BAHRIA ECONOMIC JOURNAL

COLLECTED WORKS OF ISSUES ON THE HORIZON 2008

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Director’s Address
Amid diversity of thought provoking, interesting and informative activities provided at Bahria university Karachi campus, I am pleased to observe that our in-house publication or compilation have under the banner of Bahria economic forum have become a reality. As we are engrossed in producing this journal we are reminded by our well wishers that these rare and major endeavors in creative thinking and writing are land marks in students academic and career development. While these compliments are an honor for both students and faculty, it is earnestly requested that the quality of this journal be judged not by color but by content. I facilitate my students and faculty on this work which is a harmonious blend of creativity, team work and dedication. In a nut shell, it is an excellent effort towards a mutually and rewarding experience for students embarking on the course to career and professional excellence. I wish them every success and believe that their emotional maturity, seriousness of purpose and penetrative thinking will Insha Allah earn them laurels, bring joy to their families, institution and society at large.

Ashfaq Agha Director Bahria University Karachi

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President’s Address
“The national sense of sympathy is on decline with virtue of increasing empathy.” The state of inertia is perhaps the hidden but an obvious reason behind the above mentioned emerging phenomena. The chaotic atmosphere in the sociopolitical structure is wakening the world economic thread that once was protected in isolation with collective agreement of all the countries despite the sociopolitical disorders. This understanding however proves to be a very weak shield from sociopolitical disorders. Bahria Economic Forum is the center of research in Business, Economics and Finance. It is a platform for professionals, students, teachers and independent researchers to share and publish quality and valuable articles and research works. The Bahria Economic Forum strives to bring together the brilliant minds of academia to pave the way to new opportunities and strengthen the country’s economic situation. With a focus on business and economics, our objective is to initiate reciprocal dialogue and research to promote economic growth and integration. Our theme is "Poverty is Curable", and as I say this, I believe we have enough resources in this universe to solve all our problems and under this belief; we are working to find apt solutions and workable models to cure poverty which is considered to be the undisputed king of all the problems especially in Pakistan. We also want to establish partnerships in the form of mutual understanding and support in the process of learning through research in the evolution of international Economics, Business and Finance as joint efforts of government, corporate and academic research institutions. Consequently with government and corporate patronage and support, we will be able to make substantial enhancement in society’s abilities through constant development and channelized evolution and elimination of the negative repercussions of the current capitalist system. We thank our Coordinator Mr. Khalid Khawar, Ms. Fahmida Roufi and Mr. Amir Sultan, Head of Management Sciences Department Mr. Naveed Mohammad Khan who sanctioned and supported this project and our Official Sponsor Takaful Pakistan Limited who made this project a reality.

Suhaib Ammar Hafeez President Bahria Economic Forum

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Editorial
The world of today is dynamic. Change is inevitable and unavoidable. With dynamism, competition has gone to the next level. The tools of warfare and the nature of warfare itself have changed. Status Quo has been challenged and it has created opportunities for the smaller countries to reduce the gap between themselves and rest of the developed world in the fields of science, technology, economic development and infrastructure. This is an inaugural issue of the Bahria Economic Journal. We have acknowledged the fact that promoting research in all disciplines including social sciences is the only way a developing society can prosper and sustain its development path. Technology assimilation and adaptation is necessary but it is the self-initiated research endeavors which give way to gaining comparative advantage. Intellectuals are a key to this process and they must be acknowledged, appreciated and provided with a platform where they engage in intellectual debates and exchange ideas which become successful theories of tomorrow. The purpose of this journal is to provide such platform to the young minds of universities, experienced professionals, independent researches and faculty members of the universities. I would like to thank all the contributors to this journal including students, researchers and teachers, and professionals in the industry both within and outside Pakistan who have contributed in this journal. I look forward for your cooperation and contributions in the future too. I would also like to request the learned readers to provide their valuable suggestions and I welcome their contributions in the journal in the future editions.

With Regards,

Salman Ahmed Sheikh
Editor Bahria Economic Journal

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Table of Contents
1. An Analysis of Current Islamic Banking and Proposal for an Economic Framework........................ 6

2. Reconsidering the Validity of Exports-Led-Growth Hypothesis for Pakistan and Bangladesh ...... 16

3. Stabilization Policy…A Review........................................................................................................ 26

4. Nature, Causes and Effects of Inflation on Pakistan’s Economy ....................................................... 32

5. Role of TDAP in Exports................................................................................................................... 34

6. Good Governance and Free Market Economy ................................................................................. 37

7. Promoting Microfinance: An epoch of financial inclusion.............................................................. 39

8. Analysis of Budget 2007-08 ............................................................................................................... 42

9. Importance of Technological Development in Economic Growth .................................................. 44

10. SME as a Significant Component of Pakistan’s Financial System.................................................... 46

11. In the pull of Survival......................................................................................................................47

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Research Papers

Analysis of Current Islamic Banking and Proposal for an Economic Framework
The research paper recommends radical but important changes in the Islamic banking products, such as introduction of options contract in mortgage financing, which will allow the bank to separate the tenancy and sale contract. This will still ensure that it locks the sale with the borrower or the third party without making both contracts dependent on each other. It will benefit the bank as well as the borrower, who will have an option but not an obligation to buy the asset at maturity.

SALMAN AHMED SHEIKH
Islamic Banking was introduced in Zia’s regime in the 80s. Since then, it has developed very rapidly. Meezan Bank, Dubai Islamic Bank, First Dawood Islamic Bank, Bank AlBaqarah, Emirates Global Islamic Bank and Bank Islami are full fledged Islamic banks operating in Pakistan. A number of local and foreign scheduled banks have started Islamic banking windows and exclusive Islamic banking branches. It is expected that Islamic banking will capture 12% of the deposit market by 2012. Apart from the growth, Islamic banking products have received criticism from many sections of the society. The technique used in coming up with Islamic products is to transform the consumables (like money) into tangible assets and sell these assets at a profit (in consideration for deferred payment). In this research paper, these products have been analyzed in detail. The areas in which current Islamic banking products fail to provide compatible solutions with Islamic principles are also discussed. This research paper outlines the economic teachings of Islam with regard to income, earning and spending. It compares interest with rent and with profit and shows that interest is equivalent to neither rent nor profit. It also analyzes the logical arguments put forward in favor of interest by different economists and refutes any economic and logical justification of interest. This research paper recommends a few major changes in the whole structure of economy with special focus on fiscal reforms and Islamic banking reforms. The fiscal reforms will ensure that government is able to eliminate fiscal deficit which will allow it to abstain from interest based financing. The research paper recommends radical but important changes in the Islamic banking products, such as introduction of options contract in mortgage financing, which will allow the bank to separate the tenancy and sale contract. This will still ensure that it locks the sale with the borrower or the third party without making both contracts dependent on each other. It will benefit the bank as well as the borrower, who will have an option but not an obligation to buy the asset at maturity. The modified role of bank entering in a Modarba contract as a “Rab-ul-maal” (investor) will ensure that the bank takes on operational risk. It will enable the resources to go into productive avenues rather than in financial instruments, as the bank previously had no other choice to invest the proceeds in financial instruments in the conventional system of Modarba. This will generate employment and productive activities in the economy. The division of Modarba corporate and Modarba consumer will target two very distinct markets and will result in channeling of funds from saving surplus units to savingdeficient units.

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Current Islamic Banking System
Assets
1. a. Home Financing

b. c.

b. c. d. e. f.

g.

h.

The installment is calculated based on 1 year KIBOR. KIBOR is used as there is no other benchmark rate available. The logical argument is that in a society if there is only one merchant who sells prohibited products, and then he starts to sell one legitimate product, he will use the profit rates on prohibited products for pricing and calculating profit margin on the legitimate product. In the master Musharika agreement, the floor rate and the ceiling rate is stated based on which the installment amount can vary. In a master Musharika agreement, it is stated that if payment is made on time, the transfer of ownership will take place accordingly. Reputable estate agencies are consulted for the valuation of assets. The risk of damage to the property is borne by the bank and the customer, according to the stake in the property at the time of disaster. Just like in conventional mortgage, a penalty is charged if a customer withdraws from the contract which is paid to charity. The logical argument presented for such a penalty is that the contract involves a sale of property as well and if a customer withdraws from the sale contract, he can be asked to pay a penalty. Master Musharika agreement contains details of the tenancy agreement as well as the sale agreement. A contract is made when the customer signs the contract, which means that he has agreed to the terms of the contract. The seller of the property is paid by the bank and only the bank and the customer remain in the scenario. 2. Murabiha

d.

Murabiha is used in working capital financing and trade financing. The customer is asked to buy the asset acting as an agent to the bank because he has more knowledge about the product and better relationships with the supplier to obtain the goods at a competitive price and in a timely and appropriate manner. In the case of import/export, if the exporter does not know the buyer of the asset (importer or bank), it does not matter. The logical argument presented here is that if person A takes a loan from the bank and buys an asset from B, who has no concern from where the money is coming from (the buyer’s own pocket or the bank). B’s only concern is getting the price he is selling for.

Liabilities
1. a. b. c. Current Account

The money deposited in the current account is considered ‘Qard’ (Non-interest bearing loan). The money is invested in the fund by the bank. The money is payable on demand. 2. Savings Account & Term Deposit

a. b. c. d. e. f.

The money is invested in the fund. The bank acts as ‘Mudarib’ i.e. 'Fund Manager' and the customer acts as ‘Rab-ul-maal’ i.e. 'investor'. The money is only invested in Shariah compliant assets. The Weight age is assigned to each category of investment that is stated to the customer at the outset. The assigned Weight age reflects the time value of money. The profit is distributed as follows:

a.

Murabiha is just like a sale transaction. If a trader has the right to sell a good at a profit, the bank should also have the right to sell an asset if he obtains constructive possession of the asset and bears the risk of damage to the property until the sale is made to the customer.

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Category

Deposit (Rs.)

Weightage

Weighted Average

Profit

Rate*

Savings 1 Month 3 Months 6 Months 1 year Total

3,000 1,000 3,000 6,000 7,000 20,0000

0.1 0.3 0.5 0.6 0.7

300 300 1,500 3,600 4,900 10,600

57 57 283 679 924 2,000

1.89% 5.66% 9.43% 11.32% 13.21%

Figure 1: Profit Rates (Source: www.abnamro.com.pk)

Critical Analysis of the Islamic Banking System
Application of Time Value of Money
Time value of money is the basis of interest. Interest is said to be the charge on the use of money for a particular time period. Islam prohibits interest which entails that no fixed amount can be charged for the use of money for a particular time period. The investment will have to go through the entire process of a business activity which involves risk taking at each stage and any compensation on investment will be strictly dependent upon the outcome of the business activity. Time value of money is the problem for the investor to avoid keeping his money idle and to avoid forgoing the use of money that may bring positive value to his investment. However, it does not mean that the investor can demand an arbitrary increase (or is given as the case may be) as the cost of using money without taking the risk. Assigning weight age to investment based on tenor of investment is another way of paying interest based on time value of money. The profit rates are calculated through weight age which when plotted on a graph will create the same yield curve as in the case of term deposits. The situation where losses are incurred would have been very

interesting, but the money is invested in instruments in which the chance of loss is remote. Also, the arrangement is such that the bank makes sure that it gets comparable returns taking KIBOR as the benchmark rate. A businessman facing the problem of time value of money will invest his money in a business activity, bear all the risks especially the market risk and price risk and will eventually make a profit or loss. The profit for the businessman strictly depends upon the actual profit realized after taking market risk including price risk. It does not depend upon the time. The use of weightage as a compensation for time value of money will be appropriate if the business earns same level of profits and no loss in each period. This happens in the case of Islamic savings account and term deposits because the pool of money collected in the fund is invested in instruments in which chance of loss is remote. Now a discussion on those instruments (assets of the bank) will clearly demonstrate that these instruments inherently involve interest which enables the bank to provide compensation based on tenor.

Critical Analysis of Diminishing Musharika in Home Financing:
In ‘Diminishing Musharika’, two contracts i.e. tenancy and sale are mixed. Both are made contingent upon each other.

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The rent is calculated and charged on the basis of 1 year KIBOR. The rent increases when the KIBOR increases. It is referred to as ‘Diminishing Musharika’ because of the arrangement, the ownership stake of the tenant increases

and that of the bank decreases or diminishes with the passage of time. The rent decreases as the ownership stake of tenant increases. Following table compares the conventional mortgage and ‘Diminishing Musharika'.

Features Benchmark Rate Basis of Installment Nature of Installment Prepayment Penalty Tenancy+Sale contract In subsequent years In subsequent years Changes in Installment Price and Market Risk Price of Asset Cost to the borrower Profit to the bank

Conventional Mortgage KIBOR KIBOR Interest +Principal Yes Dependent Interest payment decreases Principal payment increases Based on KIBOR No Locked at initiation Same in both cases Same in both cases

Diminishing Musharika KIBOR KIBOR Rent + Principal Yes Dependent Rent payment decreases Principal payment increases Based on KIBOR No Locked at Initiation Same in both cases Same in both cases

Figure 2: Comparison of Conventional Mortgage and Diminishing Musharika It can be seen from the table above that there is no difference between the two modes of financing. The minor differences are procedural and do not change anything. The only noteworthy argument that people put forward regarding ‘Diminishing Musharika’ is that the bank bears risk which is also a myth and is discussed separately. this is also transferred to the insurance company. Had the tenancy and sale contract not been made dependent, the bank would have had to bear the market risk which the bank cleverly avoids by making both contracts dependent and locking the price at the outset.

Critical Analysis of Murabiha
It is referred to as “cost + profit” transaction which is not true. It is a “cost + financing” transaction. It involves a loan and a deferred sale. Considering it equivalent to the spot sale is not true. Even the eminent scholar Mufti Taqi Usmani when analyzing it in his book “Islam Aur Jadid Maishat-o-Tijarat” accepts the fact that it is a loan transaction and further states that ‘compensation on deferred payment to the seller is allowed’. With all due respect, this compensation is nothing but interest.

Critical Analysis of Risk Taking By Bank
There are several types of risks. The most relevant risk is the market risk including price risk i.e. the risk that the goods will not be sold or will be sold at lower prices which may or may not cover costs. This risk is only borne by the seller when the goods are ‘held for trade’. In ‘Murabiha’ and ‘Diminishing Musharika’, operational risk is not taken by the bank. The only risk taken is against ‘destruction of property’, the occurrence of which is highly unlikely and

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For example, if a person needs a machine worth Rs.1,000. The bank appoints the person as an agent to buy it and pays the amount (Rs. 1,000) and simultaneously sells it to the person at a profit. The bank makes sure that it gets the required profit by locking the price at the outset and avoids taking any market related risk. This is not equivalent to a spot sale because if the person had Rs.1,000, he would never have come to the bank. The transaction is the same as taking a loan of Rs.1,000 from the bank, using it for some purpose for a particular time period and then repaying the bank an amount greater than Rs.1,000.

over the centuries. However, it must be emphasized that anything which does not contradict with any of the Islamic laws is permissible. The work of Muslim jurists can only serve as guidelines and should be open for debate and can never ever become a law which can not be modified. Fourthly, it is argued that profit and loss sharing is the only alternative of interest. The work of Javed Ahmed Ghamidi on ‘Islamic Economic Framework’ has argued that profit and loss sharing is not the only alternative of interest. He argues that an investor can opt to become a partner only in profits. This is a common practice in limited liability partnership of professionals like lawyers and doctors where the other partners do not make good of any loss if the loss was solely caused by the actions of a particular partner. This arrangement of partnering only in profits is very different from interest. An investor investing to earn interest gets the fixed amount irrespective of profit or loss of the borrowing entity. When a partner in a Modarba contract opts for partnering only in profits, he will only get a profit if the borrower gets a profit. Therefore, this does not result in any exploitation of the borrower and does not contradict with any of the Islamic laws. Moreover, in the conventional Modarba arrangement, Mudarib (Fund manager) bears no loss while he is the only reason of loss. The Rab-ul-maal (investor) is not allowed to interfere in the affairs of the business. When a loss occurs, the Mudarib acts like an employee of the business and when the profit occurs, he shares in the profit as if he was the only reason behind the profits.

Critical Analysis of Modarba
Modarba is said to be an Islamic mode of financing which is historically not true. At the age of 25, Prophet Muhammad (Peace Be Upon Him) entered into a Modarba contract with Hazrat Khadija (May God be Pleased With Her). This is a period before revelation. So Modarba as a mode of financing was prevalent. Since Modarba financing did not contradict with the values of Islam, people even after the beginning of revelation were allowed to enter into Modarba financing. Secondly, in the example of Prophet Muhammad (Peace Be Upon Him), He entered into the contract as Mudarib (Businessman, Fund Manager or Asset Manager). So the flow of money is from a rich financial entity to a business entity in need of finance. In the case of currently practiced Islamic banking, the flow of funds is from the small pool of investors to a large financial entity. That large financial entity can not invest the funds in instruments other than the financial instruments. Therefore, it has no productive effect on the economy and no employment and self-employment generation takes place. Mudarib is a person in need of finance, bank as a reservoir of money acting as Mudarib is a senseless arrangement. Thirdly, Muslim jurists have formulated certain rules regarding Modarba financing that are now considered as ‘Islamic rules of Modarba financing.’ This is not the right place to highlight the problems this practice has created

Concluding Remarks
The current Islamic modes of financing are no different from conventional system. Nothing can be charged on consumables including money but rent can be charged on tangibles like property or any asset. The technique is to convert the money into asset and then sell the asset on a profit or give the asset on rental basis to earn profit. This article has highlighted the defects of these instruments

Difference between Interest and Profit
Interest on Capital Profit on Trade

Confirmed profit irrespective of the result that lent Profit depends upon market mechanism and is not a money gives to borrowers. function of money or investment.

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Continuous profit on lent money. Confirmed profit on taking no risk.
Figure 3: Difference between Interest and Profit

One time profit on any transaction Profit/Loss on taking risk and putting effort.

How This System Works
Suppose in an economy, there are two people, one blessed with a lot of capital and one with a very little. The one who has a little capital wants his living standard or financial status to go up. He thinks this way by looking at the luxurious lifestyle of that rich person. He goes to the rich person and asks him for capital. The rich persons says, 'I will lend you Rs.120 and you will need to pay 10% interest per year on it.' Since there is no other way of financing, the poor person agrees and the rich person lends him money. After one year, he earns Rs.12, he goes to the rich person and begs for forgiving the interest, but the rich person

doesn't agree and says that now the interest will be charged on 10% of the original amount plus the interest (120 + 12) i.e. Rs. 132. Now one can clearly see what will happen next, the poor person will be at a higher risk for the next year. The greater the risk, the less he will think about right and wrong in his business dealings. He might survive but by bringing damage to the society and its values. The rich person has to worry about nothing. Whatever happens, he will be earning interest. His prospects of earning higher interest will grow as the severity of the needs of the people will grow.

Capital Owner: Risk free investment (Rs. 120). Confirmed 10% interest income. Borrower: Takes risk and puts in effort. No Confirmed profit. (Profit > 12, Profit < 12, Profit = 12).
Figure 4: A typical relationship of Lender and Borrower in Capitalism

Analysis of Logical Reasons in Favor Interest
Interest is the price of risk
It is not right to say that lending money involves taking a risk. Because the lender gets interest in any condition, whereas businesses after taking risk either earn profit or incur a loss.

needs are already fulfilled. He is only lending the money which is in excess of his needs.

Share in the profit of the borrower
Interest is not a share in the profit of the borrower because if money is borrowed for fulfilling needs rather than for conducting business, then, there is no question of a profit. But, even if money is lent for commercial purposes, then, how can we say that the business will be profitable. Businesses earn profit and incur losses, why the investor doesn’t share in the loss and what sort of an effort he has put in to demand a profit that is fixed and confirmed irrespective of the profitability of the business.

Price of self forgone needs
A lender lends a portion of his money which he doesn't need immediately. So, he is not forgoing his needs as his

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Interest is a rent on money
Those things on which rent is charged are used and given back in the same existing condition like homes, cars etc. While money and other consumption goods are consumed. When we borrow money, we consume it and regenerate it. When the money is consumed, the borrower has to regenerate it and the lender without taking any risk is entitled to receive the consumed money with the interest. Can we borrow apples or mangoes on rent? We can borrow hammer but not the nails based on the above classification.

further research. It implies that government can not charge anything more than these rates on the particular heads of income as specified above. But, the government can charge a rate below these ceiling rates. The government can give a tax benefit for a particular social purpose to any industry, group of people and socio-economic activity. In pure service industries like consultancy service, services of doctors and lawyers etc, a rate of 10% Zakat can be charged. When a particular industry moves away from a pure service industry to a producing industry; the rate of Zakat can be decreased up to not less than 5%. Between the service and goods producing industry, tax can be levied within the range of 5% and 10%. 3.

Fiscal Principles:
The following four fiscal principles are the basis of fiscal reforms: 1. 2. 3. 4. Rates of Zakat. Zakat rates are ceiling rates. No tax can be levied other than collecting Zakat. Zakat is payable to the government.

No Tax Levitation Other Than Zakat

The government can not levy any tax other than Zakat. This will serve as an automatic check on the government to effectively and efficiently collect and spend the proceeds of Zakat.

1. Rates of Zakat
It is generally understood that Zakat is only 2 ½% on capital. But rates of Zakat are different on various heads of income. The classification is as follows: a) b) 2 ½% on cash and capital in excess of need payable once a year at a particular set date. 5% on production using both labor and capital. It is applicable on production in industries and agriculture or on any other income earned where both labor and capital are utilized. It is charged at the completion of the production process. 10% on production using either labor or capital. It is applicable on rental income, dividend income, and income from selling securities yielding capital gains, salaries and pure service industries such as consultancy. It is charged as soon as the income is realized. 20% on production using neither labor nor capital. This is applicable on treasure or any other natural gift obtained without using neither labor nor capital.

4. Zakat is Payable to the Government
Zakat is payable to the government. It is declared as a right of the government and the duty of citizens towards the government. Only when the government is not collecting Zakat, one can pay it privately. But if the government collects Zakat in a community, people must pay it to the government.

Economic Results of Islamic Fiscal Reforms:
1. 2. 3. Gap between the rich and poor will decrease. It is a progressive system of taxation. It covers all heads of income including service industries, goods producing industries, agricultural income, rental income, personal income, corporate and business profits, income on financial instruments like stocks, mutual funds etc. It levies a special tax on cash, cash equivalents and capital in excess of need which makes sure that the money circulates and is used in the productive activities. Tax on cash and capital will force the people to invest their money in productive uses. With prohibition of interest, this money will only go in business either with the start of one's own business or equity participation in Modarba and stocks etc. It results in an increase in tax base because it covers all heads of income.

c)

d)

4.

2. Zakat Rates are Ceiling Rates
Javed Ahmed Ghamidi has discovered in his research on ‘Islamic Economic Framework’ that these rates on Zakat are ceiling rates. This is discovered by looking at the linguistic construction of that said directive. This paper will not go into details about the linguistic construction but one can refer to his book “Islamic Principles of Economics” for

5.

6.

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7. 8. 9.

It simultaneously benefits the taxpayers as the rates in the range of 5% to 10% are very lenient as compared to the current rates in conventional taxation system. Since it is not only a state obligation but a religious obligation, it is hoped that it will not result in tax evasion. It reduces confinement of wealth in few hands.

Diminishing Musharika with Option Contract
In ‘Diminishing Musharika’, the following points hinder in its wide acceptability: 1. 2. 3. Dependence of Tenancy and sale agreement upon each other. The seller (bank) takes no market risk and price risk by locking the price at the outset. The rent (as it is called in Diminishing Musharika) is calculated on the basis of KIBOR, which serves as a minimum opportunity cost for the bank on the loan. One partner (the bank) enters into a partnership and gets out of the partnership at maturity with a confirmed profit.

Fiscal Reforms and the Fiscal Deficit
Pakistan’s fiscal deficit is around 4% of its GDP. The current tax to GDP ratio is approximately 10% of the GDP. It suggests that if tax-to-GDP ratio can be increased to more than 15%, the fiscal deficit will substantially reduce. Zakat at a rate of 5% to 10% on production will automatically result in the tax to GDP ratio of around 8%. Moreover, with the removal of interest expense from the income statement of all enterprises, the taxable income of all enterprises will increase, resulting in an increase in tax collection. In the system of Zakat, the tax exemption amount is very low on cash and capital in excess of need i.e.512 grams silver which results in increase in taxable income and tax collection. The 2 ½% of all cash and capital in a country will be a very huge amount. Even if it is equivalent of 5% of GDP, it will result in attaining the total Zakat/GDP ratio of 15%. Moreover, such a lenient taxation structure will itself increase productive activities, employment generation on a large scale and higher tax collection for the government. It will allow the government to allocate more resources on development. The presence of an active public sector is required to achieve the social targets which can not be achieved through the private sector. The income from those public enterprises will not only put a check on the private sector but also achieve the social objectives, such as reducing inequality of income. If this system is enforced with utmost sincerity by the government, along with the commitment of the general public and the public/private sector partnership, this can put an end to deficit financing. It will automatically result in price stability and improvements in living standards.

4.

The alternative is as follows:
The bank buys the asset paying the asset owner the full amount of the asset. The Bank is now the owner of the asset. It gives the asset on rent to the borrower and at the same time, the bank enters into an option contract as the call option writer. In a European option contract (exercisable only at expiration date), the borrower buys that call option which gives him the right to buy the asset at call expiration. He has the right but not the obligation to buy. The option writer however, is obliged to sell the asset if the call buyer decides to exercise the contract. For short term option contracts, American style call option contracts (exercisable on or before expiration date) can also be used. If the call buyer does not exercise, the option contract expires and the bank is in a position to give the asset on rent at an amount based on the then higher market prices. Therefore, the bank’s position is safe. If the call buyer exercises the contract, the bank gets the asset price plus the rental income for the period before the expiration of the contract. If the call buyer does not exercise, the bank will be able to sell the asset at the current price which will definitely be more. If in an unlikely event, the asset prices have decreased, the call buyer will not exercise the contract because it will be an out of the money transaction for him. The bank will still be able to give it on rent again after it has earned the rental income for the period plus the call premium.

Murabiha
Murabiha is just another method of lending to earn interest. Compensation for deferred payment is interest. In Murabiha, if a person requires a good worth Rs.1,000, the bank pays the money and sells the good to the same person at a profit (e.g. Rs. 1,200). The transaction is the same as

The Guidelines for Banking System
Limited Liability Partnership
Limited liability partnership does not contradict in any way with Islamic principles and hence will be allowed.

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getting the loan for Rs.1,000, using it to buy the good and paying back the principal amount with interest (Rs.1,200) when the funds are available after some time.

Modarba
As discussed earlier, a partner can opt for partnering only in profits. The modified Modarba will have the following characteristics. There will be two types of Modarba i.e. Modarba Corporate and Modarba Consumer.

bears the executory costs relating to the use of assets and Lessor bears the costs relating to the ownership of the assets. The rent should be market based and mutually agreed upon. The term of lease can be made equal to the useful life of the asset if both Lessee and Lessor agree. Another alternative is to use option contract as proposed earlier in the case of mortgage financing.

Reforms in Equity Markets
Equity markets are complex and intertwined with other markets in a financial framework. In this research paper, only a brief outline of reforms is presented before the readers. • Information processing must be transparent. The role of CDC, Stock Exchange and SECP is to ensure that there is no insider trading, market manipulation and that rules, regulations and procedures are designed with an objective to protect investors, ensure their participation and increase their confidence. Strict check on broker's activities and cancellation of membership if any broker is convicted of a manipulation or fraud. Stock trading in futures markets should be abandoned. Secondary market trading does not influence the financial health of businesses directly and futures market of stocks is neither a need of the listed companies nor is it of any use of investors in stocks other than speculation. Moreover, repeatedly it has been proved that stock market crashes were caused by speculation in futures trading. With the closure of savings, PLS, fixed/term deposit accounts, more money will come in stock market either directly or through mutual funds. New memberships can be given to encourage competition, sound market practices and to bring the brokerage commissions down. Primary market activities will increase since companies will no longer be able to generate finance through debt. Therefore, increase in listed companies will expand the market and diversify trading opportunities. A Company must pay dividends regularly and it must not be left on the will of the company directors to decide on this matter. One possible suggestion is that every investor should be given the right to decide whether he/she wants to get the regular dividends or not. A Company can offer special benefits to those who don't want regular dividends immediately like selling shares to them at a discount price in IPO and subsequent PO.

1. Modarba Corporate
In the conventional system, the bank acts as a Mudarib. If this arrangement is reversed, the bank will truly understand what risk taking is all about. The Bank will act as a Rab-ulmaal (investors) as a rich financial entity and will provide finance to business entities and corporations. This way the fund will be utilized in productive uses rather than in the financial instruments that bring no employment generation when the bank acts as a Mudarib (fund Manager). In this contract, the bank acting as Rab-ul-Maal can opt to share only in the profits. This way the bank will be minimizing the risks and will get the principal paid back in full if the business incurs a loss. The validity of this arrangement has been discussed earlier. The Mudarib (Business enterprise) will not be willing to show losses because it will deteriorate its credit ratings and make it difficult for it to obtain finance through Modarba corporate in future.

2. Modarba Consumer
In this contract, the bank will act as a Mudarib (Fund Manager). The investors acting as Rab-ul-maal will provide investment which is put together in a fund. The bank (Fund manager) will invest the funds in the equity market, Modarba corporate, permissible derivatives like option on real estate (as discussed above), etc and declare the dividends either stock or cash as the case may be. The fund can be a closed end fund or an open end fund. The calculation of profits for each investor will also be simple as it will be based on the capital gains on investment as a difference between redemption and purchase prices calculated each day on the basis of NAV. Therefore, the bank will also avoid the complex profit calculation based on profit on daily product basis as in the current system. •

Leasing
Operating leasing is in accordance with Islamic directives since no interest is involved in operating leasing. Lessee

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Reconsidering the Validity of ExportsLed-Growth Hypothesis for Pakistan and Bangladesh
This paper reconsiders the validity of exports-led-growth hypothesis for Pakistan and Bangladesh by comparing the econometric techniques used by Md. Abdul Wadud for Bangladesh and Md. Akbar and Zareen Fatima Naqvi for Pakistan. As the issue of making a choice between imports-substitution and outward oriented development strategy as the optimal development policy has assumed significant importance in connection with policy formulation, this paper concludes that further research is needed prior to conclusively supporting or rejecting exports-led-growth hypothesis both in case of Pakistan and Bangladesh. As conventional Granger-causality approach is merely a statistical exercise, which does not explain the behavioral aspect of the relationship between exports and income, use of a structural model, comprising of two equations and analyzing them by using two stages least square estimation technique is suggested in view of significant policy implication of the issue.

S.NAYYAR ALI AND EHSAN A. SHEIKH
Introduction
The effect of international trade on the economic growth in less developed countries has long been the most passionately debated subject in the field of development economics. In this regard, development economists have actively been searching for “Optimal” development strategy. To them, making a choice between inward-oriented and outward-oriented development strategies has become the most important question to answer. Various claims have been made pertaining to this choice. According to Bela Balassa, “The evidence is quite conclusive: countries applying outward-oriented development strategy performed better in terms of exports, economic growth and employment than the countries with continued inward orientation, which encountered increasing economic difficulties. At the same time, policy reforms aimed at greater outward orientation brought considerable improvement to the economic performance of the countries that had earlier applied inward oriented policy”. Jagdish Bhagwati and Anne O. Krueger held similar views. “The growth performance of countries oriented towards export promotion appears to have been more satisfactory than that of the import- substitution oriented countries”. Michael Bruo has also favored the outwardorientation of the development strategy: “Economic theory tells us that a fully liberalized economy is most probably Pareto superior to a heavily controlled economy. The most successful development histories are those in which a country very early on switched from an import-substitution-led strategy towards an export-led development strategy”. In accordance with these views, export-led-growth has been put forward as the efficient alternative to inwardoriented strategies of development because it is believed to lead to a higher total-factor-productivity growth and encourages foreign direct investment. Exposing domestic producers to greater competition in the world market may also entail better product quality and reduced inefficiencies. Foreign exchange liberalization, an important component of export-ledgrowth strategy, is likely to reduce allocative inefficiencies. The quest for optimal development strategy pertaining to international trade has greatly enhanced the need for testing the export-led-growth hypothesis for almost all of the developing countries which have, either, switched from import- substitution regime to outward-oriented growth policies, or, are being advised to do so. The objective of this paper is to investigate the validity of export-led-growth hypothesis and evaluate the suggestions in this regard in formulating a development strategy, particularly for Pakistan. For this pursuit, we will primarily focus on two influential papers. One of these papers is by Muhammad Abdul Wadud, who using the co integration and error-correction models, has found that export-led-growth hypothesis has been supported for Bangladesh. The second paper which concerns us is

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of Muhammad Akbar and Zareen Fatima Naqvi. In this study, they have built a VAR model in the production function context to avoid possible specification biases and have tested the export-led-growth hypothesis by controlling not only for imports but also for a number of other macroeconomic variables that might have some effect on export-led-growth relationship. They found no support for export-led-growth hypothesis in case of Pakistan. Their study found rather a contrary causality running from growth to export. The plan of the paper is follows: Section II presents the review of literature. In section III, we compare the methodologies used for testing the hypothesis. Section IV discuses the findings whereas section V concludes the paper.

II. Review of Literature
The debate on the choice between import-substitution and export promotion as the strategies for fostering industrialization and hence economic growth is long standing. The export oriented scenario of growth has drawn on a vast body of empirical research in the past two decades. (Salvatore and Hatcher, 1991; Dodaro, 1993: Moschos, 1989; Ram, 1987; Balassa, 1985; Feder, 1983; Krueger, 1978; Michaely, 1977).

Development Reports 1993 and 1987 is generally consistent with much of the literature. However, the major shortcoming of this line of argument is its failure to find empirical support. Despite that, this line of reasoning is significant and serves to highlight a number of fundamental factors. First, there is no doubt that some of the more dynamic less developed countries, particularly, the South East Asian “Tigers” rely to a substantial degree on world markets and have made substantial inroads in these markets. They have developed a comparative advantage in a wide array of manufactures. However, Bradford (1986) argues that in Korea, Taiwan and Singapore, the evolution of the production structure and the composition of exports were not left to the market, but was the result of deliberate government design. In such a case, the experience of these countries suggests not a neutral policy but the creation of price and resource allocation distortions favoring production for the export market at the expense of domestic consumption.

III. A Comparison of econometric Methodologies

M. A Wadud used VAR model with an error correction terms for two co-integrated I (1) time series to capture the short term dynamics and to decrease the chance of observing spurious regression in terms of the levels of data or their first differences. It has been argued that the export-led-growth strategy After checking for the stationary and co-integration properties of the variables, he tested the Granger entails a neutral strategy with no bias against imports. causality with the error-correction model between The evidence in support of export-led-growth strategy exports growth and economic growth (in-terms of reported by the World Bank in its World GDP growth) for Bangladesh. ECM, formulated by Wadud to carry to a standard Granger’s causality test is as follows:

n ∆ ln GDPt = α0 + Σαi ∆ ln GDPt-i + i=1 q ∆ln Ext =
0

m Σ ρj ∆ ln EXt-j + γ∆ ECTt-1 + i=1 p
t

(1)

+ Σ

i

∆ln GDPt-j +

Σ

i

∆ ln EXt-j + i=1

ECTt-1 +

t

(2)

i=1

Whereas study pertaining to Pakistan conducted by Muhammad Akbar and Zareen Fatima Naqvi, employs the Granger’s causality test to analyze the interrelationships between exports, income, imports, investment and energy. Authors, have conducted four

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tests. They first, tested bi-variate causality relationship between every pair of variables using standard two-variable approach as specified below:

P Xt = ∑ aj Xt-j + J=1 P

P ∑ bj Yt-j + Ut J=1 p
--------------------------------- (1)

Yt = ∑ cj Xt-J + J=1

∑ dj Yt-j + Vt -------------(2) J=1

Where Xt denotes exports and Yt denotes income growth (in terms of GDP) In the second set of tests they examined tri-variate Granger causality with the view to test joint influence of two variables on the third variable. The joint tri-variate causality model they used, is specified as

P Xt = ∑ aj xt-j J=1 +

P ∑ bj Yt-j + ∑ ej me-j J=1 + Ut ----- (4)

P Xt = ∑ cj xt-j J=1 +

P

P + Vt ----- (5)

∑ bj Yt-j + ∑ fj me-j J=1 J=1

P Mt = ∑ qj mt-j J=1 +

P

P + Wt ----- (6)

∑ rj Yt-j + ∑ sj Xj-j J=1

Mt denotes imports.

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Similarly, they estimated four variables and five variables Granger’s causality.

SEEMINGLY UNRELATED REGRESSION (SUR) MODEL
Muhammad Akbar and Zareen Fatima Naqvi have used a five variable VAR system in SUR form, too, specified as:

Yt Xt Mt It Et Where Yt Xt Mt It Et e n = = = = = = =3 GDP =

3 Ao + ∑ AI
P=1

Yt-p Xt-p Xt-p Mt-p It-p Et-p +

ey ex em ei le

(First differenced)

Exports (First differenced) Imports (First differenced) Investment (First differenced)

Energy (First differenced) Error terms (Lag length)

An advantage of using VAR model is that it can overcome the issue of simultaneity bias. Gujrarati (1995) points out that VAR model is a truly simultaneous system in that all the variables are regarded as endogenous considering the feedback effects in the system.

IV. Comparison of results
As the objective of this paper is to reconsider the validity of exports- led- growth hypothesis for Pakistan and Bangladesh, we compare the results of the studies under consideration.

Table-1 shows the results of the study by M.A Wadud

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Granger Causality Test from Error – Correction Model (ECM)
Dependent Variable lnGDP lnEx Coefficient For ECT -0.10318 -0.36756 t-statistic for ECT t-1 -2.1709* -1.8770 4.3787* 1.2574 F-statistic for lnExt-j

* Means significant at the 5 per cent level.
Results in table-1 suggest that the coefficient of the error-correction terms for equation (1) is statistically significant with the negative sign, and F- statistic shows the significance at the 5 percent level for equation (1) as well. Therefore, export growth Granger causes economic growth, i.e. there is a unidirectional causality running from exports to economic growth. Thus, the results supports the export-led growth strategy hypothesis i.e. export growth leads to output growth.

Table 2 shows the results of bi-variable causality analysis for Pakistan. Results of bi-variate causality analysis
Variables Direction of Causality Chi-Square Statistics 4.7420 7.9694 Chi-Square (Probability) 0.192 0.047* Y causes X Export(X) & Import(M) M→X Income (Y) & Imports (M) Exports (X) & Investment(I) Y→M M→Y X→I I→X 0.8744 5.4722 0.8744 2.4955 10.8363 0.832 0.1400 0.8332 0.476 0.0130* I causes X No causality No causality No causality X→M 6.5365 0.088** X causes M No causality No causality No causality No causality Result

Income (Y) & Exports(X)

X→Y Y→X

No casualty

Income(Y) & Investment(I) Export(X) &

Y→I I→Y X→E

1.8590 4.2380 2.3457

0.602 0.237 0.504

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Energy (E) Income (X) & Energy(E)

E→X Y→E E→Y

2.0762 5.6880 7.8888

0.557 0.128 0.048*

No causality No causality

E causes Y

* **

at 5% Chi-square critical value (Wald Statistic) at 10% Chi-square critical value (Wald Statistic)

The results show that exports do not lead income but income causes exports. Put differently, export-led- growth strategy hypothesis can be rejected in case of Pakistan.

Table 3 shows the results of tri-variable causality analysis.
Variables Direction Chi-square Statistics Export (X) Income(Y) And Imports(M) X→Y Y→X X→M M→X Y→M M→Y Export (X) Income(Y) And Investment(I) X→Y Y→X X→I I→X Y→I I→Y Export (X) Income(Y) X→Y Y→X 4.0700 7.3439** 3.9522 0.5285 2.9536 0.3624 3.2029 5.5949 2.1263 8.6594 1.5147 2.4247 2.4703 12.245* Chi-Square (Probability) 0.254 0.062 0.267 0.913 0.399 0.948 0.361 0.114 0.547 0.034 0.679 0.436 0.481 0.007 No Causality Y causes X No Causality No Causality No Causality No Causality No Causality No Causality No Causality I causes X No Causality No Causality No Causality No Causality Results

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And Energy (E)

X→E E→X Y→E E→Y

2.9576 7.5805* 5.4310 5.4577

0.398 0.056 0.143 0.141

No Causality E causes X No Causality No Causality

* **

at 5% Chi-square critical value (Wald Statistic) at 10% Chi-square critical value (Wald Statistic)

The tri-variable results confirm the results of bi-variable Granger’s causality i.e. incomes lead exports in Pakistan. Other significant results include unidirectional causality running from investment to exports and energy to exports. Another important point to note about tri-variable causality results is that imports have no significance in export-income relationship in case of Pakistan.

Table 4
Direction Variables Statistics Export (X) Income(Y) And Imports(M) Investment (I) Y→M M→Y X→I I→X Y→I I→Y Export (X) Income(Y) X→Y Y→X X→Y Y→X X→M M→X 2.8183 5.3642 3.8428 1.5400 2.9732 0.5266 2.0774 9.4725 1.6080 2.8065 1.5228 1.0599* (Probability) 0.420 0.147 0.270 0.673 0.396 0.913 0.557 0.024 0.658 0.422 0.677 0.029 Y causes X No causality No causality No causality No causality No causality No causality No causality No causality No causality No causality No causality Chi-square Chi-Square Results

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And Imports(M) Energy (E)

X→M M→X Y→M M→Y X→E E→X

1.9113 0.3829 3.5009 1.0915 4.1509 6.5421**

0.271 0.944 0.321 0.779 0.246 0.088

No causality No causality No causality No causality No causality

Y→E E→Y Export (X) Income(Y) And Investment (I) Energy(E) X→I I→X X→Y Y→X

5.9498 6.0444 1.6022 10.9956*

0.114 0.109 0.659 0.012

E causes X No causality No causality No causality

2.1348 10.1352*

0.545 0.017

Y causes X No causality

Y→I I→Y X→E E→X

0.6027 3.0695 2.6069 9.4864*

0.896 0.381 0.456 0.023

I causes X No causality No causality No causality

E causes X Y→E 6.5601** 0.087 Y causes E No causality

E→Y

5.7582

0.124

* **

at 5% Chi-square critical value (Wald Statistic) at 10% Chi-square critical value (Wald Statistic)

Results of the four variable causality are presented in table 4. There is only one significant change in the relationship among various variables compared to the finding of bi- and tri- variable causality equation. Otherwise finding of bi- and tri- variable analysis are more or less unchanged.

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In case of four variable causality, (involving incomes exports, imports and investment) neither exports Granger cause income nor income Ganger cause exports. The most important results of the study pertaining to Pakistan have been shown in table

5. Table 5: Comparison of SUR results with Granger causality (OLS) results.
Simultaneous equation SURE analysis Chi-Square (Prob.) X→Y → 1.527 (0.1539) Y→X → 10.344* (0.0158) X→M → 7.8106* (0.0500) X→I → 14.319* (0.0025) I→Y → 7.3242* (0.1628) X→E → 14.741* (0.0200) Y→E → 15.162* (0.0016) 5.3409 [0.148] 2.5545 [0.466] 3.2212 [0.3591] 1.9539 [0.582] 3.8120 [0.282] 9.6952* [0.021] Granger causality analysis Chi-Square (Prob.) 1.5176 [0.678}

*Wald statistic significant at 5% critical value.
This table compares the results of 5-variable VAR model estimated using seemingly unrelated regression technique with Granger causality (OLS) results (Five variable case) The advantage of using SUR is that it takes care of the possible simultaneity bias in the equations. Results of the SUR analysis show that exports Granger cause imports, investment and energy. On the other hand, income Granger causes energy, and investment Granger cause energy. As shown in table 5, there is only one significant relationship that is common in the two analyses and that is income leading exports.

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IV. Conclusion
As has been mentioned earlier, the primary objective of this paper is to reconsider the validity of exports-led- growth hypothesis in case of Pakistan and Bangladesh because the validity of this hypothesis helps answer the most important question,” Are exports engine of growth”? A significant and positive Granger causal relationship running from exports to economic growth has been found by Wadud for Bangladesh despite the fact that exports to GDP ratio is not very high. This finding suggests the policy makers in Bangladesh to adhere to the out-ward- oriented development strategy as a means to achieve sustainable economic growth. On the other hand, study pertaining to Pakistan does not support exports-led-growth hypothesis. The results show that exports do not Granger cause growth, rather it is the growth which Granger causes exports, suggesting that a certain level of economic growth may be a prerequisite for promoting exports. Because growth may help achieve efficient allocation of resources according to comparative advantage and realization of economies of scale which lower the costs of exportable and make exports more competitive in the international markets. However, it would be pragmatic to use the results of both the studies cautiously for policy formulation. Because both the studies employ conventional Granger causalities approach which is merely a statistical exercise. It does not explain behavioral aspects of the relationship between export and income which should be studied in a structural model, comprising of two equations and analyze them by using two stages least square estimation technique.

References
1. Wadud, A. (2000): “Co-integration and errorcorrection models in estimating causality between exports and economic growth in Bangladesh”. Pakistan journal of applied economics. Akber & Zareen: “Are exports an engine of growth in Pakistan?” available at internet. Balassa, B., (1983): “Outward versus inward orientation once again”. World Development 11, 215, 218. Dodaro, S. (1991): “Exports and growth: a reconsideration of causality”. Journal of Developing Area 27, 227-44. /feder, g. (1983): “on exports and economics growth”. Journal of Development Economics 12, 59-73. Granger, C.W.J (1998): “Some recent developments in the concept of causality”. Journal of Econometrics. 6. Michaely, M., (1977): “Export expansion, growth, an empirical investigation”. Journal of Development Economics 4 (1), 49-53 7. Moschos, D., (1989): “Exports expansion, growth and the level of economic Development”, Journal of Development Economic 30, 93-102 8. Ram, R., (1987): “Exports and economic growth in developing countries: Evidence from time series and cross section data”. Economic Development and Culture Change, Vol. 24 No2 9. Balassa, B. “The process of industrial development and alternative development strategies.” Essays in international finance, No.141, 1980 10. Bhagwati, J.N. & Krueger, A.O, 1973, “Exchange control, liberalization and economic development.” American Economic Review. 11. Michael Bruno; 1985, “The reforms and macroeconomic adjustment,” World Development; 867-69.

2. 3. 4.

5.

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Articles and Reviews Stabilization Policy…A Review
ASIF SHAMIM & TAHSEEN IQBAL
Ultimate objective of economic policy is to guarantee and enhance the citizens’ welfare. This ultimate objective is often expressed as a number of separate goals that contribute to the citizens’ welfare. For instance, efficient resource utilization, full and stable employment, high economic growth, price stability, equitable distribution of wealth and income across regions, and environmental protection. Stabilization policy is concerned with the design and implementation of a variety of government polices, which seek to ensure that the values of certain macroeconomic variables (real GDP growth, employment and inflation) deviates as little as possible from the set of pre-chosen targets over time. The term “Stabilization policy” has traditionally been used to describe the use of monetary and fiscal policy to smooth the business cycle fluctuations. These policies generally encompass both discretionary changes in fiscal and monetary policy resulting from specific policy decisions and automatic stabilizers that occur when taxes and spending respond to changes in economic activity. The need for stabilization typically arises when a country experiences an imbalance between domestic aggregate demand and aggregate supply which is reflected in a worsening of its external payments position and an increase in the rate of inflation. The usual underlying argument is that output and inflation volatility has a negative impact on long run growth (Ramey and Ramey 1995). A first argument is related to skill losses due to temporary unemployment during recessions with negative consequences on productivity and long term growth (Martin and Rogers, 1997). Another argument refers to credit-market imperfections that may force firms to cut their expenditure on research and development during downswings as banks usually do not accept human capital as collateral (Stiglitz, 1994). The most common argument stresses on the importance of uncertainty for investment. If investment decisions are irreversible, it may be rational for firms to postpone it in times of uncertainty. To the extent that high business cycle fluctuations increase the uncertainty about future prospects of the economy, the theory predicts a negative relationship between cyclical volatility and long run growth via lower investment. Higher inflation has serious negative consequences. In practice, higher inflation always comes with higher variability in inflation. High and variable inflation impairs the capacity of the market mechanisms to achieve efficient resource allocation, and the ensuing uncertainty makes it more difficult for firms, consumers, and savers to make the right decisions. It leads to arbitrary and inequitable redistribution of income and assets. For instance, a shift away from small savers to professional investors and from tenants to owners of houses and property. Inflation is effectively theft from small savers and low- income groups. High inflation has no lasting positive effects and the adverse effects eventually become unbearable. Numerous historical experiences have demonstrated that bringing inflation down from a high level is costly, as a rule, a deep recession with high unemployment is required. Accordingly, it is important to avoid letting inflation take off in the first place. For these reasons, an increasing number of countries have specified “price stability” as a primary goal of economic policy. Aggregate demand policies are the part of economic policies. At first, one might think that these policies should have the same goals as overall economic policy. However, because these policies only have sustained or persistent effects on a limited number of variables affecting economic welfare, it is more appropriate that these policies are assigned a limited number of goals. Specifying goals for these, which can be achieved would be unproductive. In order to determine which goals are most suitable for these policies, one must understand the effect of these policies and what these policies can and cannot achieve.

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According to traditional views of stabilization policy, monetary and fiscal policy can moderate the business cycle by offsetting changes in aggregate demand by consumers and businesses that would otherwise cause inflationary pressures or weaker economic activity. While the importance of demand side policies in stabilizing the economy is well understood, their effects on economic growth are quite uncertain. In the recent years, the view that such policies impose significant economic costs, particularly in the form of reduced growth and employment, has become fairly widespread. Consequently, the basic question that is currently being asked by academics, policymakers in the developing world, and the international community at large, is what policies can be employed, and in what combination, to achieve the goal of macroeconomic adjustment without sacrificing growth in the process. If the initial problem is excess aggregate domestic demand then, in order to restore equilibrium in the balance of payment and reduce the rate of inflation, absorption must be reduced in the short run. Although this reduction in absorption, and particularly if consumption is affected, can be perceived as a decline in living standards, it should not be regarded as a cost of stabilization program, since absorption is merely being brought back into line with the availability of resources. The real issue is how the reduction in absorption will influence the level and rate of growth of output or real income. In most circumstances, the reduction in aggregate demand will be accompanied by some fall in the growth of output. This decline in the growth rate, however, is a necessary part of the adjustment to eliminate underlying imbalances in the economy. In other words, stabilization aims at leading the economy to a more stable and sustainable growth path from a possibly higher but unsustainable path that often accompanies the supply demand imbalances. The short effect of stabilization policy, reduction in output, could be outweighed by the long-term benefits resulting from the adoption of appropriate adjustment policies. It is a basic premise of stabilization program that balance of payment recovery and reduction in inflation do not necessarily conflict with the objective of higher economic growth when the timehorizon is lengthened sufficiently. This view is based on a number of considerations. Firms’ financial stability resulting from a successful stabilization program can have a beneficial effect on the state of confidence in the economy. This improvement in confidence would encourage both domestically financed and foreign-financed investment, leading to gains in employment, productivity and output. Second, if inflation was allowed to persist for extended periods, this would create serious distortions in relative

prices and an inefficient allocation of resources. Stopping inflation and removing distortion would raise both economic welfare and long run productive potential of the economy. Finally, structural policies in adjustment program can increase the long-run capacity of the economy by improving the allocation of resources and stimulating domestic savings and investment. To the extent that structural policies are successful, they diminish any inescapable negative impact on the measure of growth that focuses on reducing aggregate demand. The role that stabilization policy can play is likely to vary from country to country depending on the nature of the shocks, the economic structure and whether a country has a credible record of achieving price stability and a sustainable fiscal policy and the institutional form of formal commitments to price stability and fiscal balance. A country with inflation and fiscal imbalances might find itself unable to employ expansionary fiscal and monetary policies because of the potential negative reaction of financial markets and foreign exchange markets. Moreover, a country in the process of building a credible commitment to price stability and fiscal balance might be especially constrained in its use of stabilization policy in the event of an economic downturn for fear of losing credibility in its longer run objectives. Successful use of stabilization policy requires knowledge of the structure of the economy as well as an understanding of the nature of the shocks hitting the economy. Traditional stabilization policy is best suited for dealing with large and persistent aggregate demand shocks. In contrast, aggregate supply shocks and financial market shocks pose more difficult issues for policymakers. One problem is that, these shocks may be difficult to identify in a timely fashion and policy makers may not have a good understanding of how these shocks are likely to affect the economy or how the economy might behave if policy responds to the shock. There is need for structural changes in the economy to be incorporated into models used by policy makers; otherwise, policymakers would face greater uncertainty in assessing the need for stabilization policy and its likely effect on the economy.

Policy Instrument Debate
Fiscal & Macroeconomic Policy:
Fiscal policy is the use of government budget to affect the economy. When the government decides on the taxes that

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it collects, the transfer payments it gives out, or the goods and services that it purchases, it is engaging in fiscal policy. Fiscal policy, according to a typical textbook definition has three broad functions: allocation, distribution, and stabilization. Allocation policies deal with those activities in which it is believed on practical or theoretical grounds, that government may allocate resources more efficiently than the market. The distribution function involves a reallocation of resources on the assumption that the market operates but produces less desirable outcome than what is socially acceptable. The most obvious method of redistribution is through the direct taxation and through varied rates of indirect taxation. The third main goal of fiscal policy is the stabilization of business cycle fluctuations. The primary economic impact of any change in the government budget is felt by particular groups-a tax cut for example raises the disposable income of families. A discussion of fiscal policy however, usually focuses on the effect of changes in the government budget on the overall economy- on such macroeconomic variables as GNP, unemployment and inflation. The state of fiscal policy is usually summarized by looking at the difference between what the government pays out and what it receives i.e. the budget deficit. Fiscal policy is said to be tight or contractionary when the revenue is higher than the spending (the government budget is in surplus) and expansionary when spending is higher than revenue (the budget is in deficit.). The most immediate impact of fiscal policy is to change the aggregate demand for goods and services. A fiscal expansion for example, raises aggregate demand through one of two channels. First, if the government increases purchases but keeps taxes the same, it increases demand directly. Secondly, if the government cuts taxes or increases transfer payments, people’s disposable income rises, and they will spend more on consumption. This rise in consumption will in turn raise aggregate demand. Fiscal policy also changes the composition of aggregate demand. When the government runs a deficit, it meets some of its expenses by issuing bonds. In doing so, it competes with private borrowers for money lent by savers, raising interest rates and crowding out some private investment. Thus expansionary fiscal policy reduces the fraction of the output that is used as private investment. In an open economy, fiscal policy also affects the exchange rates and the trade balance. In the case of a fiscal expansion,

the rise in interest rates due to government borrowing attracts foreign capital. Foreigners bid up the price of the domestic currency in order to get more of them to invest, causing an exchange rate appreciation. This appreciation makes imported goods cheaper in the domestic country and the exports more expensive abroad, leading to a deficit in the trade balance. Foreigners sell more to the country, than they buy from it, and in return acquire ownership of assets in the country. This effect of fiscal policy is central to discussion of the twin deficits (budget and trade). Fiscal policy is an important tool for managing the economy because of its ability to affect the total amount of output produced. The first impact of fiscal expansion is to raise the demand for goods and services. This greater demand leads to increase in both output and prices. The degree to which higher demand increases output and prices depends, in turn on the state of the business cycle. If the economy is in recession, with unused productive capacity and unemployed workers, then increase in demand will lead mostly to more output without changing the price level. In contrast, if the economy is at full employment, fiscal expansion will have more impact on price and less impact on the total output. This ability of fiscal policy to affect output by affecting aggregate demand makes it a potential tool for economic stabilization. In a recession, the government can run an expansionary fiscal policy, thus helping to restore output to its normal level and to put unemployed workers back to work. During a boom, when inflation is perceived to be a greater problem than unemployment, the government can run a budget surplus, helping to slow down the economy. Such a counter cyclical policy would lead to a budget that is balanced on the average. One form of the counter cyclical fiscal policy is known as automatic stabilizers. These are programs that automatically expand fiscal policy during recessions and contract it during booms and therefore moderate the business cycle. Whenever the economy enters a recession or a boom, the government budget surplus or deficit begins to swing in the opposite direction. As the economy enters a boom, tax collections and withholdings automatically rise because income rises. Spending on social welfare programs falls because higher employment and higher wages mean that fewer people are poor. Thus, the government budget moves towards surplus. If the economy enters a recession, tax collections fall, social welfare spending rises, and the budget swings into deficit. Business cycles would have been

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considerably larger if these automatic stabilizers did not exist. But fiscal policy needs not to be automatic in order to play a stabilizing role in business cycles. Some economists recommend changes in fiscal policy in response to economic conditions i.e. discretionary fiscal policy-as a way to moderate business cycle swings. These suggestions are most frequently heard during recessions, when there are calls for tax cuts or new spending programs to get the economy going again. The stabilization of business cycle fluctuations through fiscal policy measures can work through three different channels. The first channel refers to the most typical stabilization effect of the fiscal policy, the role of automatic stabilizers. Theoretically, automatic stabilizers smooth the economic activity through the automatic response via taxes and transfers system. In recessions, fewer taxes are collected and more unemployment benefits are paid, which both support incomes. However, during a boom, the increase in the government revenues from taxes and reduction of transfer payments counteracts the expansions in the aggregate demand. These kinds of taxes and transfers react automatically to changes in the economic situation and can therefore be regarded as direct fiscal stabilizers. There is, however, a second, Indirect stabilizing channel of fiscal policy which is related to government expenditure that remain fixed in size independent of the stage of cycle. By not responding to the cyclical condition of the economy, they indirectly have a stabilizing function, too. The third channel through which fiscal policy can – at least in principle- have a stabilizing effect on the business cycle is the use of discretionary fiscal policy measure (Van den Noord, 2000), the majority of the papers point at a pro cyclical bias of these measures and therefore a destabilizing effect, a view also taken by international institutions. Empirically, there are three broad categories of contributions dealing with the issue of the effectiveness of fiscal stabilizers, some of them focusing on the expenditure side and some of them on the revenue side of the budget. Most international institutions use their large-scale macroeconomic-models to estimate the elasticity of tax revenue or public expenditures with respect to changes in output or the output gap. (Brunila et al.2002). The second approach is to characterize the response of output to tax and spending shocks in the past by means of structural vector autoregressive model in order to derive impulseresponse function (Blanchard and perott, 1998). Fatas and Mihov (2001a, 2001b) test the correlation between

government and output growth volatility within cross country as well as panel data studies. They find a strong and robust negative relationship both for OECD countries and across U.S states. Summing up the evidence from these various empirical studies suggests that fiscal stabilizers indeed play their role in reducing output variability.

Monetary policy and Macroeconomic Management:
Monetary policy generally works in ways that lower or raise interest rates and raise or lower market values of bonds, stocks and other assets. Through these effects, monetary policy stimulates or restrains spending for investment goods- for house building, business plant, equipment and inventories. It also works through the balance of exports and imports in foreign trade. Because of the floating exchange rate regime along with the amazing international mobility of funds, immense amounts of money can move rapidly across the globe in various exchange rates from, say, dollar assets into rupees assets or vice versa.. Monetary policy is a subject of a lively controversy between the two schools of economics, Monetarist and Keynesians. Although they agree on goals, they disagree sharply on priorities, strategies, targets and tactics. Monetary policies are demand-side macroeconomic policies. They work by stimulating or discouraging spending on goods and services. Economy-wide recessions and booms reflect fluctuations in aggregate demand rather than in the economy’s productive capacity. Monetary policy tries to reduce, perhaps even eliminate those fluctuations. It is not a supply- side instrument. Central banks have no handle on productivity and real economic growth. There is a general agreement between economists that expansionary monetary policy increases aggregate spending on goods and services-by consumers, businesses, governments and foreigners. Will these new demands raise output and employment? Or will they raise prices and accelerate inflation? Keynesians say the answers depend on circumstances. Full employment means that everyone (allowing for persons between jobs) who is productive enough to be worth the prevailing real wage and wants a job at that wage is employed. In these circumstances, more spending just brings inflation. Frequently, however, qualified willing workers are involuntarily unemployed; there is no demand

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for the products they would produce. More spending make them work. Competition from firms with excess capacity and from idle workers will keep extra spending from accelerating inflation. Monetarists answer that nature’s remedy for excess supply in any market is price reduction. If wages do not adjust with unemployment, either government and union regulations are keeping them artificially high or the jobless prefer leisure to work at prevailing wages. Either way, the problem is not remediable by monetary policy. Injections of new spending would be futile and inflationary. Another issue in the conduct of monetary policy is: how actively and frequently should policymakers respond to observed and expected departures from their targets? Friedman wants them to follow the same routine regardless of the economic weather; increasing the money supply at a constant rate in his view trying to outguess the economy usually exacerbates fluctuations. While not all monetarists endorse Friedman’s rule, they do stress the importance of announced rules enabling the public to predict the central bank’s behavior. In principal, announced rules need not blind policymakers to changing circumstances; they could specify in advance their response to feedback information. But it is impossible to anticipate all contingencies. No central bank could have foreseen the OPEC shocks of the seventies and decided its responses in advance. Any practicable rule is bound to be simple. Any reactive policy is bound to allow discretion.

natural rate; ironically, the long-run effects of fiscal policy tend to be the opposite of the short-run effect. Expansionary fiscal policy will lead to higher output today but will lower the natural rate of output below what it would have been in the future. Similarly, contractionary fiscal policy, though dampening the level of output in the short run, will lead to higher output in future. Fiscal policy affects the level of output in the long run because it affects the country’s saving rate. The country’s total savings is composed of two parts- private savings and government savings. Lower savings means, in turn, that the country will either invest less in new plant and equipment or increase the amount that it borrows from abroad, both of which lead to unpleasant consequences in the long run. Lower investment will lead to a lower capital stock and to a reduction in a country’s ability to produce in the future. Increased indebtedness to foreigners’ means that a higher fraction of a country’s output will have to be sent abroad in the future rather than being consumed at home. Fiscal policy also changes the burden of the future taxes. When the government runs an expansionary fiscal policy, it adds to its stock of debt which it covers through higher taxes in future. Some economists have argued that this effect of fiscal policy on future taxes will lead consumers to change their saving. Recognizing that a tax cut today means higher taxes in the future, the argument goes that people will simply save the value of the tax cut they receive now in order to pay those future taxes. The extreme of this argument, know as Ricardian Equivalence, holds that tax cuts will have no effect on national saving, since changes in private saving will offset changes in government savings. But, if consumers decide to spend some of the extra disposable income they receive from a tax cut (because they are myopic about future tax payments, for example) , then Ricardian equivalence will not hold; a tax cut will lower national saving and raise aggregate demand. In addition to its effect on aggregate demand and on saving, fiscal policy also affects the economy by changing incentives. Taxing an activity tends to discourage that activity. A high marginal tax rate on income reduces people’s incentive to earn income. By reducing the level of taxation, the government can increase output. The supply side economists argue that reduction in tax rates would have a large effect on the amount of labor supplied, and thus on output. Incentive effects of taxes also play a role on the demand side. Policies such as the investment tax credit, for

Monetary and Fiscal Policy in Achieving Stability:
Whether for good or for ill, fiscal policy’s ability to affect the level of output via aggregate demand wears off over time. Higher aggregate demand due to a fiscal stimulus, for example, eventually shows up only in higher prices and does not increase output at all. That is because in the long run, the level of output is determined not by demand, but by the supply of factors of production (capital, lobar, and technology). These factors of production determine a natural rate of output, around which business cycles and macroeconomic policies can cause only temporary fluctuations. An attempt to keep output above its natural rate by means of aggregate demand policies will lead only to ever- accelerating inflation. The fact that output returns to its natural rate in the long run is not the end of the story, however. In addition to moving output in the short run, fiscal policy can change the

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example, can greatly influence the demand for capital goods. But the problem is that making fiscal policy is complicated, decorative and time consuming. The inside lag- the time between when a policy proposal is made and when it becomes effective- for fiscal policy is measured in years. Discretionary fiscal policy is rarely able to deliver on its promise. Fiscal policy is especially difficult to use for stabilization because of the inside lags- the gap between the time when the need for fiscal policy arises and when it is implemented but if the economists forecast well, then the lag would not matter but the economists do not forecast well. The inability to find a satisfactory way of formulating discretionary fiscal policy as an implementable rule and a set of practical institutions to support that rule has led even most Keynesians to be skeptical to use discretionary fiscal policy to stabilize he business cycle. Of course, most RBC models don’t embody the recommendation that fiscal policy should be used for stabilization purposes and most Keynesian models do. But in practice, most Keynesians exhibit at best “luke warm” enthusiasm for counter cyclical fiscal policy, other than that which is embedded in the automatic stabilizers. The problem is that counter cyclical fiscal policy has to be implemented in the context of a particular institutional environment. Even if you had the hubris to think that you knew just when and how much expansionary fiscal policy to apply. The lags inherent in our institutions for setting fiscal policy are such that it never happens in either the quantity or in the time frame we want. The case for using discretionary fiscal policy to stabilize business cycles is further weakened by the fact that another tool, monetary policy is far more agile than fiscal policy. So for good or for bad, the practical stabilization policy debate

will center on monetary policy. While there is much that we don’t know, the debate can be grounded on some fundamental empirical truth about monetary policy that has been documented in the past 30 years. First, monetary policy doesn’t affect the long run growth rate of output. This places fundamental limits on what we can expect of monetary policy. In the long run, all that monetary policy can do is providing a stable environment within which agents can make decisions. Second, persistent inflation is always a monetary phenomenon. Third, monetary policy is not neutral in the short run. Fourth, most aggregate fluctuations are not due to monetary policy shocks. Monetary policy as an instrument of economic policy has certain advantages. Inside lag which refers to the lag between the time when action is needed and when action is actually taken is shorter in the case of monetary policy than in the fiscal policy. How short this lag is will depend on the decision-making apparatus of the central bank. Monetary policy changes, unlike in the case of fiscal policy can be made any time during a year. Monetary policy acts through influencing the cost and availability of credit and money and its effectiveness in the first place depends on the institutional framework that is available for transmitting the impulses released by the central bank. The empirical studies examined by Khan and Knight (1985) suggest that a monetary contraction does indeed tend to exert a deflationary effect on the domestic economy in the short run. It is shown that on average, a 10 percentage point reduction in the growth of money or domestic credit would reduce the rate of growth of output by a little less than 1 percentage point over one year. By the end of the second and third year, the contractionary effect is dissipated and growth begins to pick up.

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Nature, Causes and Effects of Inflation on Pakistan’s Economy
Inflation is an important macroeconomic variable which is a precursor for economic growth but a source of hardship for the common man. Inflation in the 90s was not as high as we have seen in the last three years where the average inflation has been in the range of 8% to 11%. The unprecedented growth in inflation affects the common man and salaried class most adversely. Food Inflation had gone up to 10.3% in 2006/07. Recent trends of un-even rise in food prices had badly affected the well being of a common man. The gap between the supply and demand of general food items and un-necessary export of crops such as Wheat, Flour and Sugar when the domestic needs are still unfulfilled has made the inflation to move steeply. The shortfall in the production of Wheat, Flour and Sugar has made the prices of these essential commodities to increase by more than 20%. Inflation as reported by the government may very well be an understatement of the true rise in inflation due to the urban based sample.

MOHAMMAD NOMAN TANVEER & SALMAN AHMED SHAIKH
Introduction
Pakistan’s developing economy in the preceding years had been facing a number of disturbances which restricted its growth despite having extreme potential to grow. Since 9/11, there have been substantial achievements and an upsurge in the economic activities which have not been witnessed in the quasi-democratic rule in the 90s. The booming economy is experiencing a resurgence and increase in confidence of the foreign and local investors as evidenced by the increase in production in both industrial and agriculture sector, stable exchange rate and the reduction in budget deficits. The foreign reserves have been at the all time high at $16 billion, the country’s debt to GDP ratio has declined from 100% of GDP to 52% of GDP. Even though the world politics and the external factors have been favorable to achieve such milestones, but the previous government deserves some credit for its policies and gaining from the available opportunities. Riding on these strong economic fundamentals, the Pakistan’s economy is doing very well, but there have been a number of challenges that came along the way. These include rising inflation, growing poverty, growing income inequality, exhaustion of natural resources, environmental decay, widening trade deficit and the deteriorating balance of payment situation. In all the macroeconomic variables, inflation has the most disturbing effects on the well being of a common man. Growth trends over the recent years have on the one hand created enormous amount of jobs, but on the other hand increase in the money supply has caused inflation to rise.

Nature and Causes of Inflation
There have been a number of reasons for the recent inflationary trend in the economy. Whereas expansionary economic policy of the current government has sky-soared inflation, mismanagement and misadministration in controlling prices within the state also played its part. The inability of the supply to meet the demand is the primary responsible factor for inflation. Supply sometimes has been short in real and sometimes hoarding has caused an artificial shortfall for the benefit of few merchants. A number of external factors also played their role in rising inflation including the rising oil prices touching $119/barrel and earthquake in northern areas in October 2005. High inflation trends in an economy can not just erode the gains from growth, but it can also increase inequality leading to social stratification. Increase in food prices has badly affected the purchasing power of an ordinary citizen and salaried class. Rise in prices of demand inelastic goods has made life very difficult for a common man earning below Rs. 10,000 and feeding 5 dependents.

Policy Tools Utilized to Check Inflation
The tools used by government like tightening monetary policy have not been able to check inflation because these tools are very effective in a documented economy. But, in a

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country, where there is low documentation, black markets, prevalence of smuggling, casual employment and tax evasion, the tool of tight monetary policy has not been very effective. The policy to open 5,000 mobile utility stores on a large scale still remains to be implemented which was supposed to be completed by October 2007.

3.

Government should provide tax relaxation to those industries that are associated with large scale production of daily necessities i.e. Sugar, Wheat, and Edible Oils etc. Non-economic factors responsible for inflation like administration lapses in monitoring and controlling prices should be tackled with price control authority at each council level. The State Bank of Pakistan should adopt tight monetary policy for another year and mop up excess liquidity whenever there is a liquidity crunch in the money market. The Government of Pakistan should take immediate measures to control the unjustified export of crops, and a committee of experts should be formed and assigned the task to examine the supply and demand in the country and take adequate steps to balance it. The Federal Bureau of Statistics use four measurement tools for the measurement of inflation in Pakistan i.e. CPI, SPI, WPI and the GDP Deflator, but these four tools are unable to calculate the real spirit of inflation in Pakistan. It must increase the sample size and redefine weight age assigned to different goods in the basket. It must also include rural areas in the sample.

4.

Recommendations
The current surge of inflation in Pakistan calls for drastic and quick measures to provide relief to the common man and growing industrial sector. Growth in agriculture production and productivity is vital to meet the rising demand of the economy. 1. Government should promote measures for the hassle free, timely and tax free imports of essential commodities so that the gap in demand and supply can be met without surge in inflation. Government should reduce indirect taxes especially General Sales Tax which burdens the consumer who is already suffering from shrinking purchasing power; this will help in the well-being of the common man. 5.

6.

7.

2.

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Role of TDAP in Exports
This article is written to introduce investment opportunities in Pakistan. Before starting any business, I would suggest people to conduct SWOT analysis (Strengths, Weaknesses, Threats and Opportunities) to determine a position of advantage and minimizing risk.

NUSRAT IQBAL JAMSHED
(The writer is a High Ranking official in TDAP) The above methodology will help in evaluating proposals as well as assist in building required SOP’s. As the saying goes, “People do not plan to fail, they just fail to plan”. If one dollar is approximately equal to sixty rupees, would you not like to enter in a business in which you earn in dollars and spend in rupees with full Government support? Before dwelling any further into exports, let’s see how Pakistani exports measure up today. A quick review of exports 1999-2005-06 reveals that in the four years up to 1999-2000, Pakistan’s total exports were stagnating at around US$ 8 billion annually, eluding the target of $ 10 billion. In 200203, for the first time in our history, we not only crossed the $ 10 billion mark but reached a total of $ 11.2 billion, exceeding the target of $ 10.4 billion. In 2003-04, we achieved still larger exports of $ 12.3 billion, again surpassing the target of $ 12.1 billion. In 2004-05, Pakistan achieved still higher exports of US$ 14.4 billion which was 5.2% above the target and represented 17% growth over 2003-04. In the year 2005-06, the exports have been recorded at $ 16.45 billion which represented 14.3% growth over the same period in the preceding year. Analysis of exports during 2005-06 shows that increase in exports was contributed by the dominant textile sector to the extent of 61% or $ 10.1 billion. This is the first time that the textile and garment sector surpassed the $ 10 billion mark. Within the textile sector, five categories fetched over a billion dollar each. These are cotton fabrics ($2.2 billion), knitwear ($1.8 billion), bed wear ($ 2.0 billion), and cotton yarn ($ 1.4 billion) and woven garments ($ 1.3 billion). Other core categories contributed 24% or $ 3.9 billion. These included rice ($ 1.16 billion), leather and leather products ($ 1.13 billion), sports goods ($ 343 million), carpets ($ 257 million), surgical instruments ($ 163 million) and POL products ($ 826 million). Developmental Categories had a share of 7.1% in total exports at $ 1.17 billion. These include fishery products, fruits and vegetables, chemicals and pharmaceuticals, engineering products, IT, marble and granite, gems & jewellery, meat and poultry. Due to tough competition from China, India and Bangladesh, the growth in exports has not been up to the mark and fell behind the year’s target of $ 18.6 billion. Exports in 2006-07 up to the month of May reached nearly $ 15.5 billion which represents a growth of 3.6% over the same 11 months in 2005-06. Some of the initiatives taken by The Government of Pakistan are given below, which will help to boost exports from Pakistan:-

Expo - 2007
To promote the exportable products of Pakistan, and to further the success of the first two editions of EXPO PAKISTAN, the 3rd EXPO PAKISTAN 2007 exhibition was held at the Karachi Expo Centre March 29 – April 1, 2007. Spread over 450 stalls and 6 halls of the Karachi Expo Centre, the 3rd EXPO PAKISTAN 2007 was visited by over 800 buyers from 74 countries. EXPO PAKISTAN is now regarded by the international business community as an important annual event of the region and a productive forum. With EXPO PAKISTAN 2007 having defined the trajectory and positioning of the next event scheduled at the Karachi Expo Centre March 13 – 16, 2008, EXPO PAKISTAN 2008 is poised to be an even more

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elaborate in planning, the display of its exportable products. Overseas Business Support Units (OBSUs) To strengthen the export development support abroad round the year, TDAP plans to establish Overseas Business Support Units in selected markets worldwide. Based on the success and learning achieved, the scheme will be extended. The OBSUs will provide support to the visiting businessmen from Pakistan in terms of marketing, by providing market profile for given export products, competitor analysis, commercial regulations, identification of trade channels like buying houses, import houses, distributors, wholesalers and retailers, consumer tastes and preferences as to quality, design, dimensions, colors and packing. OBSUs will help the visiting Pakistani businessmen make contacts with compatible business counterparts. The programme of setting up OBSUs worldwide will be undertaken in phases. In the first phase, OBSUs are proposed to be set up in UK (London and Manchester), USA (New York and Los Angeles), Russia (Moscow), Poland (Warsaw), Kazakhstan (Almaty) and Kenya (Nairobi & Mombassa). Each OBSU will have office rooms for visiting businessmen, with conference facilities, communications and secretarial support. Warehousing Abroad EPB has already launched in Kenya a scheme for warehousing Pakistani products abroad, with the objective of duty paid ex-warehouse deliveries of goods and geographic diversification of exports. The warehouses in Kenya at Nairobi and Mombassa, will also serve as focal points for re-export to adjoining countries in Africa. After the launching of the pilot project in Kenya, it is proposed to set up similar warehouses in other countries. The proposal for warehousing in Poland is already agreed and sanctioned by the EDF Board with a funding of Rs. 20 million. The next priority countries for warehousing are Jordan, Germany (Hamburg and Frankfurt), Russia (Moscow) and USA (New York and Los Angeles).

Carpet City in Lahore and Karachi To revive and promote carpet exports, government will establish Carpet Cities in Lahore and in Karachi. It will institutionalize production, increase output, improve quality, designs and colors and undertake organized marketing. The Carpet City will be a cluster of weaving and finishing units to produce specialized carpets for export and provide business opportunities to SMEs. The units will share common facilities like water treatment, import warehouse, training centre, common transport and other logistics. The project will be financed initially by the federal and provincial governments. Cost of land and construction of factories will be paid by the members of the Carpet Association who will be share holders in the management company to be established. Expo Centre at Lahore After the phenomenal success of the Karachi Expo Centre, government has launched the construction of Expo Centre at Lahore on an area of 50-acres allocated by the Punjab government in Jauhar Town. The facility includes 4 exhibition halls (30,000 Sq meters) and a Convention Center scheduled to be completed in the first phase by March 2007. Subsequently, an IT tower, a shopping mall and a five star hotel will be constructed. Expo Centre at Islamabad The establishment of an Expo Centre in Islamabad will play an important role in promotion of exports from Pakistan. CDA has earmarked 30-acres of land in Islamabad for the Expo Centre on the main Islamabad/Rawalpindi Highway (near Shakar Parian) as its equity contribution to the project based on market value of the land. It will be a joint venture between CDA and TDAP and will be managed by an Expo Islamabad Guarantee Limited Company. The Expo Centre will have exhibition halls measuring 100,000 sqm covered area in phase-I that could be extended to 150,000 sqm. It will have a five star hotel, a shopping mall, a food court, a mini golf course, I.T Tower, an auditorium for 15,000 people with all modern facilities, an office complex and a police station.

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Trade Development Authority of Pakistan (TDAP) TDAP will be a successor organization to the Export Promotion Bureau set up 43 years ago under the Ministry of Commerce for the promotion of exports. The EPB has done a creditable job in achieving its mission. However, today we are faced with a larger challenge within a significantly altered and intensely competitive trading environment that cannot be met and bettered with the concept of promotion alone. We need to make adjustments in a new trading landscape. This landscape is a collage of emerging economies, shifts and changes in producing and consuming countries, concluding new, mutually supportive bilateral and multilateral trade agreements, and an emerging order of liberalized tariffs and regulations with the objective of ensuring a level playing field for the development of our export trade. We need to claim our due share in the global trade that will contribute to the strengthening of the country’s economy. Annual Trade Policy TDAP is tasked to implement a number of Trade Policy initiatives that are approved in the annual Trade Policy from year to year. Some of the important policy initiatives, export promotion measures and export incentives are discussed below: Marble City in Karachi A major cluster of marble processing units is at Karachi and the majority of exporters are also located in Karachi. These units are located in different areas in small plots of average 500 – 600 yards which do not have the capacity to expand according to international market demands. To provide these units i.e. marble and granite processors modern facilities, it is proposed to develop a Marble City along with the Northern Bypass of Karachi at Sindh – Balochistan border. This city will be in an area of around 1000 acres on land to be provided by Sindh Government. Dazzle Park at Karachi Airport For promoting the production and export of cut and polished precious/semi-precious stones and jewellery made of gold, and other metals, government will set

up a Dazzle Park in Karachi. The Civil Aviation authority has earmarked a 16 acre land near the existing Cargo Complex at Karachi Airport. It would contain facilities like Gem Cutting and Polishing, Hallmarking, Assaying, Training Institutes, a four star hotel, Common Import Facility etc, and a onewindow operation for government regulatory bodies. Tuna Fish Corridor Pilot Project Tuna after shrimps forms the most valuable global commercial fishery. The export potential of Tuna Fish in Pakistan is over US$ 500 million annually if the long term liner technology is brought into the country through foreign direct investment. TDAP is launching a Special Pilot Project called “Tuna Corridor” with the objective of bringing long liner fishing latest technology through FDI into Pakistan and exploit the Tuna export potential of US$ 500 million. Assistance in Quality Certification In order to promote quality culture, Government is sharing 50% costs for following quality certifications including WRAP, ISO 14000, Eco Labeling and SA8000. Consultancy Services Government of Pakistan has announced a scheme whereby garment exporters would be entitled to receive 100% costs for consultancy services. Other export sectors are also provided such services on various terms and conditions. Environment Protection Government of Pakistan is picking up interest cost of loans up to 6% to encourage setting up of individual effluent treatment plants in the private sector. Market Access Government of Pakistan has signed FTA’s/PTAs with China, Sri Lanka and Malaysia which have enhanced market access for various products in the respective countries. FTA negotiations for more trade agreements are being undertaken by MoC. (The above article is based on the information as provided by PPI Directorate in TDAP)

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Good Governance and Free Market Economy
AFTAB AHMED KHAN
(The writer is a former Federal Finance Secretary of Pakistan) In the current wave of liberalization and privatization, greater stress is being placed than ever before on the central role of markets and private sector as engines of growth. All governments we have been blessed with since the mid 1980s have loudly and persistently proclaimed their faith in a free market economy and with this end in view, they have introduced a number of significant changes aimed at broadening the scope of individual and corporate initiatives and enhancing Pakistan’s links with the world economy. These measures include privatization of state owned enterprises; easing of state control over many of the activities of the private sector enterprises (such as entry into production expansion in size and output decisions); lowering of corporate rate and personal income tax; virtual abolition of exchange control; easing of trade barriers; reduction of tariffs; assurances to business groups regarding future patterns of taxation; generous concessions to foreign investors; abolition of credit ceilings and credit –deposit ratio; sound management of the external value of the currency; attractive fiscal and monetary incentives for exports and opening up of sectors hitherto exclusively reserved for the government (like telecommunications, power and airlines ) to private sector participants. The present trend in favor of free market and privatization has no doubt received considerable impetus on account of lackluster performance of state owned enterprises. Unfortunately, the exercise of the instruments of intervention in the economy often in a discretionary and non-transparent manner aside from corrupting the leadership created incentives for their avoidance and evasion if they conflicted with private interests; worst of all, resources came to be diverted from productive use towards influencing those in leadership or bureaucracy who could dispense privileges and rents created by the interventions. Free market policies in recent years have also received powerful support from the International Monetary Fund (IMF) and the World Bank. A large number of countries which are receiving assistance under Poverty Reduction and growth facility (PRGF) from the IMF or sectoral adjustment loans from the World Bank have to abide by the conditionality of pulling back the interventionist state. However, it has to be appreciated that a liberal market oriented economy can yield positive results only in a milieu characterized by good governance; governance may be taken as denoting how people are ruled, and how the affairs of the state are administered. It encompasses the stat’s institutional and structural arrangements; decision making process and implementation capacity. It implies that public authorities play an indispensable and creative role in establishing an environment conducive to growth and in determining the equitable distribution of assets and benefits. An essential feature of good governance is the maintenance of law and order without violation of human rights. In this regard, a fundamental prerequisite is an independent, reliable and effective judicial system as well as honest law enforcing agencies that effectively carry out court decisions. History tells us that a society prone to extensive corruption, maladministration and legal breakdown is not only characterized by economic stagnation but is also “without nobility, without morality and without intellect”. In Pakistan, it is crystal clear that for ensuring economic growth with social equity, the government

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has to play a crucial role in creating and maintaining an appropriate legal, institutional and policy framework. The government needs to ensure the provision of basic social services, including infra-structure (such as energy, roads, water supply and sewerage), antipoverty programs, basic education and health care; it may be more appropriate on efficiency grounds for the government to foster private competition. The government’s role is particularly critical in managing economic policy anticipating and adjusting to economic shocks, facilitating transitions in economic policy and designing and implementing policy reforms. We can no longer afford the luxury of ad-hoc policies which without sound analysis and at times influenced by considerations of political patronage and power profiteering have been harmful for us in many ways. Aside from managing economic policy, the government has also a crucial role in ensuring the provision of a suitable regulatory framework particularly for the financial sector wherein fraud and unsound management can have profoundly de-

stabilizing consequences for the economy. It is heartening to note that a result of the promulgation of elaborate prudential regulations for banks and nonbanking financial institutions, we have now a regulatory and supervisory framework for the financial sector which ensures its honest functioning and stability without impairing its efficiency and dynamism. Furthermore, government intervention is desirable for addressing market failure such as those posed by the presence of externalities (e.g. pollution and congestions). Finally, notwithstanding the present accent on privatization, it is important to be aware of the overall feasibility and consequences of embarking on it on an extensive scale. The state in Pakistan, as in many other developing countries has to play a crucial role in filling gas in the economy, ensuring adequate supplies of goods and services, preventing excessive concentration of income and wealth in few hands, facilitating balanced regional development, ensuring adequate supply of capital to priority sectors and generating adequate employment opportunities.

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Promoting Microfinance: An epoch of financial inclusion
FARAZ UDDIN AMJAD
(The writer is a Karachi-based Financial Analyst in development sector.) A large number of people, subjectively those living on low incomes, cannot access middle-of-the-road financial products such as bank accounts and low cost loans. This financial exclusion imposes real costs on individuals and their families - often the most exposed people in our society. It also has costs for the communities in which they live. Households that operate exclusively on a cash account are powerless to make savings via direct debits on utility bills, are more susceptible to loss or theft and they are far more likely to use the substitute credit market - and pay interest many times more that that of a standard rate of interest on a personal/commercial loan, often contributing to amplification of debt. In addition, for those who do get into debt or who tussle to make payments, the supply of free face-to-face money advice falls far short of demand. There is a strong need to set out the strategy to confront financial exclusion in promoting the ‘financial inclusion’. The precedent areas are access to banking, access to affordable credit, and access to free face to-face money advice. Apparently, there is a good news for Pakistan's microfinance sector; it appears that the regulator is currently reviewing a handful of microfinance bank applications to be permitted to operate at least in the near future. Currently, there are six microfinance banks operating in Pakistan; Khushhali Bank, The First Microfinance Bank Ltd., Pak Oman, Tameer, Rozgar and Network microfinance bank. The topical proliferation in activity in the Pakistani microfinance sector is due to both government initiatives & recent funding from foreign donors. Also, though not surprisingly, Muhammad Yunus' recent visit to Pakistan has also helped Microfinance remains at the top of the agenda for the Pakistani government. Since a long time, there have been extensive discussions and suggestions from the industry players that the government should review the maximum interest rate currently being charged (20 to 43 per cent) by many Pakistani microfinance institutions. The government fully supports microfinance as a factor in relieving poverty and claims a double digit reduction in poverty in last year. The World Bank however, refutes the claim by emphasizing that only single digit reduction in poverty has been witnessed. Looking at the Pakistani environment, the question still is whether microfinance has had, and can have, an effect on reducing poverty, which many people believe is on the rise. Continuing his quest to encourage and support the importance of poverty alleviation and real promotion of micro enterprise activities, the Bangladeshi Noble Peace Prize winner discussed various issues with President Pervez Musharraf. During discussions, the president requested the launch of the famous Grameen Bank in Pakistan and sought support and technical advice from him for making the poverty-alleviation movement a success. Some people have a view that legislative framework developed in Pakistan for micro-finance credit is a pioneering step and this will help in making progress in the microfinance sector. Reportedly, one of the leading microfinance banks in Pakistan has received a large grant from a private non-profit foundation created to fight global poverty and aid in international development. The bank is a private, commercial microfinance bank operating since early 2006 and is the fastest growing in Pakistan with 17 branches and an outstanding portfolio of USD $11 million. It is unique from other microfinance banks being one of the first nation-wide, private sector, non-NGO transformed, commercially sustainable micro-finance institution in Pakistan. This funding will help launch the bank into the national ATM system, allowing outreach and better service. Looking at the experiences of some of the developing countries in eastern Europe, the issues suggests that ‘blanket’ reforms such as generic SME support, commercial-oriented microfinance, and the liberalization of business environments, are too often pursued without

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paying proper attention to local and global conditions. An interesting view suggests that usually, the informal sector serves as the final destination of almost all micro enterprises supported by microfinance. It is fundamentally wrong to assume that the informal sector has unlimited abilities to elastically expand and absorb all new micro enterprises. Globalization-driven conditions of an unlimited labor supply and dramatically reduced formal sector (especially public sector) employment opportunities have combined to ‘saturate’ economies with informal-sector micro enterprises almost everywhere, also due to the decline in incomes and wages. Also, many sectors are increasingly under pressure from an influx of new entrants, all desperate to survive in conditions of flat demand. Coupled with these, one of the major impediments in flourishing microfinance industry is the standard commercial microfinance business model – high interest rates and short repayment periods. While the data point to rapid growth of microfinance, they also demonstrate the failure of MFIs in this to reach lowincome groups on a large scale. This underscores the importance of non-financial services (including basic financial education) in helping the poor to absorb and manage family and micro enterprise finance, to properly use financial services, and to develop business skills. These market gaps create opportunities for designing microfinance strategies and products to respond to these unmet needs. This means combining existing microfinance knowledge and experience with new technologies and private capital to create the new business models needed to reach more poor people. It also requires policies to level the playing field for different institutional models, and strengthen incentives for private sector investment in microfinance. Looking at a regional comparison of South Asian countries, Bangladesh seems far ahead not just in terms of number of borrowers which is almost ten folds to Pakistan, but also in terms of profitability. Interestingly, as compared to Pakistan and Afghanistan, India is coping with its high costs per borrower by keeping a lower density of staff per borrower and significantly lower operating expense ratio. Pakistan has remained a single product market for microfinance with a major focus on agriculture and livestock sector. However, many microfinance institutions are increasingly diversifying their products and adding deposits, insurance and remittance services to their

portfolio. On the other hand, entrepreneurship development efforts, especially for the overlooked gender, may be augmented by concrete developments in microfinance sector. Reportedly, women borrowers for the microfinance in Pakistan are less than half as compared to Bangladesh and India, and even below Afghanistan. One of the key success factors of microfinance in Bangladesh is the ensured high repayment behavior in absence of collateral by capitalizing on social networks through group liability and making it mandatory for the borrowers to deposit a portion of their loan in the form of compulsory savings. Apart from conventional working capital loans, diversity is available in the form of individual loans, housing and education loans, micro savings and micro insurance. Remittances and money transfer services have also been started, thus filling the gaps of financial exclusion. To address these concerns, recently, Center for International Private Enterprise (CIPE), an affiliate of US Chamber of Commerce, organized a roundtable on microfinance in Karachi. It was discussed that microfinance programs in Pakistan have reached a point that warrants consolidation, if outreach has to be increased within a short period of time to meet the stiff challenge of multiplying it to three folds. Simultaneously, issues such as: • Deepening the microfinance system into the SME sector; Creating an enabling environment both for the enterprises and microfinance banks and institutions; Developing home grown models for microfinance institutions to suit Pakistan’s norms, microfinance banks’ and institutions’ framework, processes, and products to achieve higher organizational and financial stability; Strengthening coordination (value chains) between various stakeholders for higher synergy for all are ought to be addressed to ensure the wider impact of microfinance in the country, and the success of this sector is based on the financial viability and commercial sustainability of microfinance institutions.

It is strongly anticipated that collaborative efforts are required to facilitate the informal sector so that it may directly contribute in the economy and gradually become part of the formal economy.

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Comparative analysis of growth pointers South Asian Region
No. of Active Borrow ers 250000 200000 150000 100000 44031 50000 0 Bangladesh India Pakistan Afghanistan 24179 15489 221099

Source: Five year aggregates (2002~2007): CGAP

Profit Margin 100% 0% -100% -200% -300% -400% -319% Bangladesh -8% India Pakistan -91% Af ghanistan

15%

Bangladesh
No. of Active Borrowers Percent of Women Borrowers Profitability (ROA) Profitability (ROE) Profit Margin Operating Expense Ratio Cost per Borrower (US$) Borrowers per staff member Write off Ratio

India

Pakistan

Afghanistan

221099

44031

24179

15489

94% -4% -17% 15%

90% -2% -10% -8%

48% -8% -32% -91%

67% -67% -223% -319%

12%

12%

15%

82%

10

14

67

152

131 0%

439 1%

171 1%

54 0%

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Analysis of Budget 2007-08
TAYYABA FASIH
Budget 2007-2008 was thought to be the revival of the economic reforms which can trigger economic activity by controlling inflation, poverty, unemployment and reducing uneven distribution of wealth. The present budget of Rs 1.874 trillion is almost 25% higher than the budget estimate of last year of Rs 1.5 trillion. The article also provides the recommendations for the upcoming budget.

Highlights of Budget 2007-2008:
The 40.1% that is Rs. 642 billion is allocated to pay off debts including (trade and fiscal deficit). In 1950 Pakistan’s total trade was $437 million and now it is $45 billion and the trade deficit of $ 114 million in 1950 has increased to $12 billion. In 1988, Pakistan’s foreign debt was Rs. 520 billion and now it is Rs. 4,450 billion (Domestic loan Rs. 2,302 billion and foreign loan $35.7 billion). 17.2% that is Rs. 275 billion are allocated for defense expenditure. It has been increased by 10%. Rs. 60 billion was allocated for pensions. With an unusual large public sector development program of Rs. 520 billion (up by 21.7% compared with last year), Salary of government employees was increased by 15% and minimum wage was raised to Rs.4600. Despite such steep increases in PSDP and increase in current expenditure, the fiscal deficit is budgeted at Rs 398 billion (4% of the GDP) compared to Rs. 373 billion in previous year (4.2% of the GDP). Tax collection target is set at Rs. 1.025 trillion (up by 22% compared with 2006-07). This was the brief outlook of budget 2007-08. Government in providing relief to the masses faces following challenges in the coming year. Rise in inflation: - The rate of inflation stood at 7.9% in the first 10 months of the fiscal year –marginally lower than the last year for the same period. But certainly above the target of 6.5% for the year. This year, inflation has largely been driven by higher food prices because of short fall in domestic production of pulses, rice, chilies, onion, tomato

and fruits. Food inflation was above 10% as against 7% last year. To overcome this inflation, government provided subsides on food items especially on pulses Rs. 200 million and on electricity and fertilizers Rs.6.3 billion. Sustainability of growth: - Pakistan’s export growth witnessed abrupt and sharp deceleration. Exports were targeted at $18.6 billion or 12.9% higher than last year. Pakistan’s exports are highly concentrated in few items namely cotton, leather, rice, and synthetic textile and sports goods. Pakistan needs to diversify its export not only in terms of commodity but also in terms of market. High Trade & Current A/C deficit: - Despite sharp deceleration in imports, the merchandise trade deficit became broader coupled with abrupt and sharp deceleration in exports. The merchandise trade deficit increased to $ 11.1 billion in the first 10 months (JulyApril) of the current fiscal year as against $ 9.5 billion in the same period last year. Pakistan’s current account deficit further surged to $ 6.2 billion (4.3% of GDP) in the first 9 months (July- march) of the current fiscal year from $ 4.6 billion (3.6% of GDP) in the same period last year. Lack of infrastructure and lower rate of savings: Although there have been major efforts put in to build the infrastructure that is essential to sustain economic growth, the actual utilization of the planned PSDP in variably remains low. There is serious short fall of energy as is evident from consistent electric breakdowns in the urban areas of the country, and the investment and time required to add additional energy capacity may be a major impediment to growth over the next few years. Poverty reduction: - Although poverty has declined but the fact remains that 24% people of Pakistan still live below the poverty line. Thus, reduction in poverty should be a major challenge for the government to sustain growth. In addition to macro economic stability, the successfully targeted social development programs, fair and broad based

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fiscal regimes, labor market that promotes job creation and wide spread education and training programs that enhance knowledge and skills of larger proportion of the population are imperative to reduce poverty.

9.

Recommendations:
To successfully manage economy in the face of these challenges, following measures are recommended.

Self employment schemes on easy terms and conditions be given to reduce unemployment and reduce poverty. 10. Stringent measures should be taken to stop corruption.

Long Term Measurements
The trade deficit which stands today at $15 billion should be gradually reduced by enhancing the exports through incentives and decreasing the tariff and reducing the imports particularly in consumer goods, the technology transfer be excluded from this rule. The fiscal deficit should be reduced by containing the internal and external borrowing which stands at $40 billion today. 1. The power generation process using nuclear energy, solar energy, wind energy and tidal energy should be utilized to overcome shortfall in energy sector. Also the construction of dams should be carried out without any further delay. The export related industries be given incentives by reducing the charges of utilities. The rise in fuel cost to be reduced by finding alternate sources of energy like biogas, natural gas and coal. The defense expenditure should be reduced and more resources should be allocated for development.

Short Term Measures:
1. 2. 3. 4. The inflation should be controlled by strengthening supply side economics. The fiscal deficit should not be filled through monetary expansion, as it would give rise to inflation. Strict check on hoardings, black marketing and smuggling to be done with exemplary punishment. The sales tax of 15% should be reduced to 10% for consumer goods and necessities to bring the daily use commodities within the reach of poor families. The interest offered on savings should be increased to enhance savings. The non development budget should be reduced drastically. Duty free import of food items should be allowed to keep the prices stable. Government should finance livestock and vegetable farming schemes to meet the critical shortage of food items.

5. 6. 7. 8.

2. 3. 4.

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Importance of Technological Development in Economic Growth
Technology has already brought us from a world where famines were frequent and life was uncertain into one where quality of life has greatly improved. Information technology has done much and can do much more to assist this process. Globalization is not something to be fought but something to make use of. The future may take this process even further to a point where information is traded internationally but products come to be made locally by a new generation of machines based on rapid prototyping technologies. Pakistan has already demonstrated that it has its role to play. Improved medical technology is also of importance, because it allows people to do more, particularly the older generation with a lifetime of knowledge and experience to draw on.

DR. TOM SHALLEY
(Writer is Ph.D., M.A., M.I.M.M.M., and C.Eng. F.S.O.E., F.I.Plant.E. , Group Technical Editor, Findlay Publications, Dart ford, England.) Technology is not just important in developing the economy of a country, it is absolutely vital. There may be some who look back to an imagined golden age when most people earned their living by toiling on the land, with nothing to help them but horses or oxen, but the reality was that life has hard and uncertain. Long gone, fortunately, are the days when millions would die in Indian famines, such as the Bengal famine of 1770, in which perished one third of the population, or the millions who died in 1877-79, when Lord Lytton, the governing British viceroy could decree that "There is to be no interference of any kind on the part of Government with the object of reducing the price of food," and instructing district officers to "discourage relief works in every possible way.... Mere distress is not a sufficient reason for opening a relief work." Today, farmers have tractors and machinery to assist with heavy work and fertilizers to assist production, which have greatly increased food production and eliminated famine from the Sub Continent. Furthermore, news of major disasters is now quickly communicated to the rest of the world, through mobile camera phones and the Internet should governments try to conceal the truth, rousing the public in far off places to send timely assistance in ships, trucks and aircraft. In addition, whereas floods, droughts and famines, might once have been accepted as, “The will of Allah”, we are now in an era when we can turn to engineering technologies to dam rivers, raise defenses against flooding, and store food in ways where it will not be eaten by insects and rats. Hand weaving of cloth may be picturesque, but machines do the job with much less effort, and while the lives of many people are still hard, they are much less so than in previous eras. Apart from Africa, which still seems to suffer massive problems, people in most countries now enjoy a standard of living and healthcare that their forefathers could not have imagined. There is now concern as to whether technology has gone too far, whether our present lifestyle will destroy our planet through global climate change produced by burning too much carbon, or by some disease quickly spread around the world by passengers carried in jet aircraft. The answer to such challenges is not less technology, it is more and better technology. Every man, woman and child needs to be educated about technology and how to use it responsibly for their benefit, both at a personal and national level. Here too technology can help, with distance learning using satellite technology and the Internet to bring education to people in even the most remote areas, although, I believe, there will always be a need for human teachers to assist the process. Another area in which the Internet has revolutionized business is in making it global. A venture may be financed in London, managed from Germany, have engineers working collaboratively in different countries, and then make parts in China, India and

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Pakistan that are assembled in Mexico for delivery to the US. Globalization is not something to be fought against; it is something to be made use of. Designers can now work wherever they please. Manufacturing facilities can be utilized to maximum capacity supplying customers in different countries, and companies can use the Internet to find the most competitive prices for their purchases and the most lucrative markets for their goods. The only downside is that this leads to a lot of transportation of raw materials and goods round the world, although it makes use of the most efficient ships and goods handling systems that man has ever devised. There, are, however more than a few innovators who think that the next stage in technological development will be to send design information round the globe using the Internet, but actually manufacture products locally. A recent seminar at the Royal College of Art in London entitled, “Manufacturing Reinvented” was devoted to the subject of taking the additive processes used in Rapid Prototyping to produce plastic replicas of designs produced in three dimensions on computers and turn this into a mass manufacturing technology. Upmarket lighting and furniture, dental implants, braces and false teeth, jewellery and customized ear plugs and hearing aids are already being produced in Europe by additive methods derived from computer scans and models, often with profit margin mark-ups of 10:1. “All the early adopters are based around people”, according to Dr Phil Reeves, managing director of UK consultancy, Econolyst. The barriers to turning this into a general manufacturing technology were set up by Dr Chris Sutcliffe of the University of Liverpool. “The biggest challenge to rapid manufacturing is the production of fully scaled, verified, and useful manufactured parts over a wide range of applications. The majority of manufacturing machines are very, very expensive, very slow, very difficult to use, are maintained by their suppliers at high annual cost and it probably won’t be very long before your machine is rendered obsolete. There are many process variables that are not yet fully understood and the metal powders are mostly hazardous to work with.” The solution to the lack of cheap machines, however, according to Dr Adrian Bowyer at the University of Bath is for people to make their own. He has for some

time been pushing forward a project called RepRap, more information at www.reprap.org, in which the majority of parts for a design of Fused Deposition Modeling machine called “Darwin” are themselves made by FDM, so one machine can be used to make more machines. He said, “It still needs nuts and bolts and electric motors. Things that have to be added in have to be widely available and very cheap.” The motors cost £1.50 each, and the Cartesian robot to support the write head requires M8 studding and, “A couple of sheets of MDF”. It also uses microcontrollers connected on a token ring and programmed in “C”. The target cost of all raw materials, motors and chips is £250, which “It looks increasingly that we can achieve”, he said. The machine currently produces parts made out of polycaprolactone but he said, “We want to switch to polylactic acid, which can be made by fermenting starch” and showed a picture of a polylactic acid part produced by one of the machines in New Zealand. While such technologies will doubtless do much to produce even more consumer goods and bring them into the reach of more people, technological developments are key to solve the problems of how to bring people in countries such as India and Pakistan into the ranks of prosperous countries with access to all the sorts of good things that have come to be accepted as commonplace in the West, without bankrupting the planet of its natural resources and totally destroying its climate. Here, countries such as Pakistan have a particular role to play, and we should here like to applaud projects such as the design and development of the Alif car, which shows the rest of the World how to build a four seater car that sells for only $2200 (export price), but when run on petrol consumes only 4 litres per 100km, slightly better than Toyota Prius hybrid – which consumes 4.3 litres/100km and emits 104g/km CO2, but costs more than ten times as much to buy and requires more than three times the amount of materials with which to build it. Medical technology too, is also of immense benefit to the economies of all countries. As well as improving length and quality of life, good health allows people to accomplish more. I, myself, am only able to write this article because of developments in pharmaceuticals, that have allowed me to live to the age that I have reached and transmit a little of the benefits of my long experience in engineering and technology to others.

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SME as a Significant Component of Pakistan’s Financial System
NADIA YAMIN
By definition “a given firm in manufacturing, services, or trade sector will be classified as a small or a medium enterprise either on the strength of the number of people employed by it taken together with the total assets excluding land and building, or the number of people employed by it taken together with its annual sales.” According to the SME Policy 2007, SME definition is as follows: An enterprise with 250 workers, having a Paid-Up-Capital of Rs. 25 Million and annual sales of Rs.250 Million is considered an SME. Since Pakistan has high levels of unemployment and poverty, the SMEs serve as an engine of growth and improvement for the economy. Their existence also helps to address the undeniable challenge of rural development in Pakistan. According to a report, they constitute approximately 90 per cent of the 3.2 million enterprises in Pakistan and 78% of the non-agricultural labor force is employed in these enterprises. The importance of SMEs in the Pakistani economic arena can be further understood by the stated facts- SMEs contribute over 30% to the GDP, and account for 25% of exports of manufactured goods. Realizing their need, banks extend more loans to the SMEs than to any other form of businesses. Economic indicators clearly point towards the magnitude of SMEs. Government of Pakistan (GoP) realizes them as one of the four pillars of economic revival and is taking a number of measures for private sector development including liberalization of economy, investment promotion; export facilitation, financial sector reforms, capital market reforms and creation of a conducive business environment. One of the major issues need to be settled in SME sector is of equity financing, the Government has in this regard set up SME support funds and SME Banks. There is, however, a need to craft an SME focus amongst these policy initiatives to allow momentous expansion of economic gains for the SME sector. Policy initiatives have to be directly linked to action plans. SME development in Pakistan will require decisive and concurrent measures in a number of policy areas such as business set of laws, fiscal, trade rules, labor, incentives and support (Human Resource Development, Technology, Marketing, etc.) leading to an ‘SME Space’ in these domains. The Small and Medium Enterprises Development Authority (SMEDA) was established in 1998 under the Ministry of Industries and Production. Created as an autonomous institution with private sector control structure, SMEDA promises to become an important body spearheading Government’s SME development efforts. Government should ensure adequate provision of physical infrastructure (roads, utilities etc.) in existing SME clusters. GoP ought to follow an effective strategy to reach out and correspond with SMEs using appropriate electronic and print media. Communication will increasingly use Urdu & local languages where it is found useful. Establishment of Annual SME Awards (on the lines of Annual FPPCI Export Trophy Awards) for recognizing exceptional performance in domestic and international markets, technology advancement, HRD practices, etc. can serve as a valuable means for appraisal. Furthermore, SME Surveys should be undertaken sporadically to evaluate the impact of interventions made and give support mechanisms where required. Pakistan is an economy of ‘employees’. The education and culture of our country is such that the idea of forming an enterprise is not appreciated by the young generation; therefore, new enterprises do not emerge in the economy. If proper guidance and awareness is provided, the nuisance of unemployment and income inequality can be fought. For this, I suggest creation and funding of university base incubators to assist start-up businesses. Moreover, I advocate creating co-operative research centers to commercialize new technologies and instigate research based academic activities.

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In the Pull of Survival
With increasing cost of living what do the principles of economics and theory of human needs tell us about the nature of the society and how can we do better to ensure a healthy survival?

RAHIM ALI
If you think that the cost of living, the prices of basic utilities and daily used commodities are getting ever difficult to cope up with, then you are not the only one. People everywhere are trying to make the ends meet. The increased facilities of micro loan for investments in home, car and other luxury items make our needs more convenient to attain, it also stretches us to work harder and keep ourselves engaged in the cycle of consumption and production. The requirement to fulfill the needs of a family is generally the most important priority of a family man, but where are these things taking us? Dissatisfaction at work due to inflation, resulting in unsatisfactory professional performance and it leads to every other disease in the book. How can one understand the situation which is driving the chain of his life? Can this chain be controlled by a person for his own betterment? These are the questions that are a part of every mind. It’s well said by sources unknown that, masses are without intellect. What this means is that if majority of the people are doing something then that must be right! This is not always the case. Although democratic principles tell us that majority is the authority, the principles of democracy are not designed for taking decision on problems. Simply because everyone is doing a thing does not make it right. For example, on roads, the motorists today tend to follow a particular line even if it’s on the wrong side of the road. We tend to ignore the traffic signal line which causes the traffic to get bottlenecked even if the traffic signal is open, thus causing a traffic jam for themselves and every one else. This is the similar case to the principle of authority. Authority comes from allowing others to take the decision over and for you. This authority can only be exercised by those whom we give control or accept them making decisions for us. This structure of authority and control is the key fact in determining our own lives and the lives of the others. It implies that, one can easily control the destiny of self and the destiny of others around him/her. If we look at the situation which is causing such massive inflation in food and other daily necessities, we have ourselves to blame. We have been seeing shouting and protesting massively for the democratic process and the independence of judiciary but we have never stood over the problem of increasing food and consumer items. We feel proud to buy expensive items just because it shows status of our family and ourselves. The governance of economic principles dictate that, if increase in costs occur in one product, it will affect the market prices of all others depending directly or indirectly upon it with the force that controls the market i.e. if the price of petrochemical products increase, then every good that is associated with it also increase in price too to meet the rise in cost which it incurred due to the rise in the petroleum cost. But in the true case, the cost of every good that is in the market, rises, whether it is associated with petroleum or not. This is an example of the true situation that is facing the global as well as our local economy. This behavior generally looks for a short term goal. The general behavior is the concept of earning more since the competitor is earning more then us. The fundamental fact that these small businessmen ignore is the fact that the increase in cost in one product will also affect its sales, even though the utility is inelastic in nature. This fundamental phenomenon of the market is inevitable. If we analyze the same situation in a different context, we can easily come to another conclusion. This viewpoint is based on the assumption that the cost of living increases in general if any good in the market has an increase in cost. Although the rise in price of goods has not affected other goods but the cost of living that depends on the general market prices also increases. This causes the cost of living to increase as well, thus triggering the self sustained increase of costs through the market. The question arises that what can be done to survive?

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In this struggle for survival, one generally ignores the overall picture of the state or the environment which we are a part of! This neglect of visualization of the overall picture dilutes the situation into much worse condition where the positive aspects of the free market economy do not sustain. In my discussion with a friend he argued, on this above comment, that there is an unwritten universal law that dictates a process in such that, if you take something that is not rightfully yours, the universal consciousness will take back something that is far dearer to you. This statement does not only apply to the material aspects of life but also to the abstracts which are required for survival. This argument, which is greatly generalized, also states the basic principles of the free market economy. In a very laymen language, if the prices of some goods increase, then the rest of the goods will also be affected. This will further trickle down in terms of increased inflation to all other products. One can simply predict that if we make things expensive; then, we ourselves are the one who are affected. This principle, in theory, is not the only principle which works in the market, social order and government policies can also be accredited in encouraging the inflation in the market. This principle is generally disregarded by the common man where policies favoring monopolization of the market create the very effect that leads to the artificial inflation in costs. These policies, in our country along with artificial price increase are the major cause of problem. This infact can be kept under watch. A very simple phenomenon of public accountability can indeed make a difference. But in a country where the actual rate of literacy is far less then shown makes it difficult for the masses to keep a watch on such perfectly devised policies. What can be done is a gradual shift of social realization where the society in general is aware of the short term and long term impacts of decisions, of either the state, or the businesses. This is really a far fetched dream, where the society in general can work as a group for mutual benefits rather then self interest.

The idea of mutually interactive society is not a new one. Since the time of early social theories, this concept has been presented in one way or the other. In my personal view, the idea of a society to be mutually aware of its interest comes from the study of organisms and their behavior. Consider the society as a huge organism which is working collectively for the sole purpose of survival. Although it seems a farfetched idea, the nature of its behavior reflects the same. Maslow presented a five step ladder for the progress of a person form just existing to being aware of his existence in the overall universe. This hierarchy, called Maslow’s Needs Hierarchy, consists of physiological needs, safety, social, esteem and self actualization. This ladder, as claimed by Maslow is the basic way how humans evolve. The general problem with this theory is basically visible in a lot of cultures. The Indian yogis, the Buddhist monks, and the Shoaling monks are explicit examples. This theory, in my observation, completely defines the growth and development of a society in absolute totality. Every society passes through these stages one at a time, and no exceptions have been noted yet. The social order that defines the basic needs of structure and balance can be encapsulated under the physiological needs of the society. The existence and the ability of a social order to struggle for its survival is its security needs. The interaction of different social order is the social needs of a society. And the last two are, esteem of a social order amongst vast number of different cultures and the social actualization i.e. the understanding that the society should strive for the collective benefit rather than individual and short term advantages, where one looses and the other wins. In this context, the social structure, the mode of survival and the quality of life improves on the whole. In the pull of survival, a single person can play his part by being responsible and mature enough to work for the society on the whole. But there is still a question that needs to be answered? Are we willing to start the process on our own? Or are we lazy enough to sit back and let the things take shape as they do and keep on criticizing? I for one have already taken the initiative!

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