Afghanistan and Pakistan

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Monday, April 6, 2009

Vatican Endorses Islamic Finance For Western Banks

In yet another act of conciliation on the part of Western religions towards Islam, the Vatican newspaper Osservatore Romano has voiced its approval of Islamic finance. The Vatican paper wrote that banks should look at the rules of Islamic finance to restore confidence amongst their clients at a time of global economic crisis. “The ethical principles on which Islamic finance is based may bring banks closer to their clients and to the true spirit which should mark every financial service,” the Osservatore Romano said. “Western banks could use tools such as the Islamic bonds, known as sukuk, as collateral”. Sukuk may be used to fund the “‘car industry or the next Olympic Games in London,” the article says.

The Vatican article is only one of many articles that have recently appeared on the acceptance by Western governments and bankers of an Islamic financing system. More than accepting it, they seem to be welcoming it, though they are certainly being pressured into this by unnamed forces bowing to the dictates of Islam.

Last December, the French Senate looked at ways to eliminate legal hurdles, particularly levies, for Islamic financial services and products in France and the potential for listing companies on the Paris Stock Exchange. Senate sources said that this area of the financial market is worth from 500 to 600 billion dollars and could grow by an average 11 percent a year.

French Finance Minister Christine Lagarde has announced France’s intention to make Paris “the capital of Islamic finance” and announced several Islamic banks would open branches in the French capital in 2009.

This hearkens back to a video from November 26, 2008 that was posted at many French websites showing Madame Lagarde announcing with (according to some bloggers) visible embarrassment the decision to allow Islamic financing in France. Whether or not this move is constitutional is apparently not even an issue, since European countries change their laws to accommodate Islam. If the “sacred” law separating Church and State can be violated, any law can. The video, with its very soft audio, shows the minister in a strange garb, and struggling to present a happy countenance. There is no way of knowing if this is merely the quality of the video, or an indication of her emotional state. An article from Le Parisien dated November 27, 2008 provides the following information, in addition to the facts presented above:

A revolution in the banking world. After London, where the first Islamic bank opened its doors in September 2004, France could authorize banks respecting sharia law to open in 2009 (...) Hervé de Charette, president of the Franco-Arab Chamber of Commerce emphasizes that “importing Islamic banking into France would help the integration process”. The main obstacle: “Islamic banking arouses fear because it is associated, wrongly, with religious fundamentalism, even with the financing of terrorism,” deplores Elyès Jouini, professor of economics at the University of Paris. (...)

The world economic crisis has changed the ball game. From New York to Hong Kong, all the financial centers on the planet are grabbing the billions of dollars amassed by the oil-rich monarchies of the Gulf. To tap into this manna (...) is the stated goal of Christine Lagarde. “We are determined to make of Paris a great center for Islamic finance,” declared the Finance Minister as she inaugurated the second French forum on Islamic banking.

For another longer English-language article, visit Islam On Line. This article goes back to July 2008, showing that even before the crisis, France had initiated a policy favoring Islamic banking.

Source: Brussels Journal

Related Links:

Will American Capitalism Survive?

Islamic Finance Products

Vatican Says Islamic Finance May Help Western Banks in Crisis

Easing Limits on Islamic Finance in France

Video of Christine LeGarde on Islamic Finance

Blame for Global Financial Crisis

Islamic Banking Principles

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Saturday, April 4, 2009

Social Entrepreneurs Aim for India and Pakistan

Understanding the need to design for extreme affordability is giving birth to a new generation of entrepreneurs. These are entrepreneurs with a social conscience who are motivated by the desire to do good and do well at the same time. They are finding new ways to empower the poor by satisfying their basic needs for safe water and electricity in emerging markets.

According to Wikipedia definition, a social entrepreneur is someone who recognizes a social problem and uses entrepreneurial principles to organize, create, and manage a venture to make social change. Unlike a business entrepreneur who typically measures performance in profit and return, a social entrepreneur assesses success in terms of the impact s/he has on society. While social entrepreneurs often work through nonprofits and citizen groups, many work in the private and governmental sectors.

The main aim of a social entrepreneurship as well as social enterprise is to further social and environmental goals. This need not be incompatible with making a profit, but social entrepreneurs are often non-profits. Social enterprises are for ‘more-than-profit’.

In addition to their inner desire to help others while also helping themselves, what has encouraged such entrepreneurs is the successful penetration of the mobile phones among the poor in India and Pakistan, many of whom subsist on less than a dollar a day. The rapid growth of cell phones among the rural poor in South Asia has shown that even the poorest of the poor are willing to offer several months' earnings for the benefit of connectivity. By doing so, they have demonstrated their potential as consumers of affordable products that offer them real benefits, such as a glass of safe drinking water and a bright source of light at night.

Safe, Clean Water for the Masses

Saafwater, Inc. is a startup helping people in Karachi, Pakistan with access to safe drinking water. The company founders, Sarah Bird, Saira Khwaja and Khalid Saiduddin, emerged as finalists in Massachusetts Institute of Technology’s 100k Entrepreneurship Competition in 2007, and received $10,000 to put the concept of SaafWater into practice.

The company's first product is SaafWater Daily Capsule - a simple capsule of chlorine solution that can treat one family’s daily supply of drinking water. SaafWater’s mission is to provide affordable clean water to low-income communities in urban areas. Their goal is to create a profitable distribution network that can supply billions of people with clean water.

The company has worked closely with the US Centers for Disease Control’s Safe Water System which has been responsible for pioneering this technology and reaching an estimated 16 million users worldwide. With their help the company has learned from their experiences and to ensure that it meets all the relevant World Health Organization Guidelines for Drinking Water Quality.

Going door-to-door, SaafWater representatives sell daily chlorine capsules, which can be immersed in a family’s water container rendering the supply free of contaminants in 30 minutes. Sales representatives offer a week’s supply for about 30 rupees, the rough equivalent of U.S. 40 cents. SaafWater also plans to launch independent programs with existing NGOs to help create self-sustaining water purification programs throughout Pakistan.

Saafwater's vision is to build and extend this network to include many other life-saving and life-enhancing products such as clean-burning fuels, sanitation, renewable electricity, refrigeration, eye-glasses, multi-vitamins for mothers and children, and construction materials to name but a few.

Bright Light for Night

D.light, founded by two Stanford graduates, marries next-generation light-emitting diodes (LEDs), proprietary power-management tools, and increasingly cheap solar panels. The founders, Nedjip Tozun and Sam Goldman, attended Professor Jim Patell's Stanford Business School class called Entrepreneurial Design for Extreme Affordability, highlighted recently by Fortune Magazine.

As a result, D.light is able to offer poor communities an affordable alternative to kerosene, which is ubiquitous but hazardous. The quality of the kerosene lamp light isn't good, it emits pollutants, and it's just plain dangerous. "You travel around these villages, and everyone has a story of a child being burned or a house destroyed by fire," says Tozun, speaking to Fortune by phone from his office in Shenzhen, China. "And yet in some places we found that people were spending 15% to 20% of their income on light." The world's poor spend about $38 billion a year on kerosene for lighting, according to the International Finance Corp.

According to Fortune magazine, the D.light lamps sell for about $25, steep for someone earning $1 per day, but the D.light team quickly found that the quality of light was so good that people with the D.light lamps were able to do more work at night and increase their income. Two families in New Keringa, a village of 47 families in southern India, took the plunge on D.light lamps. Says Tozun: "All of a sudden the two families were able to work at night," mostly weaving banana leaves into plates. "Their average monthly income increased from $12 to $18, and they could save the time spent traveling to buy more kerosene." Within a few days the entire village had sprung for the lights. "These people are great customers if you give them a clear value proposition," Tozun says.

In November, D.light raised $6 million in venture capital funding from Draper Fisher Jurvetson and Garage Technology Ventures, among other venture capital firms, to ramp up production and get its lamps into markets, initially in India and Africa.

Empowering would-be customers is one of the mantras of Patell's class at Stanford. Each year some students, like Goldman and Tozun, take their ideas and try to build businesses. Patell doesn't expect every student to start a company, but he does demand that every product in the class offer poor consumers tools for their own microenterprises. "We want to design things so that a farmer can decide to leave his farm and support his family selling water pumps or drip-irrigation tubing," Patell says. "We want things to be sold at a price that covers the cost of manufacturing and distribution."

The need and the opportunity for social entrepreneurs have never been greater. Both SaafWater and D.light are examples of what the institutions of higher learning can do to encourage such entrepreneurship catering to the needs of the billions of poor people in Africa, Latin America and South Asia who can potentially become a huge new lucrative market. What is needed is for the budding entrepreneurs to recognize such opportunities to offer highly useful and essential products at extremely affordable prices. Educational institutions in Pakistan and India can and should play a leading role to encourage and prepare them to do good and do well, and investors should open their minds to see the great opportunities that lie ahead for them to make good returns on such investments.

Related Links:

Supporting Youth Entrepreneurship

iGenius Goes Big in Pakistan

India's Innovative Social Entrepreneurs

Youth Engagement Services (YES) Network in Pakistan

Water Shortage in Pakistan

United Nations World Water Development Report

Water Resource Management in Pakistan

Water Supply and Sanitation in Pakistan

Light a Candle, Do Not Curse Darkness

China Profile

Safe Drinking water and Hygiene Promotion in Pakistan

UN Millennium Development Goals in Pakistani Village

Orangi Pilot Project

Three Cups of Tea

Volunteerism in America

Dr. Akhtar Hamid Khan's Vision

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Pakistan's Hydroelectric Power Development

Pakistan and Germany have initiated serious discussions of German funding of eight ongoing and new hydropower projects worth billions of dollars. These talks are taking place in Islamabad between visiting German Minister for Economic Co-operation and Development Ms. Heidemaire Wiegoreak Zeul and Pakistani Prime Minister's Adviser on Finance Mr. Shaukat Tarin, according Business Recorder newspaper.

The projects currently under discussion include 621 MW Palas hydropower project, 567 MW Spat Gah hydropower project, 28 MW Basho hydropower project, 33 MW Harpo hydropower project, 70 MW Lawi hydropower project, Naigaj hydropower project and 300 KW Hingol hydropower project, 43 KW Kurram Tangi Dam. As a start, the German Economic Minister said her country had already committed finances for Keyal Khwar hydropower project located in NWFP on river Indus at Dasu. The project would generate 130 MW power. The focus of many of these development projects are the rural areas in the North West Frontier Province and the least developed federally administered tribal areas of the country affected by insurgencies.

Ms. Heidemaire Wiegoreak Zeul said that Germany was part of Friends of Democratic Pakistan (FoDP) and she had come here for the assessment of the situation and development needs to be discussed at Tokyo in April 17 and then again at the end of April during the annual meeting of the World Bank and IMF. She added that this support was important for Pakistan's development to stabilize the country and the region.

In addition to megaprojects such as 1000 MW Neelum-Jhelum hydropower project, a number of community-based micro hydro projects are being executed with the help of the Agha Khan Foundation in Pakistan's Northern Areas and NWFP. Within this region, out of a total of 137 micro-hydro plants, the AKRSP has established 28 micro-hydros with an installed capacity of 619kW. Initially, in 1986, these plants started as research and demonstration units. These projects were extended to Village Organizations (VOs) and became participatory projects. A Village Organization (VO) is a body of villagers who have organized themselves around a common interest.

After formation, each village organization signed a partnership with AKRSP to abide by all terms and conditions necessary for the village development. The entire responsibility of implementation was passed on to the VOs. AKRSP provided the negotiated cost of the plants and technical input required during the construction period. All the VOs completed the civil work of the plants. They purchased and transported machinery from other parts of Pakistan. The VO members provided subsidized or free unskilled labour and locally produced building material.

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. 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.

The electric power situation in India is not much better. The country is suffering its worst electricity crisis and it has become a key election issue in states like Karnataka and Maharashtra. Some major cities in India are facing alarming situations; continuous load shedding in Bangalore has led to diesel shortage as people are using diesel generators to deal with the crisis. Maharashtra, Uttar Pradesh, West Bengal and Haryana are the worst hit by the ongoing crisis and they are facing power gaps of about 5,000MW, 1,000MW, 2000MW, 1,500MW respectively. In Maharashtra, state officials are asking industrial consumers to lower their demand by 10% or be ready to face forced load shedding (rolling blackouts). Cities and towns are facing 7 to 13 hours blackouts.

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 that places considerable strain on the country’s financial position, creating growing budget and trade deficits. On the other hand, renewable energyfrom hydro, wind and solar are perhaps underutilized and underdeveloped today, as Pakistan has ample potential to exploit these resources.

Pakistan has vast reserves of coal. But there is very little energy produced by burning coal. China has now agreed to invest about $600 million for setting up an integrated coal mining-cum-power project in Sindh. The project will produce 180 million tons of coal per year, which is sufficient to fuel the proposed 405 MW power plant. Pakistan is currently world's seventh largest coal-producing country, with coal reserves of more than 185 billion tons (second in the world after U.S.A.'s 247 billion tons). Almost all (99 percent) of Pakistan's coal reserves are found in the province of Sindh. Pakistan's largest coal field is Thar coal field which is spread over an area of 9100 square kilometers, and contains 175 billion tons of coal. So far this coal field has not been developed but efforts are underway.

In addition to the coal project, China has agreed to build several other power plants in Pakistan to help the South Asian nation deal with its worsening electricity crisis. When completed over the next several years, these plants, including Nandipur (425 MW, Thermal), Guddu(800 MW, Thermal) and Neelam-Jhelum(1000 MW, Hydro), Chashma (1200 MW, Nuclear) will add more than 3000 MW of power generating capacity for the energy-hungry country. Pakistan is currently facing a deficit of 4,000 to 5,000 megawatts, resulting in extensive load-shedding (rolling blackouts) of several hours a day.

China has already installed a 325-megawatt nuclear power plant (C1) at Chashma and is currently working on another (C2) of the same capacity that is expected to be online by 2010. The agreements for C3 and C4 have also been signed. The United States has objected to China supplying C3 and C4 on the grounds that any Pak-China nuclear cooperation would require consensus approval by the NSG, of which China is now a member, for any exception to the guidelines. The US is applying double standards since it supported and got approval for such an exception from NSG for its own nuclear deal with India.

Beyond the power generation capacity expansion projects, Pakistan must also pay attention to modernizing its national grid. 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.

The current power crisis has given a significant impetus for serious efforts to develop a series of power projects. With so many projects in the pipeline, it can be expected that there is relief on the way for the electricity deprived nation in not too distant a future. In rural areas in particular, Pakistan has a better chance of meeting the UN Millennium Development Goals by building infrastructure projects and providing energy and water for development.

Related Links:

Power Shortage...Where?

UN Millennium Development Goals in Pakistani Village

China Sees Opportunity Where Others See Risk

Pakistan Faces Severe Water Shortage

World's Largest Solar Deals

Pakistan's Electricity Crisis Worsens

Pakistan Inks Hydroelectric Power Deal

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Thursday, April 2, 2009

China Aims for Top Spot in Electric Cars

With China poised to surpass the United States as the world's largest automobile market this year, the Chinese government has announced plans to help the nation leapfrog Japan to become the largest producer of all-electric and hybrid vehicles in the world. By committing to electric vehicle production, China is also attempting to reduce urban air pollution, carbon emissions and growing dependence on imported oil.

Even as the world faces slowing demand for automobiles, vehicle sales in China and India have jumped last month by 25% and 22% respectively.

Monthly demand for automobiles in the world's two most populous countries had been rising by double-digits in the first half of 2008 as a growing middle-class enjoyed the fruits of a booming global economy. Then the credit crisis hit, and demand slowed. But the governments in the two Asian nations have since rolled out incentives to reverse that trend, helping year-over-year sales.

Currently, China is behind the United States, Japan and other countries when it comes to making gas-powered vehicles, but by skipping the current technology, China hopes to get a jump on the next, according to the New York Times.

The new auto-industry plan, published on the main Web site of China's central government, said China aims to build capacity to manufacture 500,000 "new energy" vehicles, such as all-electric battery cars and plug-in electric hybrid vehicles. The plan aims to increase sales of such new-energy cars to account for about 5% of China's passenger vehicle sales.

The new package, which is supposed to supplement auto-industry stimulus steps announced in January, is designed to keep overall sales in the world's second-biggest car market growing at an average of 10% annually over the next three years, the government said.

Beyond manufacturing, subsidies of up to $8,800 are being offered to taxi fleets and local government agencies in 13 Chinese cities for each hybrid or all-electric vehicle they purchase. The state electricity grid has been ordered to set up electric car charging stations in Beijing, Shanghai and Tianjin.

The 10% growth target is considered ambitious by some analysts, but if China succeeds, it would have auto sales of well over 10 million units this year, and could displace the U.S. as the world's biggest auto market by unit sales, according to the Wall Street Journal.

U.S.-based consulting firm CSM Worldwide forecasts China's overall vehicle sales to grow by 6% to 7% to about 10 million vehicles. Achieving 10% growth in overall vehicles sales this year "will not be so easy" given the slowdown in China's export-led economy, said Yale Zhang, a Shanghai-based senior analyst at CSM.

In comparison with the rest of the world, the Chinese market for automobiles appears to be relatively robust. Monthly auto sales in China surpassed those in the U.S. for the first time in January, but automakers and industry watchers say the news may tell us more about the troubles in the U.S. than about China's growing car market, says a report published in San Francisco Chronicle.

Data released in February by the China Association of Automobile Manufacturers shows 735,000 new cars were sold in China last month, down 14.4 percent from the record of 860,000 set in January 2008. U.S. sales, meanwhile, fell 37 percent to 656,976 vehicles — a 26-year low. Some analysts believe U.S. sales may fall to about 10 million vehicles this year.

The weekend announcement also reiterated Beijing's determination to consolidate the country's fledgling auto sector, which has more than 80 auto makers across the country. The government wants a less-splintered industry with fewer auto companies each generating significantly larger sales volumes.

The Chinese central government wants to consolidate the auto industry through mergers and acquisitions into fewer than 10 groups of manufacturers, down from the current 14, according to the announcement. The announcement said the government would "encourage" FAW Group Corp., Dongfeng Motor Corp., SAIC Motor Corp. and Changan Automobile (Group) Co., among others, to "implement mergers and acquisitions" around the country to form large auto groups.

Like China, Indian auto sales have also seen significant growth in the last few years, but the Indian auto market is much smaller. Tata Motors has recently launched its low-cost Nano minicar to revive growth in the midst of a slowdown by aiming at the motorcycle upgrade market. With a starting price of about $1,945, which doesn't include dealer markup and other charges that consumers will pay, the Nano will be one of the world's cheapest cars.

The automobile industry in India—the tenth largest in the world with an annual output of 2 million units last year—is expected to become one of the major global automotive industries in the future. A number of domestic companies produce automobiles in India and the growing presence of multinational investment, too, has led to an increase in overall growth. Following the economic reforms of 1991 the Indian automotive industry has demonstrated sustained growth as a result of increased competitiveness and reduced restrictions. The monthly sales of passenger cars in India exceed 100,000 units, according to a related Wikipedia entry.

In Pakistan, Engineering Development Board (EDB) is attempting to increase the GDP contribution of the automotive sector to 5.6%, boost car production capacity to half a million units as well as attract an investment of US$ 3 billion and reach an auto export target of US$ 650 million.

In addition to the growing defense industry, auto industry can become a driving force for the much needed manufacturing industrial base in Pakistan to create significant employment opportunities for its large population. Last year, the auto sector contributed US$ 3.6 billion, only about 2% of the GDP, to the national economy, and employed about 192,000 people.

Pakistan's auto parts manufacturing is a billion US dollars a year industry. Sixty percent of its output goes to the motor cycle industry, 22% is for cars, and the rest is consumed by trucks, buses & tractors.

After a significant growth spurt in 2002-2006, the auto sector is feeling the pain of economic slow-down in Pakistan. The industry is continuing in a slump which began in the previous financial year and according to Business Monitor International's recently published Pakistan Automotives Report, the industry’s performance this year will get worse. In FY08, which ended in June 2008, total vehicle sales fell by 6.2%. The downturn carried over into FY09, with sales for the first half of the year (July to December 2008) down by 48% year-on-year to 52,927 units for cars and light commercial vehicles (LCVs), while compared with November, sales for December were down 55%. These results support BMI’s forecast for a drop in sales of cars and LCVs to around 112,000 units in FY09. BMI expects the total auto market in Pakistan to contract by over 32%, with the worst damage done in the car and bus segments, which is forecast to fall by 45% each. Pakistan’s Economic Co-ordination Committee (ECC) is to consider a tax cut of 10% for domestic car manufacturers, which has been proposed by the Ministry of Industries and Production. However, the plan is not without its opposition, as the Federal Board of Revenue is reportedly against supporting individual sectors as this would prompt other industries to seek help. Moreover, with just five carmakers producing locally, the automotive industry is relatively small. On the other hand, the industry is also largely self-sufficient as the majority of its output is sold within Pakistan; this reduces the country’s reliance on imports and raises issues such as the protection of local jobs and the industry’s contribution to the overall economy.

Among the automakers, Indus Motors and Pakistan Suzuki reported positive earnings: The two leading car assemblers PSMC and INDUS posted positive earnings for 2008. PSMC reported operating losses of Rs 399 million. However, increase in other income by 77 percent offset their losses helping PSMC post positive earnings of Rs 26 million, according to Daily Times. Honda posted a loss after tax of Rs 190 million for the period July-December 2008 after a decline in net sales by 5 percent and a massive surge in operating expenses over the corresponding period last year.

The poor state of the industry is reflected in BMI’s Business Environment Rating for the automotive industry in Asia Pacific, where Pakistan is in last place on a score of 42.4 out of a possible 100. The market is held back by low production growth potential and an average rating for sales growth. However, as a signatory to the Trade Related Intellectual Property Rights Agreement (TRIPS) under the auspices of the World Trade Organization (WTO), the country’s regulatory environment scores well. A number of free trade agreements also contribute to this criterion, although forming FTAs with non-Asian countries would improve this rating further. Despite low marks for bureaucracy and corruption, the market does score well for its long-term economic risk and policy continuity.

With just a handful of manufacturers, Pakistan’s competitive landscape remains narrow. Japanese car manufacturers control most of the country’s passenger car production and sales. Figures for FY08 show that Suzuki-brand models represented 62% of total Pakistani passenger car production and 51.7% of sales. Toyota is gaining, however, with Corolla becoming the country’s best-selling model in the first half of FY09.

According to Daily Times, as many as 60,000 workers and staffers in Pakistan's auto sector have lost their jobs from July, 2008 to January, 2009 due to falling demand for cars. More jobs cuts are feared with continuing weakness in demand.

Given strong underlying growth dynamics in South Asia, the negative feedback effects of the global financial crisis are expected to be temporary. A relatively rapid rebound is expected in 2010, with a projected revival of GDP growth to 7.2 per cent. The long term prospects for the auto industry in the continent of Asia appear to be quite favorable. As the current financial crisis ebbs, there will be significant pent-up demand for automobiles in Asia, including India, Pakistan and China, that will drive the growth in auto industry.

Related Links:

Auto Industry Prospects in India, Pakistan and China

Pakistan Automobiles Report 2009

Auto Pakistan Expo 2009

Pakistan Automotive Report

China Surpasses US in Auto Sales

Auto Industry in India

India's Global Shopping Spree

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