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| October 05, 2008 | Sunday | Shawwal 5, 1429 |
The big bailout
Need to tackle Aids
‘Self-correction’ in doubt
Obama on the offensive
OTHER VOICES - Indian Press
THE market has crashed. There is great uncertainty about the future. People are generally depressed and certain that we will have a very difficult time in the next year or two.
BARACK Obama, building on a shift in the public mood on the economy, went on the offensive against John McCain, with a rally in a Republican enclave in the battleground state of Michigan.
WHILE Condoleezza Rice is going to New Delhi to celebrate the nuclear deal with India, Syed Yousuf Raza Gilani believes it isn’t exactly an occasion for Pakistan to mourn. Talking to newsmen in Multan on Friday, the prime minister said Islamabad would seek a similar deal with Washington for the peaceful use of nuclear energy. However, the issue is hardly that simple, for it gets mixed up with our anomalous relationship with America. There is no doubt Pakistan has to diversify its sources of energy production if it is to meet rising needs. New large dams, or at least some of them, are not only controversial to the extent that their construction can pit the federating units against each other, they will also take over a decade in coming on line even if work began now. Nor is there evidence that our vast coal reserves are going to be used in the near future in a way that will significantly alter the energy scene. At the same time, progress has been slow in tapping the renewable energy resources at our disposal. That, despite the inherent safety concerns, leaves us with little choice but to explore the nuclear option.
From the day it was visualised the US nuclear deal promised to be India-specific. Now that the Bush administration has said no, it is highly unlikely that any other western nation will be willing to help Islamabad out, given the stigma that has come to surround Pakistan’s nuclear programme in the wake of the A.Q. Khan scandal — not to mention western fears, even if baseless, of terrorists managing to get hold of our nuclear assets. The two American VP hopefuls’ recent statements, even if they amount to nothing more than electoral rhetoric, give a fairly good idea of the task before Pakistan in seeking other nations’ nuclear cooperation. This leaves us with only one friend — China.
Unfortunately, this government has followed a policy towards China that appears marked by lack of clarity, considering that country’s relationship with Pakistan and its fast-rising status as an economic superpower. Both President Asif Ali Zardari and the prime minister have not visited Beijing for state visits. The prime minister did go to China but only for the opening of the Olympics Games. At the same time he has met President Bush twice, and visited Malaysia, Sri Lanka and Egypt. Similarly, after getting elected president, Zardari went to Britain and America despite promising that his first official visit would take him to Beijing. The only country that can stand up to the world and has the know-how to supply new reactors to Pakistan is China. It was the only country in the nuclear suppliers’ group that annoyed India by indirectly pleading Islamabad’s case for a similar deal. Where nuclear energy is concerned, it is time to stop pleading with the West and look elsewhere.
THE US Treasury is set to begin one of the most daunting tasks in history: averting a global financial crisis. Success, however, is far from assured. Approximately six weeks from now, the treasury, through private proxies, will begin buying mortgage-related assets from the US financial sector in special auctions. Initially, the treasury will have $250bn at its disposal, with a further $450bn available after authorisation by Congress and the president. The problem? The real value of the mortgage-related assets that the stricken financial sector has on its books is unknown. The central problem of the credit crisis has been that firms that own mortgage-related assets have kept them on their balance sheets at a higher value than their current trading value in the market. The difference has been ascribed to the fact that the mortgage-related assets are complex and have been ‘sliced’ and ‘packaged’ and sold and resold many times in financial baskets.
In this nightmare scenario, homeowners are struggling to make mortgage payments or are defaulting, but the market does not know which firms own good mortgage baskets and which firms own bad ones. In reality, all firms likely own some bad mortgages in their baskets; however, the trouble is discovering just how much of bad mortgages any particular firm holds. Faced with this uncertainty, lenders have tightened their credit lines to all financial firms owning mortgage-related assets.
Enter the bailout: the special auctions will put a dollar value on mortgage-related asset baskets that have found no buyers at current prices; take them off the books of stricken financial firms; and allow risk-averse lenders to start lending again to the financial sector. The trickiest part is the purchase price of mortgage-related assets. The US Treasury will have enormous leeway to decide prices, given that it is buying in a market with few buyers and has enormous sums to spend. The treasury can protect taxpayers by buying at the lowest possible price, but it must be careful to not set prices so low that firms have to take enormous write-downs of their assets — resulting in lenders continuing to stay away and defeating the purpose of the bailout. But the bailout may be already too late. The
Economist has looked into its crystal ball and declared: “There is little to see except bank failures, emergency rescues and high anxiety in the credit markets. These forces are drawing the financial system closer to disaster and the rich world to the edge of a nasty recession.”
HIV/AIDS is a concentrated epidemic in Pakistan but the country is at risk for higher prevalence. The disease is an imported phenomenon, with migrant workers returning from the Gulf states accounting for roughly three-fourths of HIV cases reported until 1999. Since then, HIV/Aids has been found largely among injecting drug users, commercial sex workers, transvestites and prison inmates. A striking revelation about the disease is that of the 90,000 known cases in the country, 50 per cent are in Sindh. The province is finding it increasingly difficult to cope with the epidemic due to a lack of resources. The Sindh Aids Control Programme (SACP) has attributed this shortcoming to inadequate funding and equipment. Without a robust and strenuous effort to combat this problem, Pakistan may experience a rapid increase in the number of cases. According to a report, there are various factors that increase the country’s vulnerability to the epidemic, including risky sexual practices, insufficient blood screening, a considerable migrant and refugee population, unsafe medical injection practices, and limited knowledge about reproductive health issues and the social stigmas associated with them.
In order to counter this threat, it is imperative to address the factors which have hampered SACP’s efforts. Here, one option is to mobilise non-governmental organisations to secure funding from international donor agencies. Since NGOs have proved their efficacy in the past, they should be involved in anti-Aids initiatives in a combined effort with the government on a national level. The performance of the health department needs to be bolstered so that the National Aids Control Programme (NACP) is strengthened. The level of general awareness needs to be heightened so that safer practices can be adopted. Foolproof screening must be made the norm throughout the country to ensure safer blood transfusion. While these measures will prevent the spread of the disease, it is equally important to provide care and counselling to those infected. The battle has to be fought on many fronts for which the government needs to adopt a multi-pronged strategy.
The IMF team has come to help us out. However, there are conflicting views about the role of the IMF and the self-correcting ability of free markets. According to former US Federal Reserve chairman Alan Greenspan, the global capitalist economy “is vastly … flexible, resilient, open, self-correcting and fast-changing”. While some of the adjectives are operative, ‘self-correcting’ is generally being challenged.
The Fund believes it is fulfilling its task of promoting global stability as well as growth. Today the IMF also claims to be concerned about poverty. This has been criticised by Joseph Stiglitz, the Nobel laureate economist, who believes the Fund “has failed in its mission because of how it has understood its mission” because the prevalent free market ideology blurs clear thinking about how best to address an economy’s problems. The IMF doesn’t quite know how to go about it.
So far, the government has been busy with so many other issues that it has not paid any serious attention to the underprivileged who make up at least 70 per cent of Pakistan’s population, of which about half are probably below the poverty line. It is true that IMF conditionalities can be quite tough and rigid.
The usual method of self-correction by markets is that of a boom being followed by a bust. Andrew Mellon, a titan of finance, was the US treasury secretary in 1929 when the American financial system crashed. His reaction to the disaster was “liquidate labour, liquidate stocks, liquidate the farmers, and liquidate real estate … purge rottenness out of the system.” Andrew Mellon was ignored. The disastrous 1930s set everybody thinking about methods of getting an economy out of a serious depression.
The IMF rejects the Keynesian approach to market failure although many modern economists are concerned about market failure. The IMF has not tried to articulate a coherent theory on the subject. In some ways, therefore, IMF policy tends to make market failure even worse. Because the economic guru after the 1970s was Milton Friedman who claimed that the Keynesian approach was bound to fuel inflation, neoclassical economics’ systematic approach to market failure is that it is due to governmental action.
The Shaukat Aziz policy of deregulation and liberalisation led to large trade deficits which Pakistan has been experiencing for quite a few years and which inevitably create a serious problem. Subsidies were given on petroleum products to provide the PML-Q with electoral support. They have now been largely withdrawn. Shaukat Aziz’s refusal to allow independence to the central bank magnified problems. Excessively rapid financial and capital market liberalisation was likely to lead to a crisis and it did.
Neither the World Bank nor the Asian Development Bank nor the IMF criticised Shaukat Aziz’s growth policy because it was all about deregulation and liberalisation. As a matter of fact, Shaukat Aziz was declared the most successful finance minister of a developing country. Unfortunately, the name of the game for a developing country at Pakistan’s level is still savings and appropriate investment to close the knowledge and technology gap: it didn’t happen.
Pakistan did rather strange things. Monetary policy was loosened and interest rates dropped to around two per cent. The banks cancelled commitments made for deposits at higher interest rates: average deposit rates fell below two per cent. Lending to normal customers was related to Kibor. The banks got together and decided that Kibor should be around eight per cent. On the whole, it resulted in banks making large profits. Asset prices kept rising, mainly evidenced in the stock market and real estate. The country was flooded with consumer durables.
No public transport system was developed; instead, everyone was encouraged to buy a motorised vehicle. The net result in major urban areas is traffic jams and higher consumption of petroleum products. Petroleum prices shot up to almost $150 per barrel. This was accompanied by a worldwide food shortage. This has resulted in inflation which cannot be controlled by raising interest rates. It will, however, affect other products.
At the moment, we have a combination of a credit crunch, higher interest rates and a lot of uncertainty about the future. The result is a lowering of private sector investment and a sharp reduction in growth. For a developing country, this amounts to a recession. What should we do?
The US Fed is being criticised for implementing an asymmetrical monetary policy. The implication is that they failed to intervene in the boom but they are now trying to cushion the bust with a massive bailout. As a result, it is said that if a financial institution is big enough it can behave badly, but will be supported by the government if it is likely to go bust. Should the government intervene and prevent an institution from becoming so big and important?
The idea behind neoclassical economics is that the market-oriented private sector is usually right and the government is invariably wrong. Actually, both can be occasionally right and both can be occasionally wrong.
According to Robert Skidelsky, professor emeritus at Warwick University, “Each cycle of regulation and deregulation is triggered by economic crisis. The last liberal cycle associated with President Franklin Roosevelt’s New Deal and the economist John Maynard Keynes, was triggered by the Great Depression…. During the three-decade-long Keynesian era, governments in the capitalist world managed and regulated their economies to maintain full employment and moderate business fluctuations. The new conservative cycle was triggered by the inflation of the 1970s, which seemed to be a product of Keynesian policies. The economic guru of that era, Milton Friedman, claimed that the deliberate pursuit of full employment was bound to fuel inflation.”
Stagflation was handled through monetary policy by Fed Chairman Paul Volcker. The neoclassical approach believed that markets were much more capable of self-correction. This optimism led to deregulation of financial markets in the 1980s and 1990s. As a result, financial institutions tended to go berserk which resulted in the present collapse of the credit bubble.
As Professor Skidelsky has said: “A few geniuses aside, economists frame their assumptions to suit existing states of affairs, and then invest them with an aura of permanent truth. They are intellectual butlers, serving the interests of those in power, not vigilant observers of shifting reality. Their systems trap them in orthodoxy.”
Obama’s four-hour visit to Grand Rapids, the hometown of the late Republican president Gerald Ford, marked an aggressive new attempt to win over working class and middle-class white voters worried about the economic crisis.
The Wall Street meltdown and attempts in Congress to pass a bailout package have hurt McCain, opening a perceptible lead for Obama in Michigan and other states. A poll for Associated Press on Thursday showed Obama pulling away in Michigan and Pennsylvania, which the Democrats must hold to win the White House.
Obama was beating McCain in Ohio and Florida, which voted for George Bush in 2004, and was in a strong position in longtime Republican states such as Indiana, Virginia and North Carolina. That could see the Democrats once again expanding the map of battleground states.
The Democrat plans to hunker down in North Carolina next week to prepare for his second presidential debate against McCain. But the debate camp would also give him a chance to gauge his prospects for picking a real fight with the Republican for North Carolina. Obama’s visit to Grand Rapids appeared in line with that more aggressive strategy which saw him venturing outside traditional Democratic areas of the state such as the heavily African American city of Detroit.
In his speech on Thursday, Obama attacked McCain as out of touch with people in Michigan, the state with the highest unemployment rate in the country.
“Nine straight months of job loss! Yet, just two weeks ago, John McCain said the ‘fundamentals of the economy are strong’. Well, I don’t know what yardstick Senator McCain uses, but where I come from, there’s nothing more fundamental than a job,” he said.
Obama went on to blame the Wall Street crisis on the Republican philosophy of deregulation, which he linked to McCain. “My opponent’s talked a lot about getting tough on Wall Street, but in the past decades, he’s fought against the rules of the road that could’ve stopped this mess.”
— The Guardian, London
Lament of the lake
The Pioneer
IT is unfortunate that thousands of fish have died in the Pushkar sarovar [lake] in Rajasthan over the past week. They could have been saved had precautions been taken.... In India, [the] state and central governments lose no opportunity to commit themselves to [the] preservation of wildlife species. However, episodes such as the one at Pushkar highlight the weakness of such public promises and particularly of fish conservation programmes. Clearly, more effort is necessary. Fish have been found in this sarovar for decades. Yet their numbers have declined in recent years. While the government has not been able to pinpoint the exact cause, it is obvious that this is a man-made phenomenon and not a natural process.
Pushkar is a tourist hotspot as well as a destination for pilgrims. This results in large numbers of people congregating there from time to time. It also means the environs and the ecology of the lake have degraded over the years and the waters have become polluted. Just recently tens of thousands of tourists bound for Ramadevra [stopped] at Pushkar.... They fed the ... fish with wheat.... Local traders estimate over 1,000 quintals of wheat was sold during their stay, a vast quantity of it being thrown into the sarovar as a ritual. Food grains ferment in the water for days, further polluting the lake. It is not clear what purpose such a ritual serves for it only causes the large-scale destruction of aquatic life.... — (Oct 2)
At long last, a done deal
The Asian Age
WITH 86 members of the United States Senate voting in favour of the civil nuclear agreement with India ... the process set in motion three years ago by Prime Minister Manmohan Singh and US President George W. Bush has reached a satisfactory conclusion. ... [T]he legislation ... makes it clear that cooperation in the civil nuclear field would cease if India conducted a nuclear test. ...Secretary of State Condoleezza Rice wrote to Senate majority leader Harry Reid that “most serious consequences” would follow if India were to go in for a test in the future.
...Conceptually, there is nothing surprisingly new about this, given the traditional American perspective on non-proliferation. Equally, however, such thinking is not in accord with the spirit of the negotiations of the bilateral 123 Agreement between the two countries. ...Meeting the Indian prime minister in Washington recently, President Bush had said the final outcome ought to be such as to be acceptable to both the United States and to India. India would naturally be waiting to see what mitigating language he brings into play to align the new US legislation with the meaning and intention of the 123 Agreement.... The Indian leadership has been emphatic that it would be guided solely by the 123 Agreement, which envisages that both sides take a look at the balance of circumstances pertaining to security in the region, should India conduct a test. Essentially, this means that future testing does not automatically mean end of nuclear cooperation with the US.... — (Oct 4)
