Connect with us

Economy

Back to IMF: Whither Pakistan’s Medina Model

Avatar photo

Published

on

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.

IMF’s worries

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

[economic interest]

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.

Islamic modernism

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.

Conclusion

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.

Mr. Amjed Jaaved has been contributing free-lance for over five decades. His contributions stand published in the leading dailies at home and abroad (Nepal. Bangladesh, et. al.). He is author of seven e-books including Terrorism, Jihad, Nukes and other Issues in Focus (ISBN: 9781301505944). He holds degrees in economics, business administration, and law.

Continue Reading
Comments

Economy

The Upcoming Recession and its Ramifications on the World Economies

Avatar photo

Published

on

The recent decision of the new head of Twitter, Elon Musk, to sack approximately 50 percent of the workforce is only indicative of the recession that is glooming over the world. The story of Twitter is just one example among many visible ones. Almost all the major firms around the globe have or are planning to lay off employees, including Microsoft, Meta, Tencent, Xiaomi, Unacademy, etc. 

According to a comprehensive study titled ‘Risk of Global Recession in 2023 Rises Amid Simultaneous Rate Hikes’ by the World Bank, all the nation-states are tilting towards a cascade of economic crises in global financial markets and emerging economies, leading to long-term damages. The report blames central banks around the globe for raising interest rates to tackle inflation caused due to the Coronavirus pandemic and Russia’s aggression on Ukraine in the European arena. The report states that even raising the interest rates to an unprecedented high not seen over the past five decades will be insufficient to pull global inflation down to the pre-pandemic levels. It further instils the need to focus on supply disruptions and subside labour-market pressures. The President of the World Bank Group, David Malpass urged policymakers to focus on boosting production instead of cutting consumption and make policies that generate auxiliary investments, improving productivity and capital allocation, which are crucial for growth.  

Economics 101: Recession

Amidst the pandemic, many states released relief and stimulus packages that heavily leaned on measures to expand liquidity, such as loosening lending restrictions or reducing repo rates (the rate at which commercial banks borrow money from the central bank) as well as reverse repo rates (the rate at which commercial banks lend money to the central bank). China was the first state to act upon these stimulus measures to counteract the disruptions caused by the covid, followed by Japan, the EU, Germany, India and so on. Though the measures helped economies absorb the pandemic’s impact, one major drawback was increased demand due to induced money flow in the market, leading to inflation.

Inflation, defined as the rate of increase in prices of general goods and commodities in a given period of time, can be caused by multiple factors. A shortfall in aggregate supply, one of the most common factors, can lead to excessive demand pressures in the market. To curb inflation, central banks often tweak or change the fiscal and monetary policies of the nation. Increasing the interest rates is one such measure, as it tightens the economy’s banking system and thus contracts the flow of money, reducing already high demands. However, suppose only the rates are increased without substantial reforms in line with resetting the supply chains, increasing production and overall growth to meet the demand; in that case, a country may move towards a recessionary period. Therefore, alongside rising rates, a nation must diversify its suppliers, invest in technology (without increasing the debt burden), and focus on self-reliance while sustaining employment.

The International Monetary Fund (IMF) defines recession practically as the fall in a country’s Gross Domestic Product (GDP), i.e. a decline in the value of all the produced goods and services in a country for two consecutive quarters. Simply, a recession is a period of massive economic slowdown. Pointing at a specific moment when a recession occurs is almost impossible and futile. However, a few indicators, like the downfall of GDP and public spending, increased unemployment, and a decline in sales and a country’s output, generally point towards an upcoming recession. To sum up, there are various ways for a recession to start, from sudden shocks to the economy and excessive debt to uncontrolled inflation (or deflation) and non-performing asset bubbles.

The Stumbling Economies

According to IMF Managing Director Kristalina Georgieva, “First, Covid, then Russia’s invasion of Ukraine and climate disasters on all continents have inflicted immeasurable harm on people’s lives.” One-third of the world economies, including the United States, Europe and China, are expected to contract in the subsequent quarters. 

For US economists and forecasters, the recession is no longer about ‘if’ but ‘when’. The decision of the Fed (US Central Bank) to increase rates to cool inflation without inducing higher unemployment and an economic downturn has only shrunk the possibility of a ‘soft landing,’ which occurs when the tightened monetary policies of the Fed reduce inflation without causing a recession. Nouriel Roubini, one of the few economists who rightly predicted the financial crisis of 2008, also claims a prolonged and inevitable recession in 2022 that will last till 2023. Economists expect a growth rate of 0.4 percent in the fourth quarter of 2023 as opposed to the fourth quarter of the previous year, and in 2024, they expect the economy to grow at 1.8 percent. The rate of unemployment is expected to rise to 3.7 percent in December this year and to 4.3 percent in June 2023, compared to 3.5 percent in September.

Like the US, Europe was also under the impression that the economic situation would improve without a recession. Assumptions of subsiding or transitory inflation due to solid businesses, enough public savings and adequate fiscal adjustments turned out wrong for the European economies. The Euro area (5.1 percent), and the UK (6.8 percent), are among the countries with the most expected output loss. Europe has mainly been affected by the Russian war on Ukraine and the resulting oil and gas disruptions leading to an ‘Energy War’ against the former. Similarly, China doesn’t lie far from them, with an expected output loss of 5.7 percent in 2023. Zero Covid Policy, coupled with the mortgage crisis and exodus in the manufacturing sector, has led to the economic slowdown of the Asian giant.

Impact on the Indian Economy

India reported a growth of 13.5 percent in the April to June quarter and became the world’s fifth-biggest economy, taking the spot of Great Britain. However, this growth results from the nation’s shutdown amid Delta-driven covid lockdowns during previous quarters and not because of the significant improvements in the economic activities. India needs to focus on skill-based human development projects to unleash its economic potential and effectively utilise its demographic dividend. However, India is not immune to the global slowdown. It is expected to face an output loss of 7.8 percent in 2023. 

Indian CEOs are also expecting a decline in the growth of companies, but the economy is expected to bounce back in the short term, according to KPMG 2022 report. Moreover, 86 percent of CEOs in India expect an impact of up to 10 percent on earnings in the next 12 months. Reducing profit margins, boosting productivity, diversifying supply chains, and implementing a hiring freeze (worst case, layoff policies) are a few steps firms can take to weather such challenges.

India, thus, needs to tap the potential of start-ups and small enterprises, as opposed to just established firms, by expanding and enhancing the private sector’s access to capital investments and curbing environment-related risks. Reforms in dispute resolution mechanisms are also long overdue, evident through the Ease of Doing Business report, where India ranked 63rd out of 190 countries worldwide. India needs to prove its worth by showing investors that not only can their money achieve decent returns, but it is safe in Indian soil as well. 

The stand on India’s future remains split. The global rating agency S&P claims that India will not face the true and horrifying brunt of the global recession thanks to its decoupled economy with huge domestic demand, healthy balance sheets and enough foreign exchange reserves. On the contrary, according to the Japanese brokerage firm- Nomura, policymakers are misplaced in their optimism about India’s growth trajectory. Its economists assert India’s estimated growth at 7 percent in FY23, which is at par with the RBI’s revised forecasts, but it also predicts a sharp decline to 5.2 percent in FY24. This estimated growth doesn’t align with India’s commitment to becoming a 5 Trillion USD economy.

Way Forward

UNCLAD’s Trade and Development Report 2022 projects global economic growth will plunge down to 2.5 percent in 2022, followed by a drop to 2.2 percent in 2023, costing the world a loss of more than 17 trillion USD in productivity. It further warns that the developing nations will be most vulnerable to the slowdown resulting in a cascade of health, debt and climate crises. Regarding the proportion of revenue to public debt, Somalia, Sri Lanka, Angola, Gabon, and Laos are the worst-hit countries, evident through the excessive inflation these states face.

Similarly, Indian fuel and food commodities prices have increased, but India’s sturdy performance when other countries are struggling can be attributed to its efficient policies. India does not have a perpetual external debt burden to hamper its growth. In addition, the government has focussed on developing the industrial and service sector to promote jobs and increase savings, especially after the Pandemic, to revitalise the Indian economy. Domestically, the government has provided effective social safety nets to ensure healthy livelihood for the population. 

Despite these factors, India must realize and accept the harsh reality of the upcoming turbulent times. India may have a decoupled economy, but the world is one interlinked system. Global slowdowns will lead to a recession in India as well, whose effects are becoming more and more visible with each passing day. Major tech firms in India like Wipro, Tech Mahindra and Infosys have revoked their offer letters to young freshers, while others have started laying off employees amidst the fear of global recession. Irrespective of whether India becomes the “fastest growing economy” in the end, even a modest growth rate of about 5 percent will push millions into poverty in a country like India. It’s only imperative to realise that a depreciating currency and elevated inflation will hit the poorest the hardest, and India must be prepared to deal with this challenge.

Continue Reading

Economy

The Revival of China’s Supply and Marketing Co-op: A Countermove to Asia Pivot 2.0?

Avatar photo

Published

on

The Indo-Pacific Economic Framework for Prosperity (IPEF) was launched in the wake of President Joe Biden’s Asia trip this May, signaling the commencement of “Pivot to Asia 2.0” on the economic dimension. In the following months, China has accelerated to revive, despite being dubbed as “re-emergence”, its decades-old supply and marketing cooperatives—a Mao-era institution that once served as the engine of Chinese planned economy in the 1950s. The rebooting of the co-op system was actually initiated as early as 2016, but its recent sudden expansion across the country has provoked suspicion that China is reversing its market-reform efforts, and more importantly, it could be used as a pre-mobilization training by China to counter the increasing pressure from America or even to prepare for military operations targeting Taiwan.

China’s Co-op System in the 1950s: An Outgrowth of Geopolitical Threats

The first few years after the 1949 Chinese revolution is often portrayed by Beijing as a period fraught with internal and external threats—internally, a dearth of qualified infrastructure and urban workforce for industrialization; externally, the Korean War and intermittent border conflicts with Cambodia, Vietnam, and India. Consequently, China was forced to prioritize the development of heavy industry with the help of Soviet Union. The result of the rapid industrialization led by state-owned enterprises was the food shortage in cities due to the huge influx of farmers into urban areas. In order to efficiently balance the circulation of food and industrial products between urban and rural areas, the supply and marketing co-op system was born.

A year after the termination of Soviet aids to China in 1957, Beijing transformed its supply and marketing co-op system to a more centralized Commune System in the name of improving the “self-reliance” of poor communities to solve the issues of impoverishment. Later that same year, China triggered the second Taiwan Strait Crisis by initiating an artillery bombardment of Taiwan’s front-line islands, Quemoy and Matsu. Even though there was no direct evidence showing that the nearly decade-long collectivization movement in the 1950s was designed in the first place to target Taiwan, it was still an outgrowth of a grim geopolitical circumstance China believed it was in. Therefore, it is not difficult to understand China’s motivation to revive the Co-op system today.

Co-op 2.0: Decoupling from the U.S. and Targeting Taiwan?

The recent Biden-Xi meeting during the G20 summit may have sent a positive signal to the world that a period of détentebetween the U.S. and China could be expected in the near future, but a real breakthrough in their systematic competition may take a much longer time. With the successful implementation of the Regional Comprehensive Economic Partnership (RCEP) this year, China’s economic influence could be further projected in the region, which would largely bolster China’s confidence that building a regional trade bloc to exclude U.S. influence is feasible. China’s plan of becoming economic autarky, as having been framed as “internal circulation” , may be a workable cause so that a self-reliant China would no longer needs external demand to be a major driver of its economic growth.

Following the recent revival of Quadrilateral Security Dialogue (Quad) and the establishment of AUKUS, the announcement of IPEF by the United States undoubtedly reaffirm China’s conviction that it is again caught between a rock and a hard place the way it was in the early 1950s—external challenges with intensifying geopolitical tensions and internal downward economy compounded by its unwavering “zero Covid” policy. Consequently, the rebooting of the supply and marketing cooperatives was initiated with the hope to pave the way for a grand duel strategy in the future: externally, further decoupling from global economic system dominated by the U.S. and its western democratic allies; internally, tightening the government’s grip on the economy to weather international sanctions that could be imposed by western countries.

It is without doubt that Taiwan Strait is the most probable battlefield should any hot wars initiated by China in the years to come. In spite of speculations that Russia’s setbacks in Ukraine may thwart China’s potential aggression against the self-governing island, Xi Jinping’s Taiwan ambition did not seem to take a hit. Instead, his historic third term as the top leader of China appeared to inject a shot of adrenaline to his “wolf-warrior” warmongering proclivity. Not only did the 20th Party Congress deliver a work report that manifested “the most authoritative” evaluation of China’s Taiwan policy, but Xi’ recent portrayal of China’s geopolitical situation as “unstable and uncertain” was a message sent to the United States and Taiwan that any provocative initiatives from them could be greeted with China’s forceful responses.

However, that type of forceful responses would come at a cost as having been seen in Russia’s case. Having learned from from Russia’ lack of economic preparation for international sanctions, Beijing realizes the importance of planning ahead. Thus, the supply and marketing cooperative system would function as a practical drill for China’s need to transform its socialist market economy to wartime economy for possible military confrontations with the U.S. and Taiwan.

Implications for Counterstrategies of the U.S. and Taiwan

The legislation of America’s new export controls of semiconductor chips may have landed a huge blow to the China’s hope to save its economy via high-tech industry, but it is not likely that the U.S. would directly respond to the intentions behind China’s Co-op 2.0 other than continuing to proceed the advancement of IPEF. Apropos to certain bilateral trade issues, the Biden administration may even favor a temporary ceasefire with Beijing, not only for the urgency to tackle the ongoing inflation, but also for the 2024 presidential election.

On the other hand, Taiwan can actually make the most of America’s “Pivot to Asia 2.0” to win itself more bargaining chips. First, despite being denied membership, Taiwan can still take advantage of the support from its allies inside of American congress to seek active participation in IPEF under the name of the “Separate Customs Territory of Taiwan, Penghu, Kinmen and Matsu”, the same title it uses as a member of the WTO. Second, it should put more efforts to promote the “Chip 4 Alliance” which is comprised of the United States, Taiwan, Japan, and South Korea, and strengthen technological ties with more European democracies. Last, it can seek more strategic dialogues with the new Republican-dominated congress. Compared to his predecessor, the would-be House Speaker, Kevin McCarthy, holds a tougher stance toward China and has already set to form a special committee to contain Beijing. Taiwan’s active interactions with the new American congress would be helpful to increase its strategic value to both U.S. China policy and U.S. partisan politics in the following two years.

Continue Reading

Economy

Who can live in England with less than £3 a week?

Avatar photo

Published

on

A homeless woman begs for money in the centre of London, United Kingdom. Unsplash/Tom Parsons

A study from the Joseph Rowntree Foundation found that 7 million families in England have gone without things like heating, toiletries or showers this year. Gheorghe, for her part, sometimes eats just one meal a day. And this Elena Gheorghe had never eaten at a food bank until this year. But like millions of people in the UK, she has watched her daily expenses eat up more and more of her income, and she ran out of corners to cut. That’s a story from Bloomberg.

As they’ve watched double-digit inflation degrade their paychecks, millions of  people in the UK have for the first time found themselves in a similar position. Over the last nine months, the share of UK households with little or no discretionary income has doubled from 20% to 40%, according to Asda Income Tracker data.

Many have gone into debt paying for things other than food and housing. Others are cutting back on essentials. “It’s hard to feel anything but despair,” said Abigail Davis, a social policy researcher at Loughborough University who has studied poverty and inequality for 22 years.

This is but a slice of the cost-of-living crisis that the UK’s new Prime Minister, Rishi Sunak, will have to contend with as he takes office.

Britons across income levels face a foreboding combination of energy, mortgage, and pension crises. More than half of UK adults were finding keeping up with their bills a heavy burden this spring, according to the Financial Conduct Authority. Mortgage payments are already rising and the number of people either behind or struggling to pay rent has spiked by 45% since April, according to housing charity Shelter.

But the economic pain hasn’t hit all equally. Poorer people have disproportionately seen their spending power evaporate. That’s partly because those groups tend to lay out a bigger share of their income for essentials, such as food, whose prices have sky-rocketed.

The current political turmoil has only created more uncertainty over if and how the government will address skyrocketing prices.

Half of independent food banks in the UK say they either won’t be able to help everyone who reaches out to them, or they’ll have to cut the amount of food they’re giving out this winter, according to a survey by the Independent Food Aid Network.

…Britain lived ‘well and richly’ as long as the Crown plundered in India, Africa while  stolen funds came to London from everywhere. Nowadays the country gradually sinks into its normal state – an island without resources and wealth. They once  said –  an island of Royal Pirates. Salute to captain Morgan and captain Drake!

International Affairs

Continue Reading

Publications

Latest

Europe2 hours ago

Significance of first EU-Bangladesh political dialogue

The European Union (EU) and Bangladesh held their first “political dialogue” on Thursday (November 24) in Dhaka to “elevate” their...

Energy4 hours ago

USA-KSA Energy War and Global Energy Crisis

The response of the USA to OPEC and its partner’s plan to reduce output by two million barrels per day...

Eastern Europe9 hours ago

Is a Marshall Plan for Ukraine possible?

Reflecting on Ukraine’s future beyond the current conflict, many politicians and experts speculate about the expediency of a new Marshall...

International Law13 hours ago

Why International Institutions Survive: An Afterword to the G20 Summit

We, of course, are extremely critical of the very idea of global institutions and the prospects for their survival amid the emergence of a qualitatively...

Terrorism Terrorism
Defense15 hours ago

America Produces Biological Weapons; Does Russia? Does China?

On November 26th, Russia’s RT News bannered “US ‘military biological activities’ a threat to the world – Russia”, and reported...

South Asia19 hours ago

The Taliban Finally Granted Permission to the Former President Karzai to leave Afghanistan

Based on the information, the former president of Afghanistan, Hamid Karzai, was permitted to leave the country. At a time,...

South Asia23 hours ago

The Charisma and Chaos of Imran Khan

The chances of Imran Khan winning the elections of 2018 were quite murky. Despite his unparalleled fan base and populist...

Trending