Herodotus tells us that it was Croesus, King of Lydia, the land from which, according to Livy, the Etruscans came, who invented the minting of coins – hence currency – by impressing his seal on the electrum, a natural alloy of silver and gold. According to ancient history, it was a temporary stopgap.
The alloy was bound to be depleted sooner or later and much of the material extracted and sealed would be hoarded, as always happens with “good money”, whereas the one which does not appreciate over time is exchanged at high speed with goods and services.
Furthermore the scarcer the currency, the greater the need for credit for equal goods and services available.
Currently, however, we are increasingly faced with policies which tend to avoid the use of money as such, or to limit it, because of the danger of favouring the “money laundering” of proceeds from organized crime, corruption or many illegal activities.
From the logical viewpoint, these regulations closely remind us of some city police regulations of the nineteenth century, which banned for inns and taverns the possession and use of sharp knives.
If we confuse the means with the use and, in the case of money, if we eliminate exactly the typical feature of currency, as from Croesus onwards, namely its being universally valid in its legal tender, the economy will really cease to exist.
Either we hoard everything or we spend everything – hence without having any idea of the value/price ratio.
Also the European Central Bank (ECB), which never misses a novelty, will stop printing the 500-euro banknotes in 2018 which, however, will remain legal tender and will mandatorily be exchangeable at the issuing bank’s counters.
Therefore currency exchanges are no longer free, because each transaction shall be controlled by a specific bank passage and flow which, according to the naive drafters of these laws against money, should reassure on trade lawfulness.
A bank passage and flow which may also be a credit, so that the bank now succeeds in gaining money from what previously was one of its formal obligations.
Furthermore, who will guarantee us that banks are not involved in dirty money flows?
With the end of philosophy, also rationality applied to people’s practical life comes to an end.
These are the thoughts springing to our mind when we read about the demonetization of the Indian economy adopted – approximately fifty days ago – by the Indian Prime Minister, Narendra Modi.
As stated by the Indian law, by December 31, 2016 all 500-rupee (7.5 euro) and 1,000-rupee banknotes – the two average denominations of Indian currency – shall be forcibly returned to the bank, from which the equivalent of the money deposited can be withdrawn in smaller, or even larger denominations, such as 2,000 rupees or more.
The government’s aim was to stamp out corruption, the informal economy and tax evasion.
The problem is that the illegal economy or, anyway, “underground” or informal economy, is the only one on which the huge masses of poor Indians can live.
If we implement some form of tax checks or legal scrutiny for the many poor people’s intermediation and brokerage activities, they would cease all of a sudden, as if by magic.
Hence how could poor people survive? Can we imagine a tea seller, on the streets of Mumbai, issuing a “regular receipt”?
How much would the huge check apparatus cost?
Moreover, India has more than one billion poor people – surveyed inductively – not to mention usury in rural areas, generated exactly by the intermediation and brokerage between labour and land ownership – real estate usury continually pushing recently-created masses of rural underproletariat to megacities.
India’s per capita GDP is 1,718 US dollars per year.
China’s current one is triple, albeit with a ratio between urban and rural areas – the mainstay of the creation of capitalism and the crisis of the various forms of Communism – which is, to some extents, similar to the Indian one, although with a different investment policy in agriculture.
The Indians who earn incomes comparable to those in the First World countries are just 320 million people, while only twenty million families of the Indian Federation own savings over one million euro.
In India the one billion poor and very poor people earn 3 dollars a day at the maximum.
50% of Indian children are rickety. Any kind of diseases are widespread and hence the poor people’s average age decreases – the only relief from their earthly misery.
How can we imagine all these masses entering a bank and making it gain money with their exchanges, so as to increase money collection and later favour the opening of credit to the best clients, as usual?
Moreover, if over a billion people use, or think they use, ATM, POS and credit cards, taxes and deductions on transactions will increase and, of course, it will be equally impossible to trace illegal money.
It is as if the Indian government regularizes exactly one of the primary mechanisms for money laundering, namely smurfing, which means using runners to perform multiple financial transactions to avoid the currency reporting requirements. This technique involves the use of many individuals (the “smurfs”) who exchange illicit funds (in smaller, less conspicuous amounts) for highly liquid items such as traveller cheques, bank drafts, or deposited directly into savings accounts.
Obviously the results of the Indian regulations on forced demonetization have materialized almost immediately and are before us to be seen.
The slow withdrawal of new cash has quickly blocked the whole Indian economy, both the small-scale legal one and the huge informal economy.
Food prices have plummeted by 50%.
Because poor people have no longer money to buy the already scarce food.
All this has happened without even imagining the effects of this price collapse on rural incomes.
In some areas producing rice and other foodstuffs, after realizing that sale prices did not even cover half of the transport costs, farmers destroyed crops throwing them in the streets, with the immediate effect of a massive and deadly famine.
Also handicrafts, which were part and parcel of the informal economy, such as retail trade, are disappearing in India.
Obviously the banks are increasingly slow in providing the equivalent of the banknotes returned. They earn on deposits, invest and lend the money collected to primary clients.
Hence in India barter is back again – the only way people know to replace the ”universal equivalent”, namely currency.
This implies, however, further fragmentation of the Indian society by castes, ethnic groups, geographical areas and family clans.
Even exports, in which India stood out, are suffering the mad crisis of moralistic demonetization.
In general terms, the most modern companies report a 25% drop in sales and we cannot imagine how, in this context, India can have normal economic relations with foreign countries.
Obviously criminal organizations, the only ones which can make money with these beautiful monetary ideas, have quickly stepped in by offering a 20% discount for exchanging old banknotes. Hence the law of unintended economic consequences enables criminals and Mafias to launder money, which was previously much more difficult.
Even Narendra Modi, however, has his own theorist that, this time, is not a Western technocrat, but Anil Bokil, the founder of a financial and political movement known as Artakranti, namely “monetary revolution.”
According to this beautiful mind, who is in no way inferior to our third-rate economists, the bulk of illegal capital is exactly the one which raises the prices of vital goods (real estate, in particular), while the money earned honestly – that is quickly noticed – would lose value when the “bad money” grows.
It would take Vilfredo Pareto’s poison pen to mock these ideologies, but it is worth recalling that many of our graduates and economists are not far from similar theories.
With a view to corroborating his ideas, Anil Bokil, states that if you demonetizes, “illegal” wealth is self-destroyed, while poor people’s money, namely the “good money”, would appreciate.
Even Bokil, however, has his own pocket-size Tobin Tax: if demonetization is complete and the “black money” is driven away, we could abolish all taxes, except for a 1% “Tobin Tax” on each transaction.
Meanwhile, the poor wretched Indians’ banks accounts are blocked for lack of cash and the new banknotes are so badly printed that they can be easily reproduced, thus leading us to predict great success for “black money”.
And inflation throughout India worse than Weimar’s.
Faced with this fever of economic foolishness which is spreading across Asia, even Australia wants to get rid of the bad 100-Australian dollar banknote (equal to 70 euro approximately), which is responsible for all moral iniquities in the land of kangaroos.
In fact the word “kangaroo” comes from the Anglicisation of the kangaroo natives’ expression “I do not know” or “I do not understand”.
Here the logic is still wrong, such as the one of the Indian mystic monetarist, but has its own foolishly Western meaning.
In fact, if we eliminate a currency which serves mainly for private hoarding, market liquidity will increase immediately.
Not necessarily, but they think so anyway – they studied in some Ivy League universities and are exempted from using the logic and studying the classics.
However what should Australians use for hoarding their savings?
And if they do not hoard money, how could they pay loans, mortgages, taxes, utility bills, rents?
Shall they use coconuts? Or avocados? It is impossible because they are perishable products and, by eating them, their children would immediately become capitalists.
The fact is that banks and governments want to increase the households’ credit share, by abolishing their independent money reserves.
As has somehow happened with the great wage freeze since the euro introduction onwards.
Wages and salaries have decreased in real terms to the same extent as the share of consumer loans increased.
The privatization of wage increases with high percentages.
Hence If we do not think again to an economy which can work well also for the poor people, possibly with a small one-off tax to be paid every year, we will never get out of this cage full of crazy Hindus, monetarists, salon Keynesians and various ignorant people and doctrinarians with no idea of practical life.
Back to IMF: Whither Pakistan’s Medina Model
Pakistan has been availing International Monetary Fund loan packages without stricto sensuo acting upon reforms since late 1980s. Its finance minister is now horn-locked with the International Monetary Fund ferreting out strings, a tangled skein, to a US$ 6 billion to $12 billion bailout package. Pakistan could complete one IMF package that ended in 2016. That too with a number of requirements relaxed.
The thorny questions hovering over the instant package are opaque US$ 60 billion Chinese loans (diversion of IMF dollars to China), trimming unbridled spending, nurturing bloated state-owned corporations, inaction against tax dodgers (low tax-to-Gross Domestic Product ratio), sluggish textile exports (lost out to Bangladesh), and US$7.6 billion debt-stricken energy sector. Besides, current-account and budget gaps have swelled to more than 5 percent of gross domestic product and foreign-currency reserves have plunged to the lowest in almost four years. In response authorities have devalued the rupee five times since December and hiked interest rates the most in Asia. The GDP growth of about 5.2 per cent in 2018 rolled down to 2.9 per cent in 2019 and a further decline to 2.8 in 2020.Inflation jumped from 3.9 per cent in 2018 to over 7.6 per cent in 2019. Already grey listed, Pakistan is fighting tooth and nail to wriggle out of stigma notwithstanding virulent Indian pressure to freeze it so.
Interest-free Medina-model rhetoric
Pakistan had to go to the IMF doorstep despite cricketer-turned-prime minister Imran Khan’s reluctance. He was enamoured of Medina model as every Muslim should. Both Islam and Marxism did away with `interest’ as primum mobile of capital formation. But, Alas! Imran had to wake up about bitter reality of the economic world around. Much to his chagrin, even chairman of Pakistan’s Islamic Ideology Council has warned (October 22, 2018) him against `romanticism’. He urged the government to set up a task force to realize a “Medina State” and suggested the formation of a task force to realize this vision., The whole of Pakistan, with wistful eyes, looks forward to fulfillment of this dream of `new Pakistan’.
We now live in a different world.
Unlike Medina, today’s Pakistan is a complex state. Shortly after his arrival at Medina, the Holy Prophet Muhammad (PBUH) built a mosque and a market place there. Like the mosque, the market place could not be privatised. There was free entry and exit of traders (akin to perfect competition under micro-economics) and caravans to the market. No monopolies, duopolies and cartels! A section of the market caravanserai was reserved for foreign traders. The whole world could sell their goods there free of any taxes.
Some clever local traders tried to take advantage of robust trade. They used to buy caravan camel loads outside the Medina (before they reached Medina), and sell it at dictated price. Islam outlawed this practice as talaqqiur rukaban (seeing faces of riders). Islam prohibited all types of future trading involving element of uncertainty (advance purchase of raw tree-fruit, fish in the pond, and so on). Islam prohibited usury (riba) in all its forms (loan giving at agreed interest taffazzul, or loan profiting due to delay naseea). When Bilal (may Allah be pleased with him) tried to exchange his coarse-quality dates with fine-quality dates the Holy Prophet forbade him. He told him to sell his dates for cash and buy better dates at prevailing price. The Prophet did not live in a 300-kanal-and-10-marla house (like Pakistan’s prime minister). Nor did he, like our numerous politicians, own assets abroad. He bequeathed a dozen swords but no precious metals (Golda Meier). Islam globalized free-market mechanism (laissez faire). It changed attitudes and avaricious mindsets. Being a dominant religion, Islam dictated its own terms of trade.
To fulfil its promises, Pakistan’s government budgeted public-sector development- programme outlay of only Rs. 800 billion for the federation and only Rs 850 billion for the provinces. The government has a Hobson choice. With India, at daggers drawn, could it divert security allocation to welfare? Some writers described Pakistan as a `garrison state’.
For an economic turnaround, Pakistan’s visionary prime minister has to shun rhetoric, and decide upon suitable economic policies. It needs to look at the economic world around, beyond Medina.
Interest outlawed under Pakistan’s constitution
Under preamble to Pak constitution `sovereignty’ belongs to Allah Almighty, not to people themselves as under US constitution. The elected representative can wield authority within defined religious limits. Interest is outlawed under
Article 38 (f) of the Constitution of Pakistan, quoted heretofore _ Article 38 (Promotion of social and economic well-being of the people) The State shall…(f) eliminate riba
as early as possible. The Islamic preamble (Objectives Resolution) was inserted in draft constitution under Pakistan’s prime minister Liaquat Ali Khan’s influence. Unlike Pakistan’s most `leaders’, Liaquat Ali Khan was financially scrupulous. Aside from his honesty, Liaquat Ali Khan could not foresee he would be the first to sow seeds of religious discord. Jamsheed Marker, in his book Cover Point, observes ` charge against Liaquat was that he moved the Objectives Resolution, which declared Pakistan to be an ‘Islamic State’ (ibid. p. 33)”. Unlike the US and many other secular constitutions, the Objectives Resolution (now Preamble to 1973 Constitution) states `sovereignty belongs to Allah Almighty’. The golden words of the constitution were warped to continue an interest-based economy. We pay interest on our international loans and international transactions. Do we live in an interactive world or in an ivory tower? Isn’t Islamisation old wine in new bottle?
Follow-up to `Interest’ outlawed
The Security and Exchange Commission of Pakistan enforced Shariah Governance Regulations 2018. This regulation is follow-up to Article 38 (f) of the Constitution of Pakistan, and Senate’s resolution No. 393 (July 9, 2018) for abolition of riba (usury).
(extortionist interest) and normal interest/profit are indistinguishable. They disallow even saving bank-accounts. They point out that riba is anathema both as `addition’ (taffazzul) and due to `delay'(nas’ee) consequent upon fluctuating purchasing power.
The regulation is welcome but there are unanswered questions about Islamisation of finance in Pakistan. We pay interest on our loans and international transactions. The sheiks put their money in Western banks and earn hefty interest thereon.
Future trading is hub of modern commerce. Yet, it is forbidden under Islam. At International Islamic University, I learned that Islamic law of contract does not even allow advance contracts concerning raw fish, fruit, or anything involving element of `uncertainty’. Islam does not allow even tallaqi-ur-rukbaan (buying camel-loads of goods from caravan before they had reached Madina open-market. Holy Prophet (Peace be upon him) forbade Bilal (may Allah be pleased with him) to exchange poor-quality dates with superior-quality dates. He was advised to sell off his dates in open market for cash and then buy better-quality dates with money so earned.
Interest-based real world
Complex `interest’-based world
Gnawing reality of complex interest-based economic world has now dawned on the government. To quote a Murphy Law `nothing is as simple as it seems at first’. Pakistan needs to review the whole gamut of its economic structure (feudal lords, industrial robber barons, money launderers, and their ilk) and International Monetary Fund conditions. In his lifetime, even our Holy Prophet had to engage in commercial partnerships with the non-Muslim also.
Even Marx did not live in Utopia. He, also, constantly searched for solutions to the problems of the real world around. Disgusted at the simplistic interpretations of his ideas, he cried in boutade: “If this is Marxism, what is certain is that I am not a Marxist”. Keynese offered panacea of deficit financing with concomitant inflation to swerve 1930-Depression unemployment and stagnation. He also reacted to mis-interpretation of his ideas, saying `I am not a Keynesian’.
Keynesian theories preceded a lot of discussion about Gold Exchange Standard, stable prices. To create more money, deficit financing (paper money) was resorted to. As a result the hydra-headed monster of inflation was unleashed. Keynes believed inflation was a `short run phenomenon typical of a full- employment stagnant economy’. But, it became a long run phenomenon. Keynes postulated `With perfectly free competition, there will always be a strong tendency for wage relates to be so related to demand that everyone is employed at level of full employment’. When Keynes was asked about persistence of inflation (too much money chasing too few goods), he replied `In the long run we are all dead’. Post-Keynesian economists coined the term `stagflation’ to explain the phenomenon. With visible massive joblessness, Pakistan is far from a full-employment economy. The paltry household income has to bear the brunt of forced reduction in purchasing power due to rising price level, or falling rupee value.
We adopted floated exchange rate that ballooned our debt burden. No economist has ever applied his mind to effect, positive or negative, of international debt burden on Pakistan economy. No-one ever visualized even the idea of `odious debts’.
Pak government discourages savings
Keynes postulated savings are equal to investment. But, Pakistan discourage savings and encourage consumerism by reducing profit on saving deposits, and increasing taxes on small savings. Locke and others say government can’t tax without taxpayer’s consent. In Pakistan, the govt. picks people’s pockets through withholding taxes and reduction in National Saving Schemes profits. Even unissued bonds lying in Pakistan’s State Bank vaults are included in each draw. The prizes on such bonds are devoured by State Bank, a body corporate, without buying them. Pakistan’s hidden economy is more than the monetized one. It needs to evolve politico-religious milieu and macro-economic theories that suit our country best. It should promote savings while blocking illegal cash flows by introducing magnetic-card transactions in everyday life.
Pakistan’s burgeoning interest-based debt burden
External Debt in Pakistan increased to US$ 95097 million in the second quarter of 2018 from US$ 91761 million in the first quarter of 2018. External Debt in Pakistan averaged US$ 54065.23 million from 2002 until 2018, reaching an all-time peak of 95097 US$ Million in the second quarter of 2018 from a record low of US$ 33172 million in the third quarter of 2004. International Monetary Fund expects Pakistan’s external debt to climb to US$103 billion by June 2019. Pakistan Government Debt to GDP 1994-2018 presents a dismal picture. Pakistan recorded a government debt equivalent to 67.20 percent of the country’s Gross Domestic Product in 2017. Government Debt to Gross Domestic Product in Pakistan averaged 69.30 percent from 1994 until 2017. It reached peak of 87.90 percent in 2001 and a record low of 56.40 percent in 2007. Successive Pakistan governments treated loans as free lunches. They never abode by revised Fiscal Responsibility and Debt Limitation Act. Nor did our State Bank warn them about the dangerous situation. State Bank however passively reported, every Pakistani owed over Rs115, 000 as the country’s burden of total debt and liabilities increased to Rs. 23.14 trillion by the end of December 31, 2016.
Pakistan’s debts not payable being `odious’?
Pakistan’s debt burden has a political tinge. For joining anti-Soviet-Union alliances (South-East Asian Treaty Organisation and Central Treaty Organisation), the USA rewarded Pakistan by showering grants on Pakistan. The grants evaporated into streams of low-interest loan which ballooned as Pakistan complied with forced devaluations or adopted floating exchange rate. Soon, the donors forgot Pakistan’s contribution to break-up of the `Soviet Union’. They used coalition support funds and our debt-servicing liability as `do more’ mantra levers.
Apparently, all Pakistani debts are odious as they were thrust upon praetorian regimes to bring them within anti-Communist (South East Asian Treaty Organisation, Central Treaty Organisation) or anti-`terrorist’ fold. To avoid unilateral refusal of a country to repay odious debts, UN Security Council should ex ante [or ex post] declare which debts are `odious’ (Jayachandaran and Kremer, 2004). Alternatively, the USA should itself write off our `bad’ debts.
But Pakistan and its adversaries are entrapped in a prisoner’s dilemma. The dilemma explains why two completely rational players might not cooperate, even if it appears that it is in their best interests to do so. .The ` prisoners’ dilemma’ was developed by RAND Corporation scientists Merrill Flood and Melvin Dresher and was formalized by Albert W. Tucker, a Princeton mathematician.
No demand raised for forgiveness of `odious debts
Several IMF and US state department delegations visited Pakistan. But, Pakistan could not tell them point-blank about non-liability to service politically-stringed debts. The government’s dilemma in Pakistan is that defence and anti-terrorism outlays (26 per cent) plus debt-service charges leave little in national kitty for welfare. Solution lies in debt forgiveness by donors (James K. Boyce and Madakene O’Donnell(eds.), Peace and the Public Purse.2008. New Delhi. Viva Books p, 251).
Debt forgiveness promotes growth
Debt forgiveness (or relief) helps stabilise weak democracies, though corrupt, despotic and incompetent. Research shows that debt relief promotes economic growth and boosts foreign investment. Sachs (1989) inferred that debt service costs discourage domestic and foreign investment. Kanbur (2000), also, concluded that debt is a drag on private investment.
In fact, economists have questioned justification of paying debts given to prop up a regime congenial to a dominant country. They hold that a nation is not obliged to pay such `odious debts’ (a personal liability) showered upon a praetorian individual (p. 252 ibid.). Legally also, any liability financial or quasi-nonfinancial, contracted under duress, is null and void.
No economist to steer economy
Economics is mumbo jumbo to Pakistan’s finance minister. Renowned economist Atif Mian could not take over as finance minister because of uproar against his Ahmediyya/Qadiani religious belief. In protest, another cabinet-slot nominee Khwaja Asim also regretted to assume office formally (though continuing informal help ).
Pakistan’s economy: Back to basic
Economics remains a match between limited resources vis-à-vis unlimited wants (Lionel Robbins). What are our resources or factors of production (land, labour and socio-economic milieu, capital and organisation)? Through what system these resources could interplay to start capital accumulation (growth/development/technical progress) in our country?
Our agriculture is exposed to vagaries of nature (floods, famines, etc.). Besides, productivity of our agricultural sector is low because of disguised unemployment (farmers produce less as compared to their ilk in advanced countries).
People are shy of investing in productive capacity because they could earn more in marketing and other business lines (even in real estate).
We have to determine optimal balance between public and private sectors. We have to balance constraints of security and welfare.
Manufacturing sector, not agriculture, produced Asian Tigers. Studies reflect that there is
correlation between manufacturing sector and economic development in our country. We need to adopt such polices as make manufacturing primum mobile of our economic development.Let some industries be croissance des fleures and improve some nuclei (one school, one university, one hospital) before expecting to transform the whole country through a magic wand (Waterston, Development Planning: Lesson of Experience).
Lessons for an economic turnaround
We need to realize that economics is a social, an inexact, science, but responsive to dynamic environment. Keynesian post-1930-Great-Depression macro-economic policies understood that unemployment is not due to un- or under-utilised productive capacity. It is due to under-spending and lack of effective demand to buy over-produced goods.
Mega housing project to promote capital formation Pakistan government has announced to build a million houses under Naya Housing Project . The scheme smacks of Ragnar Nurkse (Capital formation in underdeveloped countries). Will effective demand increased through mega housing projects will spill over into increased buying of goods imported from China and other countries?
A faulty project
To solve any problem, its nitty-gritty (features) should be first identified: (a) Shelter-providers are highly stratified. (b) Defence Housing Authority caters for shelter needs of military officers. It strictly adheres to its formula of allotment of flats and plots. But, it excludes `civilians paid out of defence services estimates’ (c) The Federal Government Employees Housing Foundation (and affiliate Pakistan Housing Authority) is supposed to allot plots to retired employees. But, it does not follow the date-of-birth criteria. Now only Grade 22 employees (including judges) get plots. Those in Grade 17 to 21(septuagenarians like me or even octogenarians and nonagenarians) may die without a plot or a flat. (d) The FGEHF misuses hardship clause which favours not so hard-up people. For instance, a Customs collector on deputation to National Accountability Bureau was quickly obliged with a plot. He was allotted plot first and asked to submit illness certificate later (e) It is eerie that FGEHF’s definition of `employees’, now, has infinity as its limit. It includes non-employees like legal fraternity, including Supreme Court Bar Association. (f) According to media reports, the FGEHF reeks of corruption and favouritism. (g) Shelter for general public needs careful study, beyond rhetoric of market demand and supply _ The Korangi Town Project, Lyari Expressway Projects, Khuda Ki Basti, ‘Home Ownership Scheme for the People’(1964), and ‘The National Housing Policy’ 2001.Trusting FGEHF for `naya housing’? `A cat’s a cat and that’s that’. The new government should have the nerve to merge all shelter providers (in khaki and mufti) and devise a national housing policy, instead of focusing on `houses’.
China should change consumerist Pakistan into a productive economy
Let China help expand Pakistan’s manufacturing capacity and thereby reduce unemployment in Pakistan. All policymakers should act in unison. They include policy formulators (prime minister, finance minister, et. al), policy detailers (chief economic adviser, statisticians) and technocrats. The policy-makers should decide upon balance of priority. agriculture or industry, “closed” economy with import substitution, “living within means” and balanced budget or deficit budget. Will increased spending “crowd in” or “crowd out” private investment? Monetary policy objectives and the role of the central bank_ stability of employment and inflation, growth rate, balance-of-payments issues Role of foreign-direct investment and “non-bank financial institutions? Their impact on capital formation, consumption trends, and other macroeconomic aspects.
Technocrats, being apolitical unlike policy formulators, could implement policies single-mindedly. Our precious borrowed dollars should not be frittered away into increased imports.
Pakistan’s economic system?
During Ayub era, capitalist growth had a free hand. That led to rise of 22 nouveau rich families. A university mapped them in `Concentration of wealth and economic power in Pakistan’. Dr. Mahbubul Haq, himself the architect of laissez faire growth strategy, identified his mistakes in `Seven Sins of Economic Planners in Pakistan’. During post-Ayub period, we experimented with Bhutto-brand socialism. Later we embraced Islamic mode of financing mostly by packing old wine in new bottle (PLS sharing for `interest’, modarba, musharika for partnership, so on). At the same time we kept paying debt service and contracting new loans under capitalist international system.
The downtrodden remained so in our Islamic system. The international exploitative capitalist system, on the other hand, delivered goods. Rapid economic growth with substantial amelioration in lot of the common man. Soviet brand collectivism collapsed into oblivion.
Capitalism accepts inequality in incomes as a fait accompli. So do studies by political philosophers like Aristotle, Tacitus, Moska, Michel, Marx, Pareto and C. Wright Mill. Yet, sans uniform health care, education, and other basic facilities to masses, life in Pakistan is more miserable than in the West. Why? Soul searching needed by rulers and ruled alike.
A fetter to Pakistan’s rapid economic growth is debate between radical Islamists (fundamentalists) and liberal reformers The liberals, like Farag Fuda and Abu Zayd (Egypt), read the sources of Islamic sharia in terms of time and place (historical relativism). They advocate reading holy texts in our own terms, interpreting them in accordance with spirit and intentions. The radials (conservatives) regarded the liberals as heretics or apostates. Farag was murdered in 1992 and Abu-Zayd exiled in following years.
The conservatives say `Islam is complete’. The man in the street sees no undisputed Islamic model in Saudi Arabia, Iran, Pakistan or anywhere. We `circumcised’ some banking, civil and criminal laws to show case them as Islamic. For instance, we introduced PLS, modarba, musharika. Practically, there was no tangible impact on society, economy or polity. In international aid and trade, we conformed to secular principles. We continued to interest-based loans and pay debt service. Islamic punishments, introduced by Ziaul Haq had questionable impact. Sami Zubaida points out in his book Law and Power in the Islamic World (p. 224), “It is ironic that so-called Islamic punishments are described as `medieval’, when in fact, medieval jurists and judges showed great restraint in their application while modern dictators flaunt them as a religious legitimacy”.
The Islamisation of laws is regarded by critics as hypocritical. Pakistanis have a long list of Constitutional rights. But, a proviso makes them non-enforceable through courts. Pakistan’s qanun-shahadat (evidence law) defines qualifications of a witness (tazkia-tus-shahood). But, it softens its Palladian to accept any witness if the ideal witness is not available. The less said about sadiq and ameen clauses, the better. Under these clauses, even a three time priminister was sacked by Pakistan’s Supreme Court.
A judge has to decide according to law not according to his conscience and divine authority. An example is ban on gambling like circuses by one judge. The decision was turned down on appeal as it is Pakistan’s Electronic Media Regulatory Authority, not the court to adjudicate such matter.
Pakistan could not emerge as an Asian tiger because of indecision about what system to follow. The vested interests, particularly religious obscurantists, often smother dissent from so called enlightened moderators. Rampant sectarianism in Pakistan with concomitant effects on economy is an offshoot of lacunae in religious interpretations by vested interests.
Pakistan has abolished interest (riba) in accordance with its fundamental law. Yet its banking sector and international transctions are interest based.
Let Pakistan face the truth. It needs to evolve and show case a politico-economic model of Islam that is compatible with international practices. Or else, dispense with hypocritical patchwork, and go for secularist IMF model.
Financial Inclusion in Europe and Central Asia: The Way Forward?
Authors: Asli Demirguc-Kunt and Cyril Muller*
If you are unbanked there is a high likelihood you are living on the edge of poverty, exclusion and vulnerability. If you struggle to attain or maintain a secure, well-paying job, you probably do not have a bank account or access to financial services. You are completely reliant on cash, which is unsafe and hard to manage. And, should you or a family member experience a serious illness or another unexpected financial burden, you could quickly fall deeper into poverty and despair.
Unfortunately, this is the reality for millions of people in the developing countries of Europe and Central Asia. As recently as 2017, around 116 million adults in the region still had no bank account. And almost 60% of the unbanked in the region are women. In today’s highly globalized, technology-driven world, it is a stark reminder that we have a long way to go to ensuring greater inclusion and opportunities for all.
Over the past decade, account ownership has been increasing overall in Europe and Central Asia – from 45% of the adult population in 2011 to 65% in 2017 – but the data masks differences across subregions. In the high-income countries of Europe, most adults already own an account, and about 55% save formally in a financial institution. However, countries in the South Caucasus and Central Asia, despite important increases in recent years, have much lower levels of banked adults.
Armenia, Georgia, Moldova, the Kyrgyz Republic, Tajikistan, and Turkmenistan are among the countries that have seen the greatest increases globally, but they started from a very low base.
What are the reasons so many people in the region remain unbanked?
Lack of trust in institutions is a major issue. Almost 30% of unbanked adults in the region report lack of trust in banks as a barrier to opening an account, which is reflected in the very low level of formal savings in the region. Less than 25% of people in the developing countries of the region borrow from formal sources. As such, informal borrowing is prevalent. In cases of emergency, people rely on family and friends rather than savings or borrowing from a financial institution.
Gender gaps in financial inclusion also persist, and are especially acute in countries such as Armenia, Kosovo, Turkey, Tajikistan, and Turkmenistan. In Turkey, for example, 83% of men have a bank account, while only 54% of women have one. Being unbanked is also associated with a lack of labor force participation, which underscores the challenges facing so many women in the region with respect to participating equally and fully in business and in the economy.
What is the way forward?
Inclusive financial systems provide a high share of individuals with greater access to resources to meet their financial needs, such as saving for retirement, investing in education, capitalizing on business opportunities, and confronting shocks. Inability to use these financial services can contribute to persistent income inequality and slow economic growth.
There are many opportunities to increase account ownership. Over 80% of the unbanked in Europe and Central Asia have a mobile phone. Providing these mobile users with internet access or digital financial services could be key to expanding financial inclusion.
For governments, switching from cash to digital payments can reduce corruption and improve efficiency. Making government, private sector and agricultural payments directly into accounts would go a long way. For example, moving public sector pension payments into accounts would reduce the number of unbanked adults in the region by up to 20 million, including 8 million in Russia alone.
Technology has a huge role to play. Digital payments – such as receiving payments or transfers directly into an account, making payments over a mobile phone or using the internet, paying utility or fees directly from accounts – can drive financial inclusion, as many countries are also experiencing major advances in digitalization.
Financial services must be used responsibly, nonetheless. As such, countries need to ensure greater financial literacy among citizens and provide consumer protection safeguards. Financial services should also be tailored to the needs of financially underrepresented groups such as women, the poor, and first-time users.
As the Europe and Central Asia region grapples with sluggish economic growth and uncertain prospects in 2019-20, inclusive financial sector development can help boost growth and reduce poverty. Rapid technological advancement and interconnectivity between regions also provide unprecedented opportunities to ensure everyone can benefit from financial inclusion and therefore participate equally and fully in society.
*Cyril Muller is the World Bank Regional Vice President for Europe and Central Asia.
Ambitions are affordable for Asia and the Pacific
Three years of implementation of the transformative 2030 Agenda for Sustainable Development in Asia and the Pacific shows the region has some catching up to do.
Despite much progress, the region is not on track to reach the 17 Sustainable Development Goals set out in the United Nations 2030 Agenda for Sustainable Development. We are living in a time of booming prosperity, yet many are getting left behind. Basic needs, such as the freedom for all from hunger and poverty, ill-health and gender-based discrimination, and equal opportunity for all are elusive. Economic, social and planetary well-being has a price tag. Calculations by the United Nations Economic and Social Commission for Asia and the Pacific (ESCAP) show that it is mostly affordable for the region.
Realizing ambitions beyond growth
What will it take to realize the ambitious 2030 Agenda focused on strengthening the three pillars of sustainable development?
The 2019 edition of the ESCAP’s flagship publication Economic and Social Survey for Asia and the Pacific is asking for the region to raise ambitions beyond mere economic growth. Countries facing high and growing levels of inequality and environmental degradation will have to change course from pursuing a growth path that neglects people and the planet.
The 2019 Survey forecasts continuing robust growth in the region which remains the engine of the world economy. Amid rising global uncertainty that challenges the Asia-Pacific region’s economic dynamism, there is a need for investments that not only sustain growth but also build social and environmental capital.
ESCAP analysis shows the region needs to invest an additional $1.5 trillion every year to reach the Goals by 2030. This is equivalent to about 5 per cent of the region’s GDP in 2018, or about 4 per cent of the annual average GDP for the period 2016‒2030.
At $1 per person per day, this investment is worthwhile. It could end extreme poverty and malnutrition for more than 400 million people. A quality education for every child and youth would become possible, as would basic health care for all. Better access to transport, information and communications technology (ICT) as well as water and sanitation could be ensured. Universal access to clean and modern energy, as well as energy-efficient transport, buildings and industry could be achieved. Climate and disaster-resilient infrastructure could be built. Resources could be used more effectively, and the planet protected.
Most of this investment is needed to protect and nurture people and the planet. Making a better world for our people by ending poverty and hunger and meeting health and education Goals, requires some $698 billion per year. Protecting our planet by promoting clean energy and climate action and living in harmony with nature, requires $590 billion per year. Another $196 billion per year is needed to invest in improving transport and ICT infrastructure as well as access to water and sanitation services.
Of course, in a region as diverse as ours, investment needs vary considerably. Least developed countries need to invest the most at 16 per cent of GDP while South and South-West Asia has an investment need of 10 per cent of GDP to reach the Goals by 2030. More than two-thirds of the investment in these countries will be in reducing social deficits – poverty, malnutrition, lack of health care and education as well as job creation. Landlocked developing countries need to invest most in improving transport and ICT infrastructure as well as water and sanitation services. East and North-East Asia and, to a lesser degree, South-East Asia, need to focus on clean energy and climate action investment.
Paying the bill
It should be remembered that the Goals support each other and an investment in one area has a positive effect on another. Good health depends not only on access to healthcare services but also nutrition, safe water, sanitation and good air quality. Education for all also promotes gender equality. Resource efficiency supports climate change mitigation.
Besides harnessing these synergies, sustainable development financing strategies will have to turn to public and private finance. The good news is that most countries in the region have the fiscal space to invest in the Goals. There is also a massive untapped pool of private financial assets estimated at $51 trillion in developing Asia-Pacific countries alone. Enhanced regional cooperation would also help the region offset external risks and build resilience by tapping into regional resources.
Above all, leadership will be crucial in making the transition to a development strategy that balances all dimensions of human and planetary well-being. The 2019 Survey aims to stimulate a regional dialogue and offers guidance on accelerating progress towards the Goals in the region.
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