Exceeding monetary targets

THE annual monetary targets set for 2005-2006 were exceeded by March 16, three and a half months before the close of the financial year. Credit to the private sector has shot up to Rs330.4 billion, surpassing the estimate of Rs330 billion for the whole year. Government borrowings have swelled to Rs155.9 billion against the target of Rs98 billion. The rapid monetary growth has pushed the advance-deposit ratio of commercial banks to 77 per cent, close to 80 per cent considered to be the maximum ceiling for lending by by leading bankers. The record monetary growth has taken place despite a tightening of the monetary policy by the State Bank, indicating the growing demand the private sector credit which is fuelling economic growth.

The targets set by the State Bank for annual credit expansion do not carry any finality, as these estimates are dependent on a host of variable factors that determine the performance of the economy. For example, the expansion of the foreign trade sector has far exceeded official estimates, as is evident from a negative growth of foreign assets of Rs 94 billion as against the targeted increase of Rs 15 billion. Unlike many other economies awash with excess money without sufficient productive outlets to channel it, Pakistan’s massive imports of raw material and capital goods supported by liberal credit are helping to keep the wheels of the economy moving at an internationally competitive pace. Money is now being channelled into hitherto credit-starved sectors like agriculture, SMEs and consumer financing, including housing loans. Non-corporate borrowings are estimated to have risen to a recent estimate of 45 per cent of the total bank credit. Government borrowings exceeding the annual target can be attributed to an enlarged public sector spending on urgently needed modernization of physical and social sectors to sustain the momentum of private investment and the unanticipated expenditure on relief of earthquake victims.

No doubt, normally the success of a monetary policy is judged by a high economic growth combined with a low rate of inflation as in the case of our neighbours, China and India. Going by the statement of the Governor of State Bank, Dr Shamshad Akhter, “inflation is coming down” as a result of a “substantial tightening of monetary policy” and “easing of supply shortages.” Perhaps, a high inflation rate — a source of major public concern — can be largely attributed to market abuse by the sugar, automobile and cement industries. The cartels need to be curbed for inflation to be brought down, for tight monetary policy alone cannot do that. Inflation can also be brought down by encouraging savings. Commercial bank lending rates are above the inflation level and increased the net interest incomes of banks by 70 per cent in 2005. The increasing spread between lending and deposit rates at 7.2 per cent in December 2005 as against 5.45 per cent a year ago indicates that bank profits are not because of efficiency but are being earned at the cost of the depositors. A further hike in the interest rate may not be advisable as enhanced financial charges tend to discourage investment. Perhaps, a better way would be to increase the mandatory cash reserves to be kept by the commercial banks with the central bank. The State Bank needs to have a fresh look at its monetary policy.

Exams: back and forth

AFTER a lot of going back and forth and confrontation with the federal authorities, the Sindh education department has announced that all the education boards in the province will hold the Class IX examination in June. In fact, the president’s help had to be obtained to end the crisis. This should put at rest the uncertainty that had been created by the indecisiveness of the education authorities. The students should now be able to concentrate on their preparations for the examinations though these are only 10 weeks or so away. This episode, however, has some lessons for our policy-makers in Sindh as well as in Islamabad. The main issues to be considered dispassionately by all are, first, the decision-making process used in this case and, secondly, the merits and demerits of composite examinations at the school leaving level.

Unfortunately, under the Constitution the centre has been entrusted with the power of taking decisions on education issues and the mess we find in this sector is partly the result of Islamabad foisting its discretion in such matters in an ad hoc manner for several years. The decision to hold, from 2007 onwards, countrywide composite examination for the Secondary School Certificate at the end of Class X came out of the blue. It was announced in September 2005 after a meeting of the education ministers of the federal government and of the provinces. The method adopted was bad enough. By deciding to assert its powers and challenging the centre at the eleventh hour, the Sindh government did not help matters either. Worst was the tussle between various stakeholders that followed ignoring the interests of the students. There is need for a debate on the examination system. It has been pointed out by experts that the composite examination has definite merits. Staggering the examinations lowers the standards as the subjects in which the exams are held after Class IX are devalued, with the students receiving instruction in them for only one academic year. If the students are examined in all subjects at the end of Class X, the course of studies can be evenly spread over two years. But what is important is that when the change has to be made, its implementation must be properly planned and not carried out in haste.

Dealing with rabies

THAT two major hospitals in Karachi received over 50 dog-bite cases on Monday is disturbing news and highlights the need for the city government to find a solution to the stray-dog problem before it poses a serious health concern. Doctors at the hospitals emphasized the urgency of starting public awareness campaigns so that people know what to do in case they are bitten. Ignorance can lead to death as was proved when a young child died from rabies after being bitten by a dog 18 months ago. Part of the problem is the unavailability of rabies vaccinations which, if administered in time, can prevent a host of medical complications, including death. Hospitals must be adequately stocked to meet the present high demand for rabies vaccinations. As for the stray dogs themselves, previous efforts have included a shoot-to-kill strategy or poisoning sweetmeat and scattering it in various parts of the city for the animals to consume. Both strategies are inhumane, expensive and caused the death of innocent household pets for no fault of theirs But most important, none of these method solved the problem, o alternative method to be worked out

There are various animal birth control programmes that have been successfully tried in many countries which are humane and cost-effective. Animal rights groups in Karachi argue that instead of brutally killing stray dogs, birth control procedures can be used on the animal which can prevent the spread of rabies. If veterinarians are willing to offer their services in this regard, as the animal rights group claim, the city administration should move forward with this programme, especially since it had little success with other methods. A campaign targeting a serious problem like rabies will teach people the importance of treating animals with care.

A flawed business model

PAKISTAN’s chronic trade deficit this year to record the highest deficit level in its history. The explanations usually given by the representatives of the government and the corporate sector tend to point to some measures they are now undertaking ending with the hope for everyone else to believe that everything soon would be alright.

But it doesn’t get alright. Policy incentives, fiscal and financial support, tariff and non-tariff protections and the ubiquitous ‘packages’ given from time to time have not turned our industry and agriculture into efficient production systems.

The early habits of protection and rent seeking have become deeply embedded in the business model we have been practising and its structural problems have not been seriously addressed. This has become a losing business model in the global economy and our trade imbalances are likely to get worse.

In our open economy, we have little control over the consumption goods coming from the first World (cars, cell phones, etc). But this first world consumption challenge cannot be successfully met by a Third World production system. With such a mismatch between two parts of its business model, Pakistan’s economy would encounter increasing difficulties in meeting the challenges of globalisation. It would also not help in addressing the growing problems of poverty and unemployment in the country.

The latest round of WTO negotiations in Hong Kong did not hold out any promise for the hopes of developing countries for securing greater access to the markets of the developed countries and removal of agricultural subsidies. Access to these markets is important for a fair trade system and for reducing poverty in the developing countries. This is especially so where agricultural products are concerned since these are the bread and butter of the poorer sections of the developing countries.

But market access is one thing and market share is another. Even if market access is available, are our production systems efficient enough to claim a bigger market share from their competitors? Because while access could be granted by governments as a concession, market share could only be given by the consumers whose vote of confidence would depend on the price and quality competitiveness of products on sale.

Nothing highlights this fact better than the example of Mexico. No one had closer access to the American market than Mexico and with Nafta protection; it even had preferential bilateral legal agreements with the governments of the US and Canada. And yet, the low-cost but high-quality goods produced 7,000 miles away in the factories of East Asia particularly China, have been able to claim a big share of the American market away from the Mexican products. In fact, several American and even Mexican companies that had earlier set up their manufacturing facilities just across the US border in Mexico, later closed down their factories and relocated them in China.

So how do Pakistan’s production systems compare with those of other developing countries with whom it would be competing to win a bigger share in the markets of the developed countries when access to these is available?

World Economic Forum (WEF) produces one of the well recognized measures for competitiveness. The position of the countries on its Global Competitive Index (GCI) shows who is winning or losing the game of competitiveness in the global trade. The latest evidence (2005) from WEF places Pakistan among the least competitive countries and the production efficiencies of Pakistan’s economic system, even among developing countries, continue to be rated way down at the bottom along with Myanmar in Asia and Zimbabwe in Africa — much lower, for instance, than the rising Asian economies of Malaysia, Thailand, China, India and several others.

The fact that our production systems have not been efficient and competitive has, unfortunately, been repeatedly proved by several countries that have overtaken us from behind: South Korea in 1960s, Malaysia in 1970s, Thailand and Turkey in 1980s, Vietnam and India in 1990s, to name only a few.

Productivity is, of course, a measure of technical and financial efficiencies; but above all, it is a cultural phenomenon. Higher productivity invariably leads to higher profits. But if higher profits can be obtained without increasing production efficiencies, what is the need or incentive for putting in hard work to earn good profit?

A rent-seeking culture — whether in public or private undertakings — is an antithesis to promotion of productivity. And yet, taken together, our economic system has been rewarding inefficiencies and rent-seeking habits. Of course, there are many business leaders who have refused to be part of the culture, and one knows of several entrepreneurs and corporate leaders who have upheld excellent value system although some of them have faced difficulties and have even fallen victims of the rent-seeking culture.

Production efficiencies in Pakistan are handicapped not so much by a lack of the ubiquitous ‘packages’ but by the structural flaws embedded in the business model we have been following for decades. Take a look at some features of this business model.

Our corporate and security laws discourage takeover of inefficient private enterprises. No market for corporate control exists through active and balanced laws on mergers and acquisition to promote productivity. Small investors and minority shareholders have neither protection through corporate governance nor legal redress against inefficient management.

There are high entry barriers that keep the system closed to outsiders. Incentives and ‘packages’ have remained confined thus keeping Pakistan a single industry economy even after 58 years. It was easy to set up a shop without any equity stakes and even easier to get the loans written off. Again, if profits can be made by persuading governments to tinker with fiscal and monetary policies or the tariffs, where is the incentive for improving earnings by improving the competitiveness of products in the markets?

An open market system is not an anarchic system and as the recent sugar crisis has again confirmed, the regulatory incentives for better business practices are an integral part of any open and efficient economic system.

As for agricultural production, our approach has continued to treat this sector more like a traditional one than a modern production system. This model has not generated its linkages with business and industry to make it outgoing, value adding and market competitive.

Is it any wonder then that even in our predominant industrial activity — the textiles — the non-cotton producing countries are more competitive and enjoy a much bigger market share in the higher value segments of textile and clothing business in world markets than Pakistan?

During 1990s when we were marketing various investment opportunities in Pakistan to foreign investors, it was natural to invite their attention to the over 4,000 ‘sick’ industrial units. These units had locked in several hundred billions of rupees of national wealth in the form of urban land they occupied, the utilities and services extended to them, their shareholders’ investments and huge amount of bank loans outstanding against them.

The idea was to get foreign investors interested in purchasing these ‘sick’ units from owners, pump in new capital and technology and make these units producers of wealth for themselves and the country. Repeatedly, however, one heard the same stories from several interested foreign investors who soon threw in their towel complaining they could not purchase these ‘sick’ units since our economic system rewards inefficiencies and there was no incentive in the system to sell these ‘sick’ units.

The challenge for the government and the corporate sector is to develop an open and competitive production system. No one from outside can do this job for us. Nor can Pakistan’s production system stand up to global challenges by sticking to their accustomed ways. Instead of disjointed ‘packages,’ Pakistan needs holistic reforms of its flawed business model that create strong linkages between productivity and profitability. These reforms will pump vitality into our production systems and help create a first rate production system here. Only such a production system will help Pakistan secure a larger share in world markets and catch up with the rising economies of Asia that had earlier overtaken it.

Email: smshah@alum.mit.edu

The download wave

WHERE hip-hop led, Haydn follows. The download revolution which has transformed the pop record industry is about to sweep the world of classical music.

On April 10 Warner Classics begins launching its archive of recordings online — a process which will begin with 300 albums and which may end up with as many as 25,000 titles available for download. Barenboim’s Mozart piano concertos, Pierre-Laurent Aimard’s Debussy and Martha Argerich’s Rachmaninov are now but a click away.

Warner has doubtless been emboldened by the example of others who were first to put a toe in the water. Smaller independent labels such as Chandos have proved there is a market for classical music downloads, just as Radio 3 did when it indulged in a brief Beethoven symphony bonanza - popular with punters, if not with commercial record labels. —The Guardian, London