Economics of inner life1

Harmonizing moral and spiritual values with the economic ones may bring the peace the whole world needs.

Economic science focuses on our material activities, studying how we can get maximum satisfaction through material goods and services. Religion, on the other hand, draws humanity's attention in the opposite direction: towards God, who is above and beyond all matter and is indivisible and untouchable. If religion is about mankind's inner life, economics is about our outer life.

This antinomy expresses itself in different forms in the great religions and has naturally often been an impediment to economic progress.

In Buddhism there is a strong emphasis on the transient character of material life. Birth and death, growth and decay all is Samsara: an illusion.

Peace and salvation can only be found in truth, which is eternal and everlasting. The truth is realized in Buddha. The gospel of Buddha therefore admonishes the faithful to extinguish in them every desire that antagonizes Buddha. By achieving spiritual evolution, the followers too will become like Buddha. To come to this end, where all sorrow ceases, they are instructed to follow the eightfold path of right comprehension, right resolution, right speech, right acts, and right way of earning a livelihood, right efforts, right thoughts and the right state of peaceful mind.

In Hinduism, for example in the Bhagavad-Gita, there is a clear recognition that action in the world is necessary. But work should be done without attachment to the fruits of the work. We are all forced to act, but we should act with self-control and the results of the action should be renounced. Mankind's aim should not be satisfaction of its own needs, as is assumed in economics, but in doing one's duty. This duty is seen as given for every individual according to his or her situation in life, and is worked out in the caste system which has been a serious impediment to economic development.

In Islam, the believer is told that life hereafter is preferable to the life in this world. This again draws the attention and longing of the faithful in a direction opposite to worldly life. Recently some writers have tried to develop 'Islamic economics'. Drawing from the Quran and other Islamic sources, they are trying to restructure economic thought and practices on the basis of Islamic teaching. Many economic practices like the payment of interest, insurance, arbitrage, speculation and indexation are considered un-Islamic. But the injunctions to avoid these economic activities will either impede economic growth or

1 The article was published in 2006 in daily English newspaper The NEWS. Web link is:http://www.jang-group.com/thenews/may2006-weekly/nos-28-05-2006/pol1.htm

these injunctions will not be followed, creating hypocritical arrangements as in Islamic banking where interest on deposits is disguised as a 'mark-up' or 'commission'.

Christianity also teaches that humanity's aim should be a heavenly, not an earthly, treasure. Medieval Christianity imposed some restrictions on economic activities. There were injunctions for just prices and interest on loans was forbidden. Economics was subordinated to religion, just as science, ethics and aesthetics were. This was a serious hindrance for the development of market capitalism.

Seeing how religion guided mankind in a direction opposite to the striving for the satisfaction of material needs, the question arises as to how the breaking of these religious barriers came about in the West.

The great German sociologist Max Weber has shown that crucial support for this breakthrough came from Protestantism, and notably from its Calvinist version, developed by John Calvin in the 16th century. That was the beginning of the modern area of economics.

But Roman Catholic Church reconciled itself, with certain qualifications, with market capitalism only in the late 20th century. The different influences of Protestantism and Roman Catholicism on economic growth have also been statistically confirmed in a research paper. Bradford de Long, an economist and econometrician, has carried out a striking study of some nations comparing their performance during 1870-1979. He discovers that Protestant nations show higher growth rates than the Roman Catholic ones.

Once the opening for economic forces had been created in the West, market capitalism developed with great power. With industrial Revolution in England it moved from the field of trading to that of manufacturing industry. Under the protection of colonialism, market-system spread from Europe to other parts of the world.

Socialist attempts to plan economic development have generally also failed because of inefficiency, lack of innovation and the dangers of corruption.

Thus the debate over the best form of economic organization in this situation has been won by market capitalism. The strength of the system is that it uses individual self-interest for material gain to promote economic activity. This stimulates effort, investment and entrepreneurship and thus brings all economic activities together in a market equilibrium that creates a growing material welfare for all. This is what inspired Francis Fukuyama, the best-selling sociologist, to described market capitalism's impressive victory as the 'end of history'.

The question has often been asked: is this a truthful picture of mankind? Is this picture not in conflict with the religious and spiritual nature of mankind? Certainly there are many motivations at work in human inter-relationships other than material self-interest.

Adam Smith, the founding father of classical economics, clearly realized this. Besides his best-known work The wealth of Nations, he also wrote The Theory of Moral Sentiments, a moral and psychological work in which he emphasized the importance of sympathetic feelings, culminating in universal benevolence. The new approach of 'behavioral economics' introduces many psychological elements into macro-economics theories, as has been done in Keynes's famous General Theory of Employment, Interest and Money of 1936.

Fukuyama points out in his famous book Trust that classical economics with its fundamental model of rational self-interested human behavior is correct about 80 per cent of the time. But that leaves another 20 per cent of human behavior which is not fully explained by economics. In fact, he says, we have what is called 'bounded rationality'. For example, as all spending possibilities are not known to everyone, certain docility in following advice and information in society can play a role. Generally accepted social values can also be influential.

The crucial question, therefore, is how could the gradual re-integration of religion in our life influence the economy? Here we can find a source of moral values that is both universal and rooted in the depth of our own being.

The solution is to become conscious of our soul, the divine spirit of our true being. That spirit pervades the whole universe and is in all human beings. It is the same spirit in all: it is really universal. When we open our heart to this spirit, forgetting our limitations, we discover that real happiness lies in maintaining harmony with all our fellow-beings and with the conditions surrounding us. Harmony brings peace, and that reflects the inner unity of creation. It is fundamentally good and fills our heart with deep happiness. It is the living source of all moral and social values as they have been expressed and worked out in different cultures by great religions. From this source a harmonizing influence can flow into the economy and the whole society.

But the question remains: how can this be built into economic theories? We cannot always say, this economic action is right and therefore legitimate and that one is not. It is often very difficult to create and maintain harmony in economic decision-making. It is constantly threatened by different views and interests of people around us. Harmony can only be maintained if we try to understand these different views and interests. Then we can rise above our limitations and built bridges. It requires an open heart and self-control.

In fact some enlightened management consultants now make recommendations that are exactly in the line with what was described earlier as a natural approach towards a spiritual leadership. Dana Zohar in Rewiring the Corporate Brain stresses the need for leaders to develop emotional and spiritual intelligence besides mental understanding. Instead of dictatorial leadership, she favors a leader who relies on trust and feeling.

Peter Senge, in his inspiring and practical book The Dance of Change, stresses that a leader should not see his organization as a machine but as a living system, a human community. Senge points out how important it is that leaders on all levels should get as

much responsibility as is possible in their part of business. There should be harmony between the purpose of the organization and the values espoused by leaders and workers. That will create motivation -- what Senge calls "emotional engagement". Issues relating to environment can also find their place in visionary business-leadership.

All beneficial features of a new, responsive and serving leadership will grow naturally once the leaders have an awakened heart, attuned to the ultimate reality of the universe.

The Global Economy and National Politics2

Market-driven Economy

The advent of economic globalization meant that national politics had to be analyzed in a new way, focusing on the causal chains linking global markets forces to national politics.

Politics used to be thought of as an autonomous field of activity, and the management of the national economy was seen as one of the most important task of government. Now, however, it is generally agreed that capital mobility across national borders means that national government can influence the domestic economy only by controlling inflation and trying to facilitate the competitiveness of locally-based companies through “supply-side” measures. Highly generalized books with titles like, The End of the Nation State, False Dawn, The Best Democracy Money can Buy, Captive State or Internationalization and Domestic Politics conclude either that the nation state has been consigned to the rubbish-bin of history or that, on the contrary, the constraints the extent to which politics and policy in any particular country are conditioned, or even determined, by global economic forces, and what this implies for democracy and the collective values on which it depends.

The international trading regime established in 1944 at Bretton Woods succeeded brilliantly in its aim of permitting global trade to expand without risking more world-wide depressions like the one that had culminated in the Second World War. Bretton Woods also set the institutional foundations of three new International Economic Organizations. The International Monetary Fund (IMF) was created to administer the international monetary system. The International Bank (The World Bank) was initially designed to provide loans for Europe’s post war reconstruction and development. During the 1950s, however its purpose was expended to fund various industrial projects in developing countries around the world. Finally the Generally Agreement on Tariffs and Trade (GATT) was established in 1947 as a global trade organization charged with fashioning and enforcing multilateral trade agreements. In 1995, the World Trade Organization (WTO) was founded as the successor organization to GATT.

The Bretton Woods regime contributed greatly for almost three decades of what some observers have called the “golden age of controlled capitalism”. In the decades following World War II, even the most conservative political parties in Europe and the United States rejected those laissez-faire ideas and instead embraced a rather extensive version of state interventionism propagated by British economist John Maynard Keynes, the architect of Bretton Woods system. By the 1980s, however, British Prime Minister Margaret Thatcher and US President Ronald Reagan led the Neoliberal Revolution against Keynesianism, consciously linking the notion of globalization to the “liberation” around the world (Neoliberalism is rooted in the classical liberal ideas of Adam Smith 1723-1790 and David Ricardo 1772-1823, both of whom viewed the market as a self-

2 The article was published in 2006 in daily English newspaper The NEWS. Web link:http://jang.com.pk/thenews/dec2006-weekly/nos-03-12-2006/pol1.htm

regulating mechanism tending toward equilibrium of supply and demand). The Neoliberal economic order received further legitimation with the 1989-91 collapse of communism in the Soviet Union and Eastern Europe.

As pointed out above, the IMF and the World Bank emerged from the Bretton Woods system. During the Cold War, their important functions of providing loans for developing countries became connected to the West’s political objective of containing Communism. Starting in the 1970s and especially after the fall of Soviet Union, the economic agenda of the IMF and the World Bank has synchronized Neoliberal interests to integrate and deregulate markets around the world.

In return for supplying much-needed loans to developing countries, the IMP and the World Bank demand from their creditor nations the implementation of so-called “Structural Adjustment Programmes”. Unleashed on developing countries in 1990s, this set of Neoliberal polices is of referred to as the “Washington Consensus”. It was devised and codified by John Williamson, who was an IMF advisor in 1970s. Williamson, required governments to implement structural adjustments in order to qualify for loans. And some of adjustments are Financial Liberalization, Trade Liberalization, coupled with the abolition of import licensing and reduction of tariffs, Privatization of state enterprises, and Deregulation of the economy. It is no coincidence that this programme is called the “Washington Consensus” for, from the outset, the United States has been the dominant power in the IMF and the World Bank. A large portion of the “Development Loans” granted by these institutions has either been pocketed by authoritarian political leaders or has enriched local businesses and the “Northern Corporations” they usually serve. Sometimes, exorbitant sums are spent on ill-considered construction projects. The largest share of the national budget is spent on serving outstanding debts. For example, in 1997, the developing countries paid a combined $292 billion in debt service, while receiving only $269 billion in new loans. This means that the net transfer of wealth from the global South to the North was $23 billion.

The total value of world trade exploded from $57 billion in 1947 to an astonishing $6 trillion in the late 1990s. In the last few years, the public debate over the alleged benefits and drawbacks of free trade reached a feverish pitch as wealthy Northern countries have increased their efforts to establish a single global market through regional and international trade-liberalization agreements such as NAFTA and GATT. During the 1990s, new satellite system and fibre-optic cables provided the nervous system of internet-based technologies that further accelerated the liberalization of financial transaction. The best picture is being presented by the Microsoft CEO Bill Gates’ best-selling book business@the-speed-of-thought. In 2000, e-business, dot.com firms, and other virtual participants in the information-based “New Economy” traded about 400 billion dollars over the Web in the United States alone. Yet a large part of the money involved in these global financial exchanges has little to do with supplying capital for such productive investment as putting together machines or organization raw materials and employees to produce saleable commodities. Most of the financial growth has occurred in the form of high-risk “hedge funds” and other purely money-dealing currency securities markets that trade claims to draw profits from future productions. The world’s

financial systems are characterized by high volatility, rampant competition, and general insecurity.

TNCs (Transnational Corporations) are the contemporary versions of the early modern commercial enterprises. By the end of 1980s TNCs were responsible for more than half of the world’s trade in manufactures, and perhaps three-quarters of all trade in services: according to one estimate, in 1994 the 500 largest TNCs controlled three-quarters of all world trade. TNCs also controlled 80 per cent of all land under export crops, and the marketing channels for large number of primary commodities. Powerful firms with subsidiaries in several countries, their numbers skyrocketed from 7,000 in 1970 to about 50,000 in 2000 with 508,000 affiliates. Enterprises like General Motors, Wal-Mart, Exxon, Mobil, Mitsubishi, and Siemens belong to the 200 largest TNCs, which account for over half of the world’s industrial output. None of these corporations maintains headquarters outside of North America, Europe, Japan, and South Korea. In 1999, 142 of the leading 200 TNCs were based in only three countries, the United States, Japan, and Germany.

Rivaling nation-state in their economic power, these corporations control much of the world’s investment capital, technology, and access to international markets. In order to maintain their prominent positions in the global marketplace, TNCs frequently merge with other organizations. Some of these recent mergers include the $ 160-billion marriage of the world’s largest internet provider, AOL, with entertainment giant Time-Warner; the purchase of Chrysler Motors by Daimler-Benz for $43 billion; and the $115-billion merger between Sprint Corporation and MCI WorldCom. A close look at corporate sales and country GDPs reveals that 51 of the world’s 100 largest economies are corporations; only 49 are countries. Hence it is not surprising that some critics have characterized economic globalization as “corporate globalization” or “globalization-from-above”.

TRANSNATIONAL COMPANIES VERSUS COUNTRIES: A COMPARISON

Country GDP ($ Mil) Corporation Sales ($ Mil)1. Denmark 174,363.0 General Motors 176,558.02. Poland 154,146.0 Wal-Mart 166,809.03. South Africa 131,127.0 Exxon Mobil 163,881.04. Israel 99,068.0 Royal Dutch/Shell 105,366.05. Ireland 84,861.0 IBM 89,548.06. Malaysia 74,634.0 Siemens 75,337.07. Chile 71,092.0 Hitachi 71,858.58. Pakistan 59,880.0 Sony 60,052.79. New-Zealand 53,622.0 Honda Motor 54,773.510. Hungary 48,355.0 Credit Suisse 49,362.0Source: Sales: Fortune, GDP: World Bank, World Development Report.

TNCs have consolidated their global operations in an increasingly deregulated labor market. The availability of cheap labor, resources, and favorable production conditions in the global south has enhanced corporate mobility and profitability. Accounting for over 70% of world trade, their ability to disperse manufacturing processes into many discrete phases carried out in many different locations around the world reflects the changing nature of global production. Such transnational production network allows TNCs like, General Motors, Nike and Volkswagen to produce, distribute, and market their products on a global scale. Production could also now be divided up in new ways the most labor-intensive in low-wage countries, those most dependent on sophisticated technology in high-wage countries, those showing the highest profits in low-tax countries and so on. Transnational production network augment the power of global capitalism by making it easier for TNCs to bypass nationally based trade unions and other workers organizations.

Corporations are also sophisticated lobbyists at the supranational as well as national levels of power, often with diplomatic backing by their home states. The chief executive of a major TNCs seldom has to wait long for an appointment with a minister. Following the defeat of the OECD’s proposed Multilateral Agreement on Investment in 1998, this political project became focused instead on the World Trade Organization (WTO) and when the Seattle meeting of the WTO ended in failure the strategy shifted to securing more limited regional agreements that could gradually be linked together into an eventually global system. The authors of these plans are the chief executives of the largest TNCs and their staffs, organized in bodies like European Round Table, the International Chamber and the Transatlantic Business Dialogue (TABD), working closely with officials of the European Commission and the US Department of Commerce, and strongly supported by some states notably Britain.

The power to tax is the foundation of national sovereignty yet the complexity of contemporary TNCs financing, combined with the network form of organization, enables them to limit the bite of all. TNCs have opposed attempts at the strengthened regulatory cooperation between states. Instead, they have developed legal structures for transnational corporate capital which take advantage of the ambiguities, disjuncture, and loopholes in international tax system. And perhaps half of the industrialized world’s stock of money resides in or passes through tax havens.

In short, we have to recognize how far the balance of power between governments and corporations has shifted. Perhaps the best comparison is between most states today and municipalities in the past. Susan Strange is right to insist that transnational corporations should now be put centre stage in any realistic analysis of domestic politics, not just in the analysis of international relations.

Postmodernism and its impact on World’s Economy3

Modernism and its successor post-modernism have created societies and economies driven by ruthless pursuit of self-interest. But now the tide may be turning against the ideas and ideals inspired by a Godless, Darwinian view of the universe

Postmodernism is one of the most important trends shaping our world today, in modern times it has become one of the most discussed concepts. We can look at postmodernism in the light of the generally accepted definition “The stage after modernism, a trend that emerged in reaction to modernism.” The considerable debate that what kind of understanding postmodernism proposes in such fields as science, economy, art and philosophy. The climate of chaos, confusion and uncertainty in present-day societies is sufficient to understand that. Even if postmodernism is regarded as a criticism of modern culture, which has left mankind facing a huge impasse, it is actually rising to prominence on the back of the “spiritual emptiness” and collapse caused by the modern age. We need, therefore, first of all to consider the concept of “modernism” that this system is built on.

Modernism is generally regarded as equivalent to the civilisation built by the West. These are the ideologies and movements that emerged with the Enlightenment. The main point that makes this system that developed and strengthened. During 19th century Europe abandoned everything to do with its history and traditions that was a time when this system “modern” emerged and strengthened. So what kind of world view was that, and what did it change in the Western world? The answers to these questions will help us

3 The article was published in 2006 in daily English newspaper The NEWS under the title of Focus on individuals. Web link is:http://jang.com.pk/thenews/dec2006-weekly/nos-31-12-2006/pol1.htm#4

.

understand the ideological roots of postmodernism. The process today known as modernism began with the Enlightenment, which fundamentally altered the Western societies. Until that time, religion had been the basic principle of the life of societies. With the Enlightenment changes began to appear. The starting point for that change was the materialist approach. The spread of philosophies of anti-religious thinkers, Western societies began to break with religious morality. Materialist and “human-centered” ideologies and movements began to indoctrinate people with the idea that there was nothing beyond the life of this world, and the entire universe were the result of blind chance. Materialist and atheist theoreticians emerged one by one in the fields of, science, philosophy, sociology, economics and psychology.

Materialists such as Diderot and Baron d'Holbach, suggested that the universe was a collection of matter that had existed forever, and that there was no world of existence outside matter. In the 19th century, materialism and atheism spread further. Thinkers such as, Marx, Engels, Nietzsche, and Freud applied atheist thought to different spheres of science and philosophy.

The greatest support for materialism came from Charles Darwin, who rejected creation and replaced it with the theory of evolution. Darwinism supplied a so-called scientific answer to the question of how “living things and man had come to be,” which atheists had been unable to answer for centuries.

At the end of the 19th century, atheists came up with a “world view” that they thought explained everything. They denied that the universe had been created and there was no purpose behind the cosmos. They believed that Darwinism had answered the question of how living things and man had come into existence. They thought that history and sociology had been explained by Marx and Durkheim, and psychology by Freud. Yet all of these atheist assumptions were eventually torn down by scientific, political and social developments in the 20th century. Discoveries and findings in a wide range of different spheres, from astronomy to biology and from psychology to social ethics radically tore down all atheist assumptions.

One of the greatest proofs of the defeats suffered by materialist ideologues was the disaster suffered in the social arena. Those ideologies that developed from materialism, headed by fascism and communism, proved to be destructive forces. The concept of morality underwent total degeneration: Together with the dominance of the materialist worldview, fidelity, loyalty, sacrifice, honour and honesty ceased to be important virtues.

The fact that moral values like hospitality, making sacrifices for each other, solidarity, and generosity totally disappear in society were no longer regarded as being of any worth resulted in such virtues being regarded as a kind of “naivety.” Selfishness, ruthlessness, injustice and unfairness came to be regarded as the norm. In this social Darwinist climate in which helping others had been replaced by a common desire to earn and consume more, oppressing the weak and ruthlessly exploiting the unfortunate.

In an environment without religion, the first concept to be eliminated is that of the family. Values such as loyalty, fidelity, allegiance, love, and respect, which sustain the family, are totally abandoned. It must be remembered that the family is the foundation of society and if the family collapses, so does society. Even the state and the nation have no reason to exist, since all moral values that underpin the state and the nation have been obliterated. Furthermore, there is no reason left for anyone to feel respect, love or compassion for anyone else. This leads to social anarchy. People do not value each other as the human beings they are, because they see each other as beings that have evolved from monkeys. Here, the main logic is that people are good to each other only if they can expect some profit in return.

One of the major deceptions of the ideologies that emerged together with modernism was the idea that there could be morality without religion, and that people could display proper morality under those conditions. That is a terrible deception. History is full of examples that demonstrate how once the proper behaviour that religion instills in the human soul and God's guiding rules cease to apply, then true morality can in no way be established. Postmodernism is an idea that recognises the emptiness of the values, criteria and aims of modernism.

The greatest error of postmodernism is “relativism” in other words, the mistaken idea that all values and beliefs change from person to person, and they are all relative ideas containing no absolute truth. Truth as a “relative idea” is actually an erroneous deception. Postmodernism offers mankind no solution. It is another error that leads mankind to ideological chaos, in which man has no absolute values or aims.

Today, advances in various different spheres, such as cosmology, biology, psychology, medicine and sociology have accelerated the collapse of materialism and atheism. Today, modernism and atheism, and thus the ideologies built on them, are undergoing a rapid collapse. The American writer Patrick Glynn in his book God: The Evidence, The Reconciliation of Faith and Reason in a Postsecular World makes this comment on this collapse: Over the course of a century in the great debate between science and faith, the tables have completely turned. In the wake of Darwin, atheists and agnostics like Huxley and Russell could point to what appeared to be a solid body of testable theory purportedly showing life to be accidental and the universe radically contingent. Many scientists and intellectuals continue to cleave to this worldview. But they are increasingly pressed to almost absurd lengths to defend it. Today the concrete data point strongly in the direction of the God hypothesis. (p. 19-20, 53)

Here this should be worthwhile if we look the Postmodernism and the shaping and reshaping of world’s economy. Fernand Braudel, Civilization and Capitalism, 15th-18th Century, in 3 volumes, emphasizes that capitalism is something different from the market economy, a distinction that should be kept in mind in understanding. In lectures in 1976, he said, despite what is usually said, capitalism does not overlay the entire economy and all of working society: it never encompasses both of them within one perfect system all its own. The Braudel’s focus on everyday life in Capitalism and Material Life represents a concern shaping many areas of study after 1950, a movement from the study of elites to

those of more ordinary people. This entered archaeology, as excavations moved from the palaces and temples to remains of foods, bones, and the dwellings of the poor, or lack thereof. Braudel's emphasis thus fit very well into much Marxian history and with a view that capitalism grew at the expense of the lower classes.

The foremost theoreticians of Social Darwinism prepared a scientific support for capitalism. Herbert Spencer, the main theorist of Social Darwinism, who introduced the principles of Darwinism to the life of society, if someone is poor then that is his mistake; nobody must help this person to rise. If someone is rich, even if he has acquired his wealth by immoral means, that is his competence. For this reason, the rich man survives, while the poor man disappears.

In his article Darwin's Three Mistakes, the evolutionary scientist Kenneth J. Hsu, reveals the Darwinist thoughts of America's foremost capitalists: Darwinism was also used in a defense of competitive individualism and its economic corollary of laissez-faire capitalism in England and in America. Andrew Carnegie wrote that the "law of competition, be it benign or not, is here; we cannot evade it." Rockefeller went a step further when he claimed that "the growth of a large business is merely a survival of the fittest; it is merely the working out of a law of nature." As has been seen from what has been explained so far, capitalism has dragged human beings to worship only money and the power that comes from money. This capitalist morality holds sway in almost all societies in our day.

Another feature of capitalist society is the way it gives room to inequality within itself. In societies of this kind the divide between rich and poor grows ever wider, as the poor grow poorer, the wealth of the rich grows greater. For the last 150 years people and societies which possess this ruthless make-up have begun not to be condemned or criticized like the others. Behavior of this sort began at last to be accepted as a law of nature.

Robert E. D. Clark explains the situation this way: Evolution, in short, gave the doer of evil a respite from his conscience. The most unscrupulous behaviour towards a competitor could not be rationalized; evil could be called good.

The moral bankruptcy of all these experiences over the last two centuries, experienced by most of mankind today and the disasters that led to it, have spelt the end of both modernism and all the atheist movements that emerged after it.

Today, the world suffers the consequences of a disregard of the values of religion. A culture of violence prevails in our societies caused by a godless way of life. This culture drives people to depression, chaos, poverty, war and exploitation. The system shaped by this culture has now been unmasked with all its contradictions. Scholars and sociologists maintain that only an approach from outside this culture can eradicate the chaos brought about by post-modern culture.

GLOBAL POLITICAL ECONOMY AND ISLAMIC FINANCE4

Islamic financial system is strongly tied to the globalised international capitalism. Yet some recent political events have put Islamic financial instruments and organisation under a huge Western scanner.

The theme of Islam as a ‘new global enemy’ has become fashionable in certain policy circles. A number of academics and policy pundits’ posited the fundamental incompatibility between Islam and western values. In certain foreign-policy circles given the threat vacuum, Islamic fundamentalism was often designated as the most likely successor to world Communism as the single greatest threat to American interests. The influential journal Foreign Affairs, carried debate: Is Islam a Threat? Judith Miller answered ‘yes’, Leon Hadar answered ‘no’. Harvard University’s Samuel Huntington’s book The Clash of Civilizations was appealing to foreign-policy experts who since the end of Communism, had been frantically looking for a new foreign-policy doctrine and Anti-Islamic punditry became something of a cottage industry.

The 1974 OIC summit in Lahore voted to create the inter-governmental Islamic Development Bank (IDB), which was to become the cornerstone of a new banking system inspired by religious principles. In 1975, the Dubai Islamic Bank, the first modern, non-governmental, Islamic bank came into existence. In 1979, Pakistan became the first country to announce the full Islamicization of its banking sector which was followed by Sudan in 1983. The first paradigm of modern Islamic banking was established in those years. Although commerce had always been central to the Islamic tradition profit from pure finance was viewed with suspicion. Islam prohibits riba, literally meaning ‘increase’ the term has been variously interpreted sometimes as usury or excessive interest more often as any kind of interest.

Islamic finance, in the context of cold war, firmly embedded in the US-centered international political and economic order. Banking and finance is by nature oriented towards preferring the status quo. It gives them stability and they easily penetrated in new markets. Islamic banks established links with the local power structure, and operated within the political, economic and regulatory framework. At the international arena, because of their lacking experience the major Islamic groups were keen on working with international financial institutions. And international capitals of Islamic finance were London and Geneva.

Playing the “Islamic card” was not simply an ad hoc response to the Soviet invasion. This was expressed in a 1998 interview by Zbigniew Brzeinski, former national Security Advisor in the Carter Administration. He had conceived the secret operation which had the effect to bring the Russians into the “Afghan trap” six months before the entry of

4 The article was published in 2006 in daily English newspaper The NEWS. Web link is:http://jang.com.pk/thenews/dec2006-weekly/nos-31-12-2006/pol1.htm#4

Soviet troops. Religious fanaticism was necessary to justify a jihad or holy war against the Soviets. The rise of some unruly Islamists was the price to pay for the liberation of central Europe and the end of Cold war. Throughout the Reagan years the Crusade against Godless Communism continued.

By 1990, it was clear that major new political and economic forces were at work. The previous year had seen the fall of Berlin Wall and the Soviet decision to withdraw forces from Afghanistan. It was then President George Bush first spoke of a ‘New World Order’. Capitalism and the market economy were interpreted as the victory over the battle against socialism and central planned economy. That year marked the beginning of the ‘Globalization Decade’: new global rules, norms and institutions emerged, with attendant impacts on Islamic politics and finance.

Now Washington Consensus was conquering the world. Structural adjustment policies became the order of the day. International aid was linked to the dictations of the International Monetary Fund (IMF) and World Bank. A new trend was the “rating” of countries by rating agencies and other proxies in order to reassure “the markets”

Banking and finance experienced the transformations. The lifting of restrictions on capital movements financial markets became increasingly interconnected and financial market regulators no longer held full sway over their regulatory territory. New derivatives were created by the risk managers to fulfill a variety of commercial and investment needs. Financial engineers were in a position to create new financial products through slicing and splicing. Traditional loans and other financial assets were securitized.

During this period the Islamic World experienced major economic, political, religious and demographic transformations. Notably the rise of Asian tigers, the emergence of new Islamic states following the collapse of the Soviet Union, a changing oil market, the emergence of new Islamic middle class and growing Islamic presence in the West. And above all Islamic revivalism. There were many obvious reasons for this revivalism: notably the vacuum left by secular ideologies, socialism that were both described both politically and economically. We can also count identity crisis and the search for roots in a world dominated by commercialism and materialism.

By the 1990s most conventional banks in the Islamic World started offering the option of “Islamic windows”. In the new world of global finance, riba was no longer the central theo-logical sticking point now concerns over gharar (risk, uncertainty) drew the attention of scholars. Major financial institutions such as Citibank, HSBC developed Islamic departments or subsidiaries. In Europe and America Islamic institutions were established to cater the local Muslim communities. Much of the new ijtihad on Islamic finance is conducted in cooperation between conventional and Islamic institutions, and surprisingly often outside the Islamic world like Harvard Islamic Finance Program (HIFIP). Now despite the authenticity of the financial products which are offered by Islamic banks one can see that in many countries Islamic institutions were more innovative and dynamic than their conventional counterparts.

In the pre-September 11th period, the incipient hostility of the “New World Order” to Islam had direct and indirect impacts on financial institutions in a certain respects. The advent of global regulation robbed national regulators of some of their previous autonomy. Now central bankers in the Islamic world had to comply with the dictates of international bodies such as the Basle Committee on Banking Supervision of the Bank of International Settlements, the IMF, the World Bank and the WTO. They were expected to impose new rules and norms like Basle or Cooke ratios, Core Principles of Banking Supervision. Most Islamic techniques had conventional counterparts they did not always fit conveniently within existing regulatory regimes. Their main financing techniques often implied specific contractual obligations and different levels of risk than their conventional counterparts. Islamic banks were considered that they should not be subjected to the same prudential financial ratios and capital requirements as conventional banks. The attitude of many Western regulators could be summed up in a famous statement by Robin Leigh-Pemberton, the former governor of the Bank of England, to the effect that Islamic banking is a perfectly acceptable mode of investment, but it does not fall within the long-established and well-understood definition of what countries banking in this country.

Many Islamic financial institutions belonged or were otherwise associated with transnational groups such as Geneva-based Dar al-Maal al-Islami (DMI) or the Bahrain-based Dallah al-Baraka Group. Both are controlled by Saudi citizens, but do not operate commercial banks in their home country. From the standpoint of ownership and control, many Islamic institutions could not comply with the comprehensive consolidation supervision by the home country regulator requirements. Another reason for the increased scrutiny of Islamic institutions was that had come to the attention of international regulators at the time of the Bank of Credit and Commerce International (BCCI) scandal in 1991.

Islamic Finance was neither well-known nor well-understood by those circles. For those who assumed that Islam had sinister designs, Islamic institutions could only look suspicious. As we saw, in reality Islamic financial institutions were firmly committed with international status quo. There had been only one instance where Islamic finance had been used to upset the status quo: it was in the Sudan, where Sheikh Hassan al-Turabi took advantage for his association with the Faisal Bank to build his power base. Other “suspicious links” could be found through they were primarily linked to the “blowback” from the “afghan trap”.

The events of September 11, 2001 marked the beginning of a view that “Islam is the new enemy”. The clash of civilizations theory went mainstream. Anti-Islamic policy makers such as Daniel Pipes and Steven Emerson and a journalists like Stephen Schwartz, exerted unprecedented influence on public opinion and policy-making. In his 20 September 7, 2001 speech to Congress, President Bush asked: why do they hate us? He foreclosed any discussion of US foreign policy when he uttered another famous line: if you’re not with us, you’re with the terrorists. As a result most debates have focused on the presumed essence of Islam and its problematic relations with the west. For Bernard

Lewis, the root of Islamic rage and resentment could be found in the hatred of western modernism and secularism.

Islamic finance, which had long been perceived as a moderating element in Islam, found itself as never before in the crosshairs of law enforcement. The magnitude of the attacks of September 11th led to suggestions that ‘sophisticated financial network’ were behind the attacks. In the ‘new kind of war’ against terror, the uniform would be in the words of Defense Secretary Donald Rumsfeld ‘bankers’ pinstripes and programmes grunge just as assuredly as desert camouflage. So the first battle took place on the financial terrain. On Sunday, 23 September, flanked by Treasury Secretary Paul O’Neill and Secretary of State Colin Powell, President Bush announced: we have launched a strike on the financial foundation of the global terror network. A presidential decree simultaneously blacklisted twenty-seven individuals and groups. Since most assets linked to terrorism were outside the US, the president gave notice to the international financial community: ‘If you do business with terrorists, if you support or sponsor them, you will not do business with the United States of America.

The template for the financial war was the money-laundering apparatus in place since the war on drugs of the 1980s. the rationale for the surveillance and control of financial flows was twofold: first they could untangle money puzzles and yield a great deal of information about subversive and otherwise shadow groups; second, the use of economic and financial tools embargoes, asset seizures, and the like-would eventually ‘take profit out of crime’. More people leaned about Islamic finance and it took six months for Treasury Secretary Paul O’Neill, the official in charge of the financial war on terror, to ‘learn’, in March 2002 following meetings in Saudi Arabia, Kuwait and Bahrain, that Islamic banking was a legitimize way of doing business.

In a business where reputation matters greatly, the image of leading Islamic institutions suffered a devastating blow. At a November 2001 Islamic Banking Conference in Bahrain, the two leading figures in Islamic finance expressed dismay at the smear campaigns against their institutions. Prince Muhammad Al-Faisal said: The West is raising various questions. But these questions are not raise with us but with “experts” who do not know anything about this. As for Sheikh Saleh Kamel, founder of the al Baraka Group and chairman of the Council of Islamic Banks, he declared: The concept of Islamic banking is one of the creative methods of Islam to serve the economic and social welfare of Muslims. But some circles tried to use the September 11 th attacks to launch a campaign under the false pretext that these Islamic banks are the source for financing terrorism.

‘Guilt by association’ hit Islamic institutions from different sides. With every new list of ‘suspect organizations’ which included such as Bank al-Taqwa, hawalas ( money-transfer outfits) such as Al-Baraka Investment and Development Company, and Islamic charities such as Al-Wafa. Islamic financial institutions were also affected in their dealings with international banks. As ‘know your customers’ rules were tightened, new rules on correspondent banking required that banks ensure that none of their correspondents was, wittingly or un wittingly involved in financing terror.

A report prepared by self-styled ‘nonpartisan’ committee of ‘experts on terrorist finances’ sponsored by the Council of Foreign Relations in New York concluded: It is worth stating clearly and unambiguously, if only because US government spokespersons have not: for years, individuals and charities based in Saudi Arabia have been the most important source of funds for Al Qaeda, and for years Saudi officials have turned a blind eye to this problem. The committee, headed by Maurice R. Greenberg, chairman and chief executive of the American International Group, included William H. Webster, former director of the Federal Bureau of Investigation and the Central Intelligence Agency; David Cohen, deputy commissioner for intelligence of the New York City Police Department; and William F. Wechsler, former director for transnational threats at the National Security Council.

The new narrative mixed facts-Saudi Arabia had promoted its Wahhabi Brand of Islam; it had generously funded Islamic groups worldwide and in particular the ‘Afghan Arabs’ who were behind the attacks, and fifteen of the nineteen hijackers were Saudi citizens, with a new storyline the Saudi paid off extremists so that they would stir trouble abroad and not on Saudi soil.

It was only a time before the question of financial compensation would rise. On 15 august 2002, lawyers for relatives of 600 victims filed in US District Court in Alexandria, VA. New York Senator Charles Schumer suggested that $ 3.1 billion seizes from Muslim charities should be used to compensate American victims. Leading figures of Islamic finance and major Islamic institutions, Prince Mohammad Al-Faisal and his Dar al-Maal al-Islami, Sheikh Saleh Kamel and his Dallah al-Baraka Group, the Al-Rajhi Banking and Investment Corporation and so on were among eighty defendants accused of racketeering, wrongful death, negligence and conspiracy. Other defendants included two Saudi Princes, the government of Sudan, seven banks and eight Islamic foundations. The fifteen lawsuits modeled after action filed against Libya in the Pan Am flight 103 disaster, aimed to force the sponsors of terror into the light and subject them to the rule of law by seeking an amount in excess of $ 1 trillion.

As a result of these developments there was a dramatic slowdown in the integration of the major Islamic institutions in the global economy. Sheikh Saleh Kamel went as far as to call for a repatriation of Islamic funds, declaring: The West has always been hostile to Islamic banking, and Al-Baraka Bank was even closed down in London. Therefore it is time Muslim financial institutions and individuals bring back their money from the West to invest in Muslim countries and develop this industry in the region. The call for repatriation of funds did not go unheeded. Islamic institutions suffered a blow but demand for Islamic products has continued unabated, and the number of conventional institutions offering Islamic windows or Islamic products has kept growing, both inside and out side the Islamic world. Latest development in Pakistan both in number of Islamic banks and Islamic financial products are major visible change in the mindset. Actually the demand was very much there in the Muslims now the Islamic banks or other banks and financial institutions are getting the huge profits of untapped portion of the market.

Political Islam now, is far from dead under the relatively free conditions in the Islamic world. In Turkey, Algeria, Palestine Bahrain and Morocco moderate but dissident Islamist groups achieved, despite numerous obstacles, significant gains. These developments caught the west by surprise. It was assumed that the only choice was between secularism and radical Islamism. The nature of political Islam that will define the coming years will depend on the interplay among countless factors, some related to the Islamic World itself like the problems of persistent poverty, corruption, alienation as well as gap between rulers and ruled and other related to the interaction between Islam and the West.

Darwinism's 'natural' links to capitalism and communism5

While investigating Darwinism's political influence, keep in mind that this theory is related not to one single ideology, but to too many seemingly different ones. Apart from capitalism and communism, the wide spectrum of ideologies relying on Darwinism includes racism, imperialism and fascism. The common point that all these apparently independent, even contrary, ideologies share is their opposition to monotheistic religions.

In order to understand this relationship we must examine the European culture in the 18th and 19th centuries. Beginning in the second century A.D. under the Emperor Constantine, Europe gradually accepted Christianity. Christian culture held sway until the Enlightenment of the 18th century, when a number of artists and thinkers began embracing the influence of pagan Greek and Roman culture and consequently, rejecting the dictates of religion. The Enlightenment's most important political result was the French Revolution, which was not only an uprising against the ancient regime, but at the same time, a revolt against religion.

The foundation of the French Revolution was established by the influence of such anti-religious thinkers as Voltaire, Diderot and Montesquieu. From 1789 on, the Enlightenment's pagan, anti-religious tendencies became obvious. After an intense propaganda campaign, the Jacobins came to lead the revolution, established a movement against orthodox Catholicism, and even managed to create a new religion. Revolutionary worship, seen first during the national Feast of the Federation on July 14, 1790, spread quickly. Robespierre, one of the leaders of the bloody revolution, explained its rules and principles in a report, wherein he called it 'The Worship of Supreme Being'. Paris's famous Notre Dame Cathedral was changed into what he called the Temple of Reason. Statues of Christian saints were removed from the cathedral walls, replaced by the statue of an allegorical woman called the 'Goddess of Reason'. In the course of the French Revolution, many priests and nuns were killed; churches and monasteries were plundered and destroyed.

In the 18th century, few thinkers adopted materialism, but it became much more widespread in the 19th, overflowing the borders of France to take root in other European countries. the philosophy of materialism reawakened and began to spread throughout Europe. As a result of flawed logic, materialists reject the existence of God and cannot conceive that all things continue to exist by God's will. These ideologies leaders see religious beliefs and values as impediments, and use Darwinism as a weapon to destroy them. For example, capitalists claim that a Darwinist outlook is needed to legitimate the ruthless 'struggle to survive' evident in the free market. In this way, they support the very communism that they oppose.

5 The article was published in 2006 in daily English newspaper The NEWS. Web link is:http://jang.com.pk/thenews/aug2006-weekly/nos-27-08-2006/pol1.htm#1

The philosophy of materialism reawakened and began to spread throughout Europe. Certain ancient Greek philosophers had first proposed this philosophy, which believes that only matter exists, those living things -- indeed, human consciousness itself -- are only 'matter in motion'. In the 18th century, two important names in the French Revolution, Denis Diderot and his close friend Baron d'Holbach, adopted this philosophy and imposed it on the people. In his book 'Systeme de la Nature' (The System of Nature) published in 1770, Baron d'Holbach used a few so-called 'scientific' suppositions to propose that only matter and energy existed.

Anton Pannekoek's book' Marxism and Darwinism 'refers to this interesting paradox. He describes the support given to Darwinism by the bourgeoisie (Europe's wealthy capitalist class) in these words: "That Marxism owes its importance and position only to the role it takes in the proletarian class struggle, is known to all. . . Yet it is not hard to see that in reality Darwinism had to undergo the same experiences as Marxism."

Darwinism served as a tool to the bourgeoisie in their struggle against the feudal class, against the nobility, clergy-rights and feudal lords. What the bourgeoisie wanted was to get rid of the old ruling powers standing in their way. With the aid of religion the priests held the great mass in subjection and ready to oppose the demands of the bourgeoisie. Natural science became a weapon in the opposition to belief and tradition; science and the newly discovered natural laws were put forward; it was with these weapons that the bourgeoisie fought.

Darwin's theory that man is the descendant of a lower animal destroyed the entire foundation of Christian dogma. It is for this reason that as soon as Darwinism made its appearance, the bourgeoisie grasped it with great zeal. Under these circumstances, even the scientific discussions were carried on with the zeal and passion of a class struggle.

The forces that held sway in Europe saw Darwinism as a rare opportunity to legitimise the capitalist order they had established in their own countries, and their imperialist colonial systems throughout the world. Darwinism's scientific inconsistency, its imaginary suppositions and nonsensical claims have totally been ignored. Those who regard it as a weapon against religion and morality have disseminated it for ideological purposes.

But the capitalist class responsible for Darwinism's dissemination has supported both this theory and its rival. Why? Because Darwinism's spread and the concomitant destruction of religious belief have benefited Marxism as much they have capitalism. Religion teaches such values as moderation, modesty, brotherhood, self-sacrifice and compassion. With these removed, society becomes a savage arena in which the 'struggle for survival' among capitalists goes on, much as does the class struggle between capitalists and communists.

Capitalism means the sovereignty of capital, a free and unrestricted economic system totally based on profit and where society is in competition within these criteria. There are three important elements in capitalism: individualism, competition and profit-making.

Individualism is important because people see themselves not as a part of society, but as 'individuals' standing alone on their own two feet. 'Capitalist society' is an arena where individuals compete with one another under very harsh and ruthless conditions just like that described by Darwin, where only the strong survive, where the weak and powerless are crushed and eliminated.

According to the logic capitalism is based on, every individual -- and this can be a person, a company, or a nation -- must only fight for its own development and advantage. In this war, the best producers survive, the weak and incompetent are eliminated. What is seen as worthy of attention is not human beings, but economic development, and goods. For which reason the capitalist mentality feels no ethical responsibility or conscience for the person whom it crushes underfoot and climbs on top of and who has to live in great difficulty. This is Darwinism put into total practice in society in an economic way.

Materialism was adopted by anti-religious forces, which started to impose it on European societies. Propaganda insisted that materialism was the foundation of reason and science -- a deception that quickly spread among the enlightened, moving first from France to Germany and then, gradually, throughout the rest of Europe. In this respect, Freemasonry was an important ally. Masons adopted materialism as a religion and, in the 19th century, many enlightened Europeans became its members. As this ancient dogma spread, there were attempts to adapt materialism to several branches of science: To natural science, by the English naturalist Charles Darwin. To social science, by the German philosophers Karl Marx and Friedrich Engels.

The scientific importance of Marxism as well as of Darwinism consists in their following out the theory of 'evolution'. Thus, both teachings, the teachings of Darwin and of Marx, the one in the domain of the organic world and the other upon the field of human society, raised the theory of evolution to a positive science. In doing this they made the theory of evolution acceptable to the masses as the basic conception of social and biological development.

Darwinism and Marxism are fully compatible in two basic arguments: Darwinism proposed that all existing things consist of 'matter in motion'. This alleges that God neither created nor ordered matter and that therefore, all life arose by chance. Human beings are a species of animal, evolved from other, lesser animals. But these claims rest on no scientific proof and have been proven false be subsequent scientific discoveries. But Darwin's theory harmonises with the views of Marx and Engels, who believed that only matter existed, and that the whole of human history can be explained in material terms.

Darwinism proposed that 'conflict' is the motivating force that brought about development in living creatures. His basic supposition was that the natural world's resources weren't sufficient to support living things; that therefore, organisms had to fight a constant struggle that drove evolution. The dialectical method adopted by Marx and Engels is the same as Darwin's. According to dialectics, the single motive force

underlying development in the universe is the conflict between opposites. Human history has progressed by means of this conflict. Humanity itself has advanced in the same way.

 

In fact, Karl Marx was the first to realize Darwin's important contribution to materialism. Reading Darwin's 'The Origin of Species' after its publication in 1859, Marx found in it great support for his own theory. A letter he wrote to Engels on December 19, 1860, says that Darwin's book "contains the basis in natural history for our view." In a letter to Lassalle in January 16, 1861, he says, "Darwin's book is very important and serves me as a basis in natural science for the class struggle in history."

Marx's dedication to Darwin of his greatest work, 'Das Kapital', shows the common mind that they shared. In the German edition of his book that he sent to Darwin, Marx wrote with his own hand, "To Charles Darwin from a true admirer, from Karl Marx."

Capitalism and communism gave birth to two results: claims that continuous conflict is necessary, and steps to eradicate humanity completely, leading to endless bloodshed, which we are examining around us not in this century but the 20th century is a good example in the shape of two world wars.

Despite their differences, both capitalists and communists found common ground in their opposition to religion, and for that opposition, they found great support in Darwinism. For this reason, communists believe that before the revolution can occur, a society must first become capitalist. According to this idea, along with the general adoption of 'capitalist morality' (where Darwinist propaganda plays a vital role), a society must first discard religion before communism can grow. In Vladimir Lenin's 1909 article titled 'The Attitude of the Workers Party to Religion' the communist leader describes the role played by the capitalist bourgeoisie in opposing religion: "the task of combating religion is historically the task of the revolutionary bourgeoisie. In the West, this task was to a large extent performed by bourgeois democracy. Both France and Germany have a tradition of bourgeois war on religion, which began long before socialism. In Russia, because of the absence of bourgeois-democratic revolution, this task too falls almost entirely on the shoulders of the working class." Lenin's words show that in essence, the opposition between capitalism and communism is an 'inner conflict' only. Religion is their common enemy.

Growth of an unequal world6

It's hard to find conclusive evidence for a positive link between trade liberalisation and poverty reduction.

Globalisation is not a shortcut to development. Economic development has always required a prudent blend of domestic innovations with imported practices. But political leaders and policymakers look in a hurry to catch the momentum generated by globalisation. Openness mantra which is always backed by the senior officials of the International Financial Institutions like the World Trade Organization (WTO) and International Monetary Fund (IMF) has been repeated in so many times that it is now viewed as an essential component of a country's development strategy. Poor nations are diverting resources from key domestic issues to global economic integration. This is bad news for them.

The global integration agenda is based on shaky empirical ground and seriously diverts policymakers' priorities. Openness does not deliver on its promises: the developing countries that have embraced the integration orthodoxy are now discovering this fact. Simply opening borders is insufficient: It needs to be complemented by a thorough institutional reform. Developed countries took generations to achieve the level of openness their economies have but now they want poor countries to do the same thing in minimum time. The examples normally are given of the fastest growing countries like China, India, East and Southeast Asia, but policymakers in these counties implemented trade and investment liberalisation in an unorthodox manner. These countries worked gradually and sequentially. China worked on two-track strategy which is a highly unorthodox way and practically violates every rule in the guide book. Secondly India, which achieved significant growth rate in the 1980s, remains one of the most highly protected economies. These countries have combined their outward orientation with unorthodox policies. The only clear pattern is that countries dismantle their trade barriers as they grow richer. They liberalise trade gradually over a period of decades not years. And when the World Bank holds such countries up as proof that liberalisation works, this is hypocritical, to say the least. Another worry about this sort of attitude is that it fails to distinguish clearly between trade policy and quantity.

Ask any World Bank economist what is required for trade liberalisation and he is likely to provide a laundry list of measures beyond the simple reduction of tariff and non-tariff barriers. As the promise of trade liberalisation fails to materialise, the prerequisites keep expanding. 'Political Uncertainty' has always been a favorite of international financial agencies to blame the developing countries for their failure.

Do lower trade barriers spur greater economic progress? The available studies find no systematic relationship between a country's average level of tariff and non-tariff barriers and its subsequent economic growth rate. Neither economic theory nor empirical

6 The article was published in 2007 in daily English newspaper The NEWS. Web link is:http://jang.com.pk/thenews/feb2007-weekly/nos-18-02-2007/pol1.htm#5

evidence guarantees that deep trade liberalisation will deliver high economic growth. Mattias Lundberg and Lyn Squire find similar trends.

They report that greater "openness is correlated negatively with growth among the poorest 40 percent, but strongly and positively with growth among the middle 60 percent and wealthiest 40 percent" of households. The IMF cites estimates that developing countries could gain between $ 83 billion to $ 226 billion dollars per year if all barriers to trade in merchandise were eliminated (IMF, 2001). Even reducing a single subsidy could greatly help some countries. For example the, cotton subsidy under the 2002 US farm bill costs Central and West African countries about $ 250 million annually in lost revenue (Ingco & Nash, 2004, 9). Oxfam estimated that US dumping alone has caused poor cotton-producing countries in Africa losses of almost $ 400 million (Oxfam, 2005c).

The situation is far worse for developing countries in bilateral and regional agreements with developed countries. The African Growth and Opportunity Act provides access to the US market if the African apparel manufactures use US produced fabric and yarns, so limiting the potential economic spillovers in African countries.

Examples of East Asian tigers, China and now India are given and the advocates say where would they be without international trade and foreign capital flows? Yes, this is undeniable that these countries reaped enormous benefits from their progressive integration in the world economy. But we need to look closely to know what prudent policies produced these results. South Korea and Taiwan abided by few international constraints and pay few of the costs of integration during their formative growth experience in the 1960s and 1970s. It is also worth noting that some studies of stabilisation and adjustment programmes (SAPs), which include many of the liberalising policies that we are interested in, show that the performance of countries that have undergone SAPs has been worse than those that have not undergone adjustment.

On the whole, the view that the market liberalising reforms advocated by the IFIs are increasing growth rates, decreasing inequality, and ameliorating poverty is unsubstantiated. Liberalisation may even be contributing to increasing inequality and decreasing growth rates amongst the poorest segments of the world's population.

Economists argue that differences in growth rates between countries depend on may factors (though the effects of these factors on growth rates can be quite complicated): Education levels, initial incomes, climate, disease, proximity to markets, trade policy, and the quality of national and international economic institutions are just some of the factors. But high levels of education, land redistribution, and investment in agriculture may increase growth rates. Policies to improve bureaucratic quality, reduce the risk of expropriation, prevent government repudiation of contracts, reduce corruption, and liberalise trade are correlated with higher income levels on average. Additional factors which can effect growth include the availability of land and natural resources as well as government policies regarding public consumption, property rights and distortions in domestic and international markets.

In the financial arena, too, various studies have found that financial market liberalisation does not increase growth and decrease inequality. They found that financial market liberalisation creates instability and is not correlated with growth. There is plenty of evidence to suggest that financial liberalisation is often followed by financial crash. Look at Asian tigers -- Indonesia, Malaysia, Thailand -- and then Mexico and Turkey. All these countries have shown that there is little evidence to suggest that high rate of economic growth follow capital account liberalisation. But there is plenty of evidence that financial liberalisation is followed by financial crisis.

Controlled depreciation of the domestic currency by the developing countries has caused every growth boom during the last four decades. But financial openness is making impossible to manage exchange rate. When some successful countries gave in to Western pressure to liberalise capital flows rapidly they were awarded with the Asian financial crisis. Developing countries are pushed to import legal codes and standards by international agencies rather than improving their existing legal institutions.

According to Branko Milanovic, a leading economist in World Bank Research Department, a unit of the bank dealing with poverty, income distribution and household surveys, the growth of World GDP between 1961 and 1978 was an average of 2.7 per cent per year. It declined to an average of 1.5 per cent per year between 1979 and 2000. It is not entirely clear what kind of growth the IFIs are advocating if growth has been decreasing in the decades when liberalisation has been increasing. Branko Milanovic nicely illustrates these trends. He divides the world into four income groups and then sees how countries move between the groups. The 'rich' group includes the traditionally rich Western European and North American countries. The 'contenders' in a given year are those whose incomes are no more than 1/3 below the poorest 'rich' country. The 'third world' countries have incomes between 1/3 and 2/3 the income of the 'rich' and the rest are classified as 'fourth world'. Milanovic then tracks the movement of countries between groups over time. Most developing countries are doing worse now than they were in 1978. In percentage terms, 82 per cent of those that were rich in 1978 were still rich in 2000; 12 per cent of those that were rich in 1978 became contenders by 2000; 6 per cent of the erstwhile rich joined the third world; 13 per cent of the contenders became rich, 6 per cent of them were still contenders, while 69 per cent of them joined the third world and 13 per cent joined the fourth world.

Every year 9 million people are diagnosed with tuberculosis. Every day more than 13,400 people are infected with AIDs. Every 30 seconds malaria kills a child. In the area of public health developing countries are bound to obey WTO rules even if this causes thousands of deaths. In 1997 when South Africa passed legislation allowing imports of patented AIDS drugs from cheaper sources the country came under severe pressure from Westerns governments. More than 2.7 billion people of the approximately 6 billion people on earth live below the two dollars a day international poverty line. Over a billion people have less than one dollar a day. "Roughly one third of all human deaths, 18 million annually or 50,000 each day, are due to poverty-related causes" (Pogge, 2005, 2).

Normally there are two methods to measure poverty. First, we might use an assortment of indicators such as education and caloric intake levels to measure poverty. The second is use of a unitary measure of poverty. A unitary measure allows us to get a sense of how well people are doing overall. According to the World Bank's $ 1 a day is poverty line. The Bank relies on purchasing power parity (PPP) measures to convert country estimates of income poverty into a common currency. This is problematic. In fact the bank itself admits this much. "Poverty is multi-dimensional, and not all its aspects are determined by economic performance." (World Bank, 2001, 27-28).

The main sources of PPP measures are the Penn World Tables (PWT) and the International Comparison Project (ICP). These measures are based on surveys with inadequate coverage. Only 63 countries participated in the 1985 ICP (Reddy & Pogge, 2006, 25). China has not participated at all in the ICP surveys and India has not participated since 1985 (Wade, 2004, 572). This makes poverty calculations quite unreliable. there are a great number of poor people living in these countries (Reddy & Pogge, 2006).

After all, the world's 358 richest people have more money than the combined annual incomes of countries with 45 per cent of the world's population. Calculation of income inequality within a country and among countries is normally measured in three ways. The first is by altering the distribution of goods within nations. One might call it intra-national inequality. For example, the decreasing size of the middle class in the US is a manifestation of this sort of inequality. The second is by altering the distribution of goods between nations. For instance, if developed countries are getting richer while the developing countries are getting poorer international inequality is increasing. The third is by altering the distribution of goods between individuals. World inequality is inequality between individuals independent of their country of origin. If the global rich are getting richer and the global poor are getting poorer then world inequality is increasing. Those who are concerned only about how individuals are faring independent of country of origin should be most interested in trends in world inequality. Communitarians might care about inequality between nations. It is not at all clear what kind of inequality is at issue for those who argue that globalisation is increasing growth while reducing poverty.

There are many ways that world inequality can change. Intra-national inequality might be increasing, but this might be compensated for by decreasing international inequality. International inequality might be increasing, but this might be compensated for by decreasing intra-national inequality. In either of these cases, the situation of the extremely poor might not be improving. World inequality could decrease if the only change is that the elite (either in the developed or in the developing world) are not getting richer. It is important to look at the components of world inequality to get the larger picture. International inequality is the largest contributor to world inequality (intra-national inequality contributes less).

However, it is worth mentioning that the worsening exchange rate inequality does bode poorly for poor countries. Because many debts are denominated in dollars, imports are paid for in dollars, and participation in international affairs must be paid for in foreign

currency, the costs of worsening inequality in exchange rates can be high. Though the bias of market exchange rates is to make inequality look worse than it actually is, Dowrick and Akmal argue that population weighted international and world inequality are getting worse using exchange rate conversion methods even when biases in exchange rates are corrected (Dowrick & Akmal,2001). A keen reader can find further detail in Milanovic's book, Worlds Apart: International and Global Inequality 1950-2000. It provides a comprehensive and detailed overview of recent results and discussion of methodological issues.

Market liberalising policies are not the only ones that may sometimes require trade-offs between increasing growth, and reducing inequality and poverty. However, it should also be clear that some kinds of public expenditure can reduce poverty and inequality, while increasing growth rates. One policy, not mentioned above, that may be particularly useful for reducing poverty without negatively impacting world growth rates is liberalising movement of people. Dani Rodrik argues that "this would produce the largest possible gains for the world economy and for poor countries in particular" (Rodrik, 208, 2005). The possible gains from liberalising labour markets are much greater than from liberalising markets in goods and capital. He speculates that 25 times as much growth could come from liberalising movement of people as from liberalising goods and capital. L A Winters estimates that developing countries could gain $ 300 billion per year or $ 60 per person in the developing countries by the liberalisation of people's movement (Winters, 2000). Poor countries will benefit from greater remittances, technology, skill transfer, and investment. Even better, if the poor were allowed to work in developed countries, they will benefit directly from liberalization. We would not have to wait to see whether the benefits of liberalization will eventually trickle down (Rodrik, 2005, 209).

In conclusion, the empirical evidence that market liberalising reforms improve the lot of the worst off is not as clear as the International Monetary Fund and the World Bank contend. Growth rates have been declining in the 30-year period since market liberalisation became fashionable (Milanovic, 2005; Wade, 2004). The poverty statistics are too poor to be of much use. Inequality under almost all (including the most relevant) measures has been increasing (Reddy & Pogge, 2003). Some studies have even found that liberalisation itself is correlated with increasing inequality and decreasing growth rates (Cornia, 2004).

We cannot just have faith in the ability of markets to increase growth, decrease inequality, and ameliorate world poverty. Thus, we need to examine particular policies the global economic institutions might implement to see how they impact growth, inequality, and poverty. For instance, we need to consider the effects of different policies on different people. How do those suffering from diseases like AIDs fare under the World Trade Organization's agreement on trade related intellectual property rights? Is there a more equitable system of intellectual property rights we can implement? We also need to consider the effects of different combinations of policies. What background conditions must be met before we can conclude that education will both increase growth and help the poor? When is land reform going to reduce inequality and increase growth rates?

Finally, we need to consider policies' different effects on the many things we care about.

Will opening borders increase inequality even as it decreases poverty and increases growth rates? Do structural adjustment programmes increase growth rates but also hurt the poorest of the poor? We need to carefully consider the best means to increasing growth, and reducing inequality and poverty, if we are going to be successful in achieving these goals. I have not argued for a particular means of increasing growth, decreasing inequality, and ameliorating poverty here. However, we also need to get clearer about what matters. Does it matter if opening borders increases inequality even when it reduces poverty? What kinds of inequality matter? We should seriously consider promoting land reform, agriculture, micro-credit, education, and health care services. Finally, we might liberalise trade and investment in some respects, but we should consider liberalising migration as well.

Multinational Corruption7

7 The article was published in 2007 in daily English newspaper The NEWS.

Not only are the rich countries and their agencies impotent, they commonly have been and are accomplices in corruption abroad.

Corruption has become a major international concern. The topic of international conferences, policy forums and ministerial speeches, it is also the subject of a recent OECD Convention and the focus of an international non-governmental organisation, Transparency International. Corruption is increasingly cited as a reason for withholding foreign aid or debt relief. If a country's inability to pay interest on its loans is due to its leaders siphoning off national earnings into their own bank accounts, the reasoning goes, surely extending aid or canceling the debt will merely sanction further graft.

Most commentators on corruption and on the 'good governance' initiatives instigated to combat it dwell on developing countries, not industrialised ones. Most scrutinise politically-lax cultures in the South, not the North. Most call attention to the petty corruption of low-paid civil servants, not to the grand corruption of wealthy multinationals. Most focus on symptoms such as missing resources, not causes such as deregulation of state enterprises. Most talk about bribe-takers, not bribe-givers.

Growing corruption throughout the world is largely the result of the rapid privatisation of public enterprises. Multinationals, supported by Western governments and their agencies, are engaging in corruption on a vast scale in North and South alike. Donor governments and multilateral agencies such as the World Bank and International Monetary Fund frequently put forward 'good governance' agendas to combat corruption, but their other actions send different signals about where their priorities lie.

In many instances, privatisation has been accompanied by widespread corruption. Joseph Stiglitz, ex-Chief Economist at the World Bank, admits that "it has proved difficult to prevent corruption and other problems in privatizing monopolies. Advocates of privatization may have overestimated the benefits of privatization and underestimated the costs, particularly the political costs of the process itself and the impediments it has posed to further reform."

The head of the World Bank's Asia-Pacific branch, Jean-Michel Severino, confessed that infrastructure privatisations in the region became a 'horror story' in which 'there was a high level of corruption'.The 'horrors' come about partly because of the inflexible and hasty deadlines set by the IMF and World Bank. Public services are privatised without enough time being allowed to set up workable frameworks for regulation. As the recent External Evaluation of the Enhanced Structural Adjustment Facility (ESAF) noted with some puzzlement

Corruption is a major cause and result of poverty around the world, at all levels of society, from governments, civil society, judiciary functions, military and other services and so on. The impact of corruption in poor countries on the poorer members of those societies is even more tragic.

At a global level, as globalisation continues at rapid pace, with promises of prosperity, the 'international' (Washington Consensus-influenced) economic system that has shaped this globalisation in the past decades requires further scrutiny for it has also created conditions whereby corruption can flourish and exacerbate the conditions of people around the world who already have little say about their own destiny.

A hard thing to measure or compare though is the impact of corruption on poverty issues, versus those inequalities that are structured into law, such as unequal trade agreements, structural adjustment policies, and so-called 'free' trade agreements and so on. It is easier to see corruption. It is harder to see these other more formal, even legal forms of 'corruption'. It is easy to assume that these are not even issues because they are part of the laws and institutions that govern national and international societies and many of us will be accustomed to it.

When asking why poor countries are poor, it is quite common to hear, especially in wealthier countries that are perceived to have minimal corruption (at least domestically) that other countries are poor because of corruption. Yet, corruption is not something limited to third world despots. Rich countries and their multinationals too have been involved in corrupt practices around the world.

Professor Robert Neild from Trinity College, Cambridge University writes in Public Corruption; The Dark Side of Social Evolution, 'Rich countries and their agencies... commonly have been and are accomplices in corruption abroad, encouraging it by their actions rather than impeding it...." (p.209). Specific problems he highlights include:

• The impact of Cold War corruption (supporting dictatorships, destabilising democracies, funding opposition, etc);

• Firms from rich countries bribing rulers and officials from developing countries to gain export contracts, particularly in the arms trade and in construction (even justifying it by suggesting bribery is 'customary' in those countries, so they need to do it to, in order to compete);

• The 'corruption-inducing effects of the purchase, by the rich countries and their international corporations, of concessions in Third World countries to exploit natural deposits of oil, copper, gold, diamonds and the like.' Payments made to rulers often violate local (and Western) rules, keeping corrupt rulers in power, who also embezzle a lot of money away.

• The drug trade.

Neild suggests that international law and national laws in rich countries that prohibit drugs may serve to "produce a scarcity value irresistible to producers, smugglers and dealers." Governments and civil society in the third world are often 'undermined, sometimes destroyed' by the violence and corruption that goes with the drug trade. "This is probably the most important way in which the policies of rich countries foster

corruption and violence. Yet the effect on the Third World seems scarcely to enter discussion of alternative drug policies in the rich countries." Legalising drugs, a system of taxation and regulation, comparable to that applied to tobacco and alcohol might do more to reduce corruption in the world than any other measure rich countries could take, he suggests.

Dr Susan Hawley, writes in Exporting Corruption; Privatisation, Multinationals and Bribery, that bribery may be pervasive, but it is difficult to detect. Many Western companies do not dirty their own hands, but instead pay local agents, who get a 10 per cent or so 'success fee' if a contract goes through and who have access to the necessary 'slush funds' to ensure that it does. Bribery is also increasingly subtle.... Until recently, bribery was seen as a normal business practice. Many countries including France, Germany and the UK treated bribes as legitimate business expenses which could be claimed for tax deduction purposes.

Multinational Corporations and Corruption 

Corruption scandals that sometimes make headline news in Western media can often be worse in developing countries. This is especially the case when it is multinational companies going into poorer countries to do business. The international business environment, encouraged by a form of globalisation that is heavily influenced by the wealthier and more powerful countries in the world makes it easier for multinationals to make profit and even for a few countries to benefit. However, some policies behind globalisation appear to encourage and exacerbate corruption. As accountability of governments and companies have been reduced along the way.

For multinationals, bribery enables companies to gain contracts (particularly for public works and military equipment) or concessions which they would not otherwise have won, or to do so on more favourable terms. Every year, Western businesses pay huge amounts of money in bribes to win friends, influence and contracts. These bribes are conservatively estimated to run to US$80 billion a year -- roughly the amount that the UN believes is needed to eradicate global poverty.

Such bribery may be pervasive, but it is difficult to detect. Many Western companies do not dirty their own hands, but instead pay local agents, who get a 10 per cent or so 'success fee' if a contract goes through and who have access to the necessary 'slush funds' to ensure that it does. Bribery is also increasingly subtle. It often takes the form of semi-legal fees or 'commissions', and inflated or marked-up prices. In contracts guaranteed by export credit agencies, such 'commissions' are included in the costs and thus in the total contract value covered by the guarantee. "It is obvious," comments Transparency International, "that this practice constitutes an indirect encouragement to bribe which, in future, brings it close to complicity with a criminal offence". Until recently, bribery was seen as a normal business practice. Many countries including France, Germany and the UK treated bribes as legitimate business expenses which could be claimed for tax deduction purposes.

Dr Hawley investigates for multinationals, bribery enables companies to gain contracts (particularly for public works and military equipment) or concessions which they would not otherwise have won, or to do so on more favourable terms. Every year, Western businesses pay huge amounts of money in bribes to win friends, influence and contracts. These bribes are conservatively estimated to run to US$80 billion a year -- roughly the amount that the UN believes is needed to eradicate global poverty.

Dr Hawley also lists a number of impacts that multinationals' corrupt practices have on the 'South' (another term for Third World, or developing countries), including:

• They undermine development and exacerbate inequality and poverty.

• They disadvantage smaller domestic firms.

• They transfer money that could be put towards poverty eradication into the hands of the rich.

• They distort decision-making in favour of projects that benefit the few rather than the many.

They also

• Increase debt;

• Benefit the company, not the country;

• Bypass local democratic processes;

• Damage the environment;

• Circumvent legislation; and

• Promote weapons sales.

 

Tackling corruption 

What can be done to tackle this problem? Campaigners from around the world, but particularly the South, have called for a more just, independent, accountable and

transparent process for managing relations between sovereign debtors and their public and private creditors.

An independent process would have five goals:

• To restore some justice to a system in which international creditors play the role of plaintiff, judge and jury, in their own court of international finance.

• To introduce discipline into sovereign lending and borrowing arrangements... and thereby prevent future crises.

• To counter corruption in borrowing and lending, by introducing accountability through a free press and greater transparency to civil society in both the creditor and debtor nations.

• To strengthen local democratic institutions, by empowering them to challenge and influence elites.

• To encourage greater understanding and economic literacy among citizens, and thereby empower them to question, challenge and hold their elites to account.

The Bretton Woods Project organisation notes that the World Bank, under pressure of late, has suspended a number of loans due to concerns of corruption. These include loans to Chad, Kenya, Congo, India, Bangladesh, Uzbekistan, Yemen, and Argentina. The Bank has also started internal investigations of Bank corruption. However, "despite high-profile moves by President Paul Wolfowitz, the root causes of corruption -- underpaid civil servants, an acceptance of bribery by big business, and dirty money -- remain largely unaddressed."

The Bretton Woods Project adds that the "normalisation of petty corruption in developing countries has in part been driven by"

• IFI conditions

• The aid industry for 'overpaying consultants' and turning a blind eye to corruption in some regimes

• The "World Bank's 'pressure to lend' culture where staff are rewarded for the volume of the portfolio they manage"

• The World Bank's slow pace in investigating and disbarring companies found guilty of corrupt practices such as bribery, fraud or malpractice

• Failing to increase transparency of some of its own procedures

• The IFI's "central part of an international financial system which has both actively and tacitly supported the global proliferation of dirty money flows" including, for example, the financing of various despotic rulers that have siphoned off a lot of money to personal offshore accounts.

To help address these problems, the Bretton Woods Project suggests a few steps:

• Greater transparency of World Bank processes, allowing greater visibility for elected officials and civil society in recipient countries;

• Strengthening internal mechanisms within the Bank itself, to monitor integrity of Bank functions, and allow truly independent audits of Bank operations;

• Minimum standards in governance, transparency and human rights that must be fulfilled before approving oil, gas and mining projects in institutionally weak countries.

• Not always tying loans with economic policy conditions in such a way that some governments surrender their policy-making space.

But it is hard to see how the international economic agencies and their member governments can introduce incentives that would cause corrupt rulers to attack corruption... Not only are the rich countries and their agencies in this respect impotent, they commonly have been and are accomplices in corruption abroad, encouraging it by their action rather than impeding it.

War Profiteers8

8 The article was published in 2007 in daily English newspaper The NEWS.

A perspective in Global Economy

Corrupt governments are working in tandem with corporations in order to meet their various political and economic agendas.

Bertrand Russell in Roads to Freedom writes “If a man is offered a fact which goes against his instincts, he will scrutinize it closely, and unless the evidence is overwhelming, he will refuse to believe it. In recent years miltiry speanding has divert valuable economic means in a dangrous direction which may satisfy the instincts of few warmongers but a vast majority of the world is asking for overwhelming evidence.

Global military expenditure and arms trade form the largest spending in the world at over 1 trillion dollars in annual expenditure and has been rising in recent years, close to Cold War levels. As world trade globalizes, so does the trade in arms. In order to make up for lack of domestic sales, newer markets must be created. USA, Russia, France and Britain do the largest businesses of arms trade in the world. Sometimes, these arms sales are made secretly and sometimes knowingly to human rights violators, military dictatorships and corrupt governments. And this does not promote democracy in those nations.

(1991 figures are unavailable.)

Summarizing some key details of the Stockholm International Peace Research Institute (SPIRI)’s 2006 Year Book on Armaments, Disarmament and International Security.

World military expenditure in 2005 is estimated to have reached $1,001 billion at constant (2003) prices and exchange rates, or $1,118 billion in current dollars.

This corresponds to 2.5 per cent of world GDP or an average spending of $173 per capita.

World military expenditure in 2005 presents a real terms increase of 3.4 per cent since 2004, and of 34 per cent over the 10-year period 1996–2005.

The USA, responsible for about 80 per cent of the increase in 2005, is the principal determinant of the current world trend, and its military expenditure now accounts for almost half of the world total.

SIPRI also comments on the increasing concentration of military expenditure, i.e. that a small number of countries spend the largest sums:

The 15 countries with the highest spending account for 84 per cent of the total; The USA is responsible for 48 per cent of the world total, distantly followed by

the UK, France, Japan and China with 4–5 per cent each.

Another organization, the Center for Arms Control and Non-Proliferation, provides similar date (tabulated further below), showing the breakdown of spending by countries. A summary pie chart shows the following:

High and rising world market prices of minerals and fossil fuels is also a factor that has aided the upward trend in military expenditure, says SIPRI. For example, Algeria, Azerbaijan, Russia and Saudi Arabia have been able to increase spending because of increased oil and gas revenues, while Chile and Peru’s increases are resource-driven,

“because their military spending is linked by law to profits from the exploitation of key natural resources.”

Also, “China and India, the world’s two emerging economic powers, are demonstrating a sustained increase in their military expenditure and contribute to the growth in world military spending. In absolute terms their current spending is only a fraction of the USA’s. Their increases are largely commensurate with their economic growth.”

SIPRI’s data also shows that while in raw dollar amounts some nations are increasing spending at large amounts, their percentage increases may vary:

The United Nation which was created after World War II with leading efforts by the United States and key allies and was set up to be committed to preserving peace through international cooperation and collective security. And if we compare the military spending with the entire budget of the United Nations. we will be surprised to know that the United Nations and all its agencies and funds spend about $20 billion each year, the UN’s entire budget is just a tiny fraction of the world’s military expenditure, approximately 2%. Yet for nearly two decades, the UN has faced a financial difficulties and it has been forced to cut back on important programs in all areas. Many member states have not paid their full dues and have cut their donations to the UN’s voluntary funds. As of October 31, 2006, members’ arrears to the Regular Budget topped $661 million, of which the United States alone owed $526 million (80% of the regular budget arrears).

It seems ironic that the world spends more on things to destroy each other (military) and to destroy ourselves (drugs, alcohol and cigarettes) than on anything else.U.S. Military Spending

The United States, being the most formidable military power, it is worth looking at their spending:

Generally, the US military spending has been on the increase, of course since the 2001 September 11 terrorist attacks, but also before that:

This table further details the military expenditure each year, and is compared at constant 2007 prices:

Year $ Billions At 2007 prices Change from previous year (%)2008 643.9 643.9 2.84%

Year $ Billions At 2007 prices Change from previous year (%)2007 626.1 626.1 7.46%2006 571.6 582.66 -0.05%2005 554 582.93 0.34%2004 534 580.93 4.03%2003 500 558.42 27.97%2002 382 436.36 8.00%2001 348 404.03 4.82%2000 323 385.46 0.81%1999 310 382.38 4.95%1998 289 364.35 n/a

Sources:For data up to 2005, Chris Hellman, The Runaway Military Budget: An Analysis, Friends Committee on National Legislation, March 2006, no. 705, p. 3For 2006, 41% of Your 2006 [US] Taxes go to War, Friends Committee on National Legislation, February 15, 2007For 2007 and 2008, Highlights of the Fiscal Year 2007 Pentagon Spending Request and Highlights of the Fiscal Year 2008 Pentagon Spending Request, both from the Center for Arms Control and Non Proliferation.Notes:1998-2006 includes Department of Defense spending, Department of Energy’s nuclear weapons program, the costs of the wars in Afghanistan and Iraq, and “other items” (i.e. military spending by other agencies, foreign military financing and training, mandatory contributions to military retirement and healthcare).2007 and 2008 do not include “other items.”Congress has already approved over $500 billion in supplemental funding for operations in Iraq and Afghanistan. Fiscal Year 2008’s budget request includes a supplemental $141.7 billion to cover Iraq and Afghanistan operations. 2007’s was $93.4 billion. (See Center for Arms Control and Non Proliferation source mentioned above.)2007 constant prices calculated using Federal Reserve Bank of Minneapolis Consumer Price Index CalculatorCompared to the rest of the world, these numbers are indeed staggering.

U.S. Military Spending Versus Rest of the WorldWhile FY 2008 budget requests for US military spending are known, for most other countries, the most recent data is from 2005 (at time of writing). Using US spending at that time, we can compare US military spending with the rest of the world:

The US military spending was almost two-fifths of the total. The US military spending was almost 7 times larger than the Chinese budget, the

second largest spender. The US military budget was almost 29 times as large as the combined spending of

the six “rogue” states (Cuba, Iran, Libya, North Korea, Sudan and Syria) who spent $14.65 billion.

It was more than the combined spending of the next 14 nations. The United States and its close allies accounted for some two thirds to three-

quarters of all military spending, depending on who you count as close allies (typically NATO countries, Australia, Canada, Israel, Japan and South Korea)

The six potential “enemies,” Russia, and China together spent $139 billion, 30% of the U.S. military budget.

Tabulated data is as follows:

Military spending in 2005 ($ Billions, and percent of total)Country Dollars (billions) % of total Rank

United States 420.7 43% 1China * 62.5 6% 2Russia * 61.9 6% 3United Kingdom 51.1 5% 4Japan 44.7 4% 5France 41.6 4% 6Germany 30.2 3% 7India 22 2% 8South Korea 20.7 2% 10Italy 17.2 2% 11Turkey 9.8 1% 15Israel* 9.7 1% 16Indonesia* 7.6 1% 20North Korea* 5.5 1% 25Pakistan 3.7 0% 33

Source: U.S. Military Spending vs. the World, Center for Arms Control and Non-Proliferation, February 5, 2007

Notes:Figures are for latest year available, usually 2005. Expenditures are used in a few cases where official budgets are significantly lower than actual spending. * 2004 Figure. Source uses FY 2008 for US figure (and includes Iraq and Afghan spending). I have used 2005 to try and keep in line with other countries listed (but I have NOT included the Iraq

and Afghan operations cost which would be another $75 billion. Other items as described above are not included either. If they are included, the gulf between US spending and others might be even wider). Due to rounding, some percentages may appear as zero.

Generally, compared to Cold War levels, the amount of military spending and expenditure in most nations has been reduced. For example, global military spending declined from $1.2 trillion in 1985 to $809 billion in 1998, though in 2005 has risen to almost one trillion. The United States’ spending, up to 2007 requests was reduced compared to the Cold War era, though still close to Cold War levels.

Supporters of America’s high military expenditure often argue that using raw dollars is not a fair measure, but that instead it should be per capita or as percentage of Gross Domestic Product (GDP), and even then the spending numbers miss out the fact that US provides global stability with its high spending and allows other nations to avoid such high spending. In regards to the high spending allowing other nations to spend less, that is often part of a supportive theory of the global hegemony being good for the world. Granted, other nations in such a position would likely want to be able to dominate as much of the world as possible, as past empires have throughout history.

However, whether this global hegemony and stability actually means positive stability, peace and prosperity for the entire world (or most of it) is subjective. That is, certainly the hegemony at the time, and its allies would benefit from the stability, relative peace and prosperity for themselves, but often ignored in this is whether the policies pursued for their advantages breeds contempt elsewhere (in the modern era that may equate to “anti-Americanism”, resorting to terrorism and other forms of hatred.) unfortunately more powerful countries have also pursued policies that have contributed to more poverty, and at times even overthrown fledgling democracies in favor of dictatorships or more malleable democracies.

So the global good hegemony theory may help justify high spending and even stability for a number of other countries, but it does not necessarily apply to the whole world. To be fair, this criticism can also be a bit simplistic especially if an empire finds itself against a competitor with similar ambitions, that risks polarizing the world, and answers are likely difficult to find.

In this new era, traditional military threats to the USA are fairly remote. All of their enemies, former enemies and even allies do not pose a military threat to the United States. For a while now, critics of large military spending have pointed out that most likely forms of threat to the United States would be through terrorist actions, rather than conventional warfare, and that the spending is still geared towards Cold War-type scenarios and other such conventional confrontations.

Many studies and polls show that military spending is one of the last things on the minds of American people. But it is not just the U.S. military spending. In fact, as Jan Oberg argues western militarism often overlaps with civilian functions affecting attitudes to militarism in general.

Arms Sales By Supplier Nations

Arms sales (agreements) ranked by Supplier, 1998-2005 (in constant 2005 million US Dollars and percentage of world sales).

Supplier Total DollarsPercentage of total

sales

United States out of 97,144

36%

Russia out of 41,600 16%France out of 30,000 11%Germany out of 17,000 6%United Kingdom out of 14,900 6%China out of 9,100 3%Italy out of 5,600 2%Other European out of 33,800 13%Others out of 17,300 6%

Source: Conventional Arms Transfers to Developing Nations, 1998-2005, Report for Congress, U.S. Congressional Research Service, Library of Congress, October 23, 2006. (Dollar values are constant 2005 dollars)

Each country shown as follows:

developing countries industrialized countries

Permanent UN Security Council members USA, UK, France, Russia, and China dominate the world trade in arms and they are top five countries profiting from the arms trade. While international attention is focused on the need to control weapons of mass destruction, the trade in conventional weapons continues to operate in a legal and moral vacuum.

Arms Sales Trends 1998-2005

Arms Transfer Agreements Worldwide, 1998-2005, Developed and Developing WorldsCompared (in constant 2005 million US Dollars and percentage of total sales in that period)

Year Total Dollars Percentage of total

Arms Transfer Agreements Worldwide, 1998-2005, Developed and Developing WorldsCompared (in constant 2005 million US Dollars and percentage of total sales in that period)

Year Total Dollars Percentage of total1998 out of $35,861 12%1999 out of $41,823 14%2000 out of $36,320 12%2001 out of $34,843 12%2002 out of $31,657 11%2003 out of $29,250 10%2004 out of $40,207 14%2005 out of $44,158 15%

Source: Conventional Arms Transfers to Developing Nations, 1998-2005, Report for Congress, U.S. Congressional Research Service, Library of Congress, October 23, 2006. (Dollar values are constant 2005 dollars)

Each year shown as follows:

developing countries industrialized countries

Here we can see that Developing nations are top recipients. And these nations continue to be the primary focus of foreign arms sales activity by weapons suppliers with roughly two thirds, or $30.2 billion dollars, in arms transfer agreements in 2005 alone (the highest for the entire 1998-2005 period).

The top ten developing nation recipients of arms sales accounted for just over two-thirds of the total developing nations arms market, and there is continued concentration of major arms purchases by developing nations among a few countries. These countries were mostly Asian or from the Near East (or Middle East).

This is a true picture which clearly shows that to satisfy the destructive instincts of few warmongers and on the name of R&D, actual words for military purpose should be “DR&D, Destructive Research and Development”, a big portion of the world’s GDP, is thrown in these destructive activities. And with the arms trade, corrupt governments and corporations are “cooperating” to meet their different political and economic agendas.

LOOKING FOR A NEW FINANCIAL SYSTEM9

9 The article was published in the magazine “Money Plus” of daily English newspaper The NATION.

A review in the context of Global Financial Crisis

Much have been written and debated that capitalism and democracy both work together and for the existence of capitalism, democracy must prevails in the society. But current global financial crisis tells us a different story. Now this is an uncomfortable truth that democracy and free markets are incompatible. The main point of democratic government is that it uses the legitimacy of democratic mandate to diffuse power throughout society rather than allow it to accumulate—as any player of monopoly understands—in just a few hands. It forcefully uses the political power of the majority to offset what would otherwise be the overwhelming economic power of the dominant market players.

The dominance is reflected those who believe that governments should be kept away from the levers of power and a very tiny minority of greedy capitalist who control and benefit most from the economic progress and considered themselves the only people competent to direct it.

The global economic crises started in the middle of 2007. Financial Tragedy was started with the collapse of the US sub-prime mortgage, other industrialized countries have ripple effect around the world and complex financial products added fuel in this crisis. World stock markets and financial institutions are suffering and being bought out. Life of every common person is being affected either living in west or in the east. Many people have this view that responsible are being bailed out. In the mean while poorer and smaller businesses people rarely have this option for bail out when they find themselves in crisis.

It is important to notice during Asian financial crisis in 1990s when Asian Nations were affected by short selling, hedge funds and other financial insolvent institutions in currency speculation. Currencies were being attacked through short selling and the rates of local currencies were brought far below than their real economic values. That time their complaints were not heard by the western governments and their created International Financial Institutions rather they were blamed it on their financial mismanagement.

Controversial and unpopular bailout package was passed to support the US financial system. US public seen it as a bailout for the culprits and a common person was left to pay for their folly.

Joseph Stiglitz a well known economist narrates bailout package in these words. “It is a disappointment but no surprise that the administration came up with a bill that is again based on trickle down economies. You throw enough money at Wall Street and some of it will trickle down to the rest of economy. It is like a patient suffering from a massive blood transfusion while there is internal bleeding.”

He further added “Americans have lost faith in its economic philosophy a new corporate welfarism masquerading behind free-market ideology. Wall street has polluted our economy with its toxic mortgages it should pay now for its cleanup”.

The political philosopher John Gray a former professor at the London School of Economics expressed his views in these words, “The era of American global leadership, reaching back to the Second World War is over…. The American free-market creed has self-destructed while courtiers that retained overall control of markets have been vindicated.”

Almost half or more of population of the world is facing daily crisis of poverty, financial, educational and inequality. International media hardly pay attention to these problems but this financial crisis is fully highlighted which predominantly affects the wealthy class. Global food crisis never get such coverage in the media of developed countries. Following diagram shows a harsh reality that world’s poorest consume only 1.5% of the total production of the world.

The gap between rich and poor is widening day by day and modern researches show that over the last thirty years, inequalities among nations and within nations has increased following diagram depict this gap.

Developing countries have seen these moves that how military and Banks get money easily. World military spending of $ 1.473 Trillion is going in few accounts those belong to Arms Factories and $700 billion bailout in US and billions by other countries have solid reasons but crippling third world debt has no solid reasons to be bailed out. Debt write off plan was announced a $40 billion by developed countries but hardly $18 billion is written off. Third world countries are always blamed by their inefficient people and economic mismanagement but no body points out corrupt dictators(either from military or selected /elected by so called democratic system) had come to power with the support of western governments and their IFIs; IMF and World bank.

Poverty is increasing even in the developed countries, rich are getting richer and poor are crossing even minimum $1 definition of poverty.

Many economist and political thinkers are raising this point that this financial crisis could have been averted but to suggest would be blamed with the titles of socialists and anti-capitalists. Some authentic voices are pointing that the most extreme form of capitalism can also lead to the bigger bubbles and the bigger busts.

It has been observed that American based Global financial system failed in its responsibilities while managing risk and allocating capital. And many of the failed elements of the US financial system were imposed to the entire world by its backed IFIs. Thus triumph of global “free” market over the last three decades has been a political triumph.

John Maynard Keynes, the father of neoliberal economics suggested interventionist form of government to mitigate against the worst effects of cycles of recessions. After World War II until 1970s, his ideas were followed globally but the Ronald Regan in US and Margaret Thatcher in England changed economic rules for world and again economic liberalism was imposed through IMF and Word Bank which is now collapsed after serving the Economic Elites of the world for three decades.

Now again world is looking for new system to run the economy of the world. Fascinating economic theories invented in “top” universities by “genius” brains are failed to serve the humanity or even to the people of the west.

Neoliberal fundamental problem one-size-fits-all is not working but still these current economic ideologies are influential and so vocal which will definitely lead the world to

another financial crisis after some years. Now this is time to change the fundamentals of world economy. West should give a chance to Islamic Financial System to serve the world. But this chance should be in a complete form.

Architectures of New Global Financial System10

It is now proven the legacy created by Alan Greenspan former head of Federal Reserve of USA and a key person of Global Financial System over the last two decades is now collapsed. But how this is possible for west to accept the failure of Capitalism. At one side they are making to hide this financial disaster that created huge unemployment, high inflation and economic slow down. This all exposed a flawed economic system. But west is still insisted that Capitalism can run the economy of this world and now they are busy to architect a new Global Financial System. Global policy-givers have already begun to formulate the framework in November 2008 at the summit of G20 and now this is at its final stage and by March 31, 2009 these rules will be implemented. These are key features of this forthcoming system.

An interventionist regulatory framework will be established which will perform these tasks:

Strengthening transparency and accountability which will enhance disclosure on complex financial products and align incentives to avoid excessive risk-taking, further guidance for liquid securities will be given

Enhancing sound regulation those will strength regularity regimes which will review pro-cyclicality including the ways that valuation, leverage bank capital, executive compensation and loss provisioning exacerbate cyclicality. Minimizing conflicts between rating agencies and enhancing international standards, implementing central counterparty services quickly and efficiently and maintaining adequate capital. Re-examining bank risk management is very essential, particularly liquidity and counterparty risks, stress testing, incentive alignment and development of structured products.

Prop up integrity in the financial markets that will stimulate regional/international regulatory cooperation. Endorse information sharing on threats to market stability, ensure legal provisions to address threats. Further it will review business conduct rules to protect markets and investors against market manipulation and fraud

Reinforcing international cooperation by this way make global regulations which will set up decision-making colleges for all major cross-border financial institutions to strengthen supervision. Further strengthen the crisis management measures and conduct recreation exercises

10 The article was published in the magazine “Money Plus” of daily English newspaper The NATION.

Reforming international financial institutions which will advance the reform of Bretton Wood’s institutions to reflect changing economic weight. In financial stability forum there will be addition of emerging economies which will strengthen IMF and FSF collaboration on surveillance and standard setting. Adequate resources of development banks, restoring access to credit and resuming private capital flows to emerging economies must be reviewed.

The next point is back to basics in banking. It has been observed in the years leading up to the crisis financial institutions moved away from their roots and worked as mediator by which they provide corporate finance, advisory, brokerage and asset management services to their customers. And in post-crisis scenario now they will to orient their strategies towards their core competencies that prioritize client business over ring-fenced propriety trading activities.

On the equity side banks will continue to focus on closing the gap between write-downs and raised capital. Towards the asset side banks will mange to increase the portion of short-term instruments, and on the liability side they will manage to reduce their liance on wholesale funding by attracting deposits. If we look at the overall global capital raised since the beginning of the crisis remains less than total write-down which is shown in the diagram.

To avoid liquidity crisis banks will be forced to take following measures:

An improvement in liquidity rations by raising cash and other short-term securities

Segregation of liquidity assets by enhancing liquidity portfolios which will be matched short-term liquidity gaps.

A tougher stress tests will be conducted about the survival poof a bank through mock liquidity drills

Early warning will be issued to develop a tight monitoring like credit default swap (CDS) spread and by lowering rating

Escalation procedure will be developed for unforeseen events like extensions of deposit and sponge maturities

In the Pre-crisis scenario five independent global investment banks like Bear Stearns, Lehman Brothers, Merrill Lynch, Morgan Stanley and Goldman Sachs relied heavily on (repos) repurchase agreement which is a form of short-term secured lending to finance longer term assets details are shown in the figure.

Facing losses of nearly US$ 1 trillion by the end of 2008, global commercial and local banks are revising their vision. Now they are focusing on their core competitive advantage. In this regard at least five most important modules are likely to emerge that sway one or more core competencies and decrease the amount of overlie in global banking.

1. Scale globals will expected to be part of a small, super class of global liquidity providers. They will use their deposit-funded, fortress-like balance sheets, global footprint and trading communications to maintain or become major liquidity providers across markets and asset classes. Many of them will be universal banks, and will grow retail deposits and high net worth accounts to stabilize their funding sources, but will reduce the amount of ring-fenced proprietary trading.

2. Focused regionals will likely start again to regional franchises. They will noticeably reduce their capital assurance and balance sheets, will pick businesses where they identify a regional advantage, and will take out corporate and commercial cross-sell synergies to control mid-sized corporate and government advisory and financing consent. They will build secondary trading operations to support their advisory and primary issuance businesses and support small international teams that can help consortium issues globally. As regional specialists, they may connect in a limited amount of proprietary trading where they have an informational advantage.

3. Private banks will recommit to their retail, small business and high net worth client franchises. Like scale globals, they will stress deposit funding, but like focused regionals, they will considerably de-risk their trading businesses and seek to remove cross-sell synergies for other banking products. They will maintain some presence in secondary markets to smooth the progress of client transactions.

4. Merchant banks may come forward and gain share in advisory and corporate finance as a greater number of institutions focus on domestic and retail markets and the scale globals look to serve only the largest international clients.

5. Alpha risk takers, such as hedge funds and private equity firms, may more and more act as market makers on instruments where spreads have widened or arbitrage opportunities are present. Hedge funds with trading infrastructure are likely to move into select high-margin sell-side businesses (e.g. fixed income, credit, corporate finance). Private equity firms with established track records of aligning the interests of general and limited partners will be best located to attract fresh capital to invest in illiquid markets.

Potential near-term losers and winners

StakeholdersLoser Winner

Banks Banks with significant exposure to toxic assets.

Re-regulated “utility” banks that did not streamline costs to adapt to a new, low growth environment

Deposit-rich universal banks that can extract group synergies.

Regional banks that can quickly refocus on their core value proposition.

Boutique investment banks and merchant banks that gain share from former global bulge bracket institutions.

Non-banks that can attract principal investing and proprietary trading talent

Alternative Highly-levered hedge Top performing funds with

investment firms funds with monocline businesses.

Hedge funds that have failed to deliver expected returns.

Open-ended fund structures.

2006-2007 vintage PE funds.

Less established mid-tier private equity and hedge funds being punished by flight to quality

proven track records profiting from flight to quality.

Funds with longer lock-up periods or closed-end fund structures.

Scalable beta indexation providers.

Emerging “new beta” providers.

Beneficiaries of government stimulus packages (e.g. infrastructure).

PE funds with strong operational value creation capability.

“Unconstrained” investors, such as sovereign funds and family offices

Insurance Provider Those exposed to deteriorating credit markets, particularly MBS and CRE loans.

Those exposed to equity market declines.

Those with significant securities lending operations or who are otherwise vulnerable to liquidity constraints.

P&C providers facing large professional liability claims

Capital-rich insurers that acquire businesses with a strategic fit (domestic scale, regional expansion, product/capability extension).

Innovators of new retirement products

Stakeholder Loser Winner

Above analysis points to a new set of near-term winners and losers. The former will primarily be those who entered the crisis with low financial influence, slackening their transition to a deleveraged world, have supple liquidity arrangements and can capitalize on consolidation opportunities that give them scale and enlarge their reach

The latter are likely to be those that had high experience to acclaim, counterparty, market and liquidity risk, or who were laden with lessen assets, or who were required to liquidate assets at multi-year lows. Winners will emerge from all sectors, as will losers.

Going ahead, winners will be distinct more by their business strategies than by their responses to the financial crisis. Therefore, a vigorous long-term analysis is required to

evaluate the driving forces that are certain to shape the future of the financial system.

Darwinism Finance to Islamic Finance11

11 The article was published in the magazine “Money Plus” of daily English newspaper The NATION.

We were taught in our classes of Management Sciences that ethics in business is a key to your success, but in practical world for the last many years I am observing the opposite of this. This is a dichotomy of entrepreneurship that they expect all sorts of ethics from their subordinates but this rule does not apply on them.

Darwinism Finance may seem a strange word in Financial World but recent Global Financial Crisis portrays the suitability of this new term. The basic concept is fittest survival; “strong overcoming the weak”. Darwinist concept is justified by the survival of the strongest financial institutions in the market, and we have seen examples in recent months. Societies under the sway of a Darwinist state of mind are constantly dominated by mass slaughter, murder, terror and disorder, insecurity and tension. Under the consequence of Darwinism, eradicate the weak has been seen as essential in order to maintain the equilibrium in nature, which is why communist, fascist and now capitalists societies have had no doubts about mass murder. Social Darwinism constituted the utmost intellectual groundwork for communists such as Marx, Lenin and Mao, for fascists Mussolini and Hitler and for capitalism Feidrich Hayek, Milton Friedman, Francis Fukuyama and the last two decades were dominated by Alan Greenspan.

No one can deny the moral corruption which is an integral part of today’s Corporate Culture has now fully exposed. In my point of view now the world is facing two types of crisis, one is Global Financial Crisis and another is Global Spiritual Crisis. Because when societies have only concerns with their material needs and spiritual needs are forgotten they definitely visage such situations. Top academia and dominant financial circles of the world like Harvard and World Economic Forum are setting new direction to run the financial matters but indirectly they are also trying to bring some ethics in this new direction. Now they look ready to listen and give some space to Islamic Finance. Now Islamic Finance Industry is getting more attention into ever-deepening gloom of global financial industry.

For the past four decades Islamic financial institutions have proved themselves on solid grounds and this system is now a full fledged realities rather then a mere concepts.

Ethical and risk-sharing approach of Islamic Finance is attracting not only 1.6 billions Muslims of the world but a lot of others who are discovering Islamic as a complete religion.

In 2008 Top Islamic Financial Institutions (TIFI) have shown healthy size and strong growth of sharia-complaint assets (SCAs), the number of firms reporting sharia-complaint assets rose by 57 to 280 this year and the number of registered institutions are reaching 614 this year compared with 524 last year. The growth of new Islamic investment bank such as Noor Islamic Bank in Dubai and Al Hilal Bank in Abu Dhabi are providing huge capital basis. Gulf and London are key locations of Islamic Finance.

Growth of Islamic Banking

The rise in SCAs demand in the last few years is not contained within the Muslim countries, but other institutions like European Finance House, Absa Islamic Banking (a subsidiary of Barclays), Gatehouse Bank, Europe Arab Bank, European Islamic Investment Bank and HSBC Amanah (Arabic meaning deposit in trust) the Islamic subsidiary of global giant HSBC has shown a significant rise of 56.2% in SCAs.

Example of New Islamic Banks

The penetration of Islamic Banking is growing on the back of a number of institutions in traditional markets.

Selected New Islamic Banks (excluding banks with Islamic Windows)

Muhammad Amin, UK head of Islamic finance at PricewaterhouseCoopers, says “I am aware of several UK companies, which would otherwise borrow conventionally, who are talking to Islamic banks regarding funding. The credit crunch has had much less impact on Islamic banks ability to lend compared with conventional banks.”

Douglas Johnson, CEO of New York-based Calyx Financial “The rise of Islamic banking may indeed be one of the most important developments in global financial services this decade. Islamic financial institutions help to integrate and expand worldwide economic development, which is never a zero-sum game.”

In 2008 Top 500 market of Islamic institutions contributed $639.1 bn. Institutions from Gulf Co-operation Council (GCC) – Bahrain, Kuwait, Oman, Saudi Arabia and the United Arab Emirates grew by 47.5% to reach $262.7 bn. And the Middle East and North Africa (MENA) rising by 40.4% to reach US $ 248.3 bn. This is 80% of the total Islamic Top 500 market. Malaysian market grew by 32.3% to reach US $ 67.1 bn, and The

Europe/Australia/ America expanded by 60.6% to reach 5.4% of the total market, here HSBC Amanah has more contribution.

Islamic Economists are expecting Sharia-compliant assts, SCAs to grow with the same pace of 30% but even if we make this 25% for 2009 the sum would be $800 bn and $1000 bn in 2010.

Loyalty must be earned not bought, this is essence of Islamic finance, and by creating loyality of customers one gets the turust and Islamic Finace is getting complete turut of customers. Trust is valued by customers in three ways:

the faithfulness of trnascation (providing guarantey of a transcation) the quality of the transcation (a transcation must be satisfactory as per Muslim

morality the execution of a transcation at a competitive cost (normaly Muslim customers

compare the results with conventionally banks)

Innovation experiementation, branh opening, lifestyle product and services tailored to specific market segments are key for their growth. Exaples of few are SME financing, services specific for women, Visa credit, debit cards, mobile banking and 24/7 banches.

Sukuk started as a recognized Islamic financial instrument about nine years ago. The $100m Bahrain sovereign issue in 2001, and two Malaysian international issues, the $600m sovereign benchmark and Guthrie $150 m corporate issues in 2001-2002, led the global sukuk market development. As shown below, total issues through June 2008, including Malaysian domestic exceeded $111 billion.

Islamic mutual funds at present represent one of the best ever growing sectors within the Islamic financial industry. As Sharia supervision is an essential part of the industry, its

place in relation to Islamic mutual funds is undoubtedly no less important. Predominantly now, with the opening of the retail markets to middle class Muslim investors, Islamic mutual funds discover themselves if not in direct competition, then at least subject to direct contrast with the host of conservative mutual funds accessible to consumers. Today, funds offer all modes of services to investors, from fundamental office space on their websites, to real time performance updates, to standard reports, to the ability to customize a portfolio by using a pin number and selecting new fund options online or over an automated phone system! In short, the mutual fund industry has progressed from its early stages as almost a congested sort of country club process that catered to financial elite.

Number of Islamic Mutual Funds

At the end we can safley say that Islamic Finance has ability and resource to fill the gap which is created by the western capitalist system, which is based on fittest survival. Islamic Financial System gives equal rights to the poor to survive.

Now faith is driving finance12

How Islamic Fund Industry is rising

The modern Islamic fund management industry was born in the 1970s, when a new class of Arab investors, rich from oil profits and celebrating the 15th century of the Islamic calendar (Hijra) in 1976, sought a culturally-aware alternative to the "profit at all costs" mentality of western investing, particularly in interest-dealings. The industry has been growing ever since: Islamic banking is active in 75 countries and is growing at 15% globally, with an estimated $1 trillion waiting to be managed.

The primary characteristic that distinguishes Islamic fund management from conventional investing is its compliance with Shariah law. Fund managers who are Shariah compliant must adhere to moral economic activity and invest only in companies that have an ethical purpose. In addition, the investors cannot deal with conventional banks that trade in fixed rate interest, or Riba, but instead would depend on Ijara, an Islamic method of financing. Investments must also be screened for companies that trade items restricted in Islamic laws, such as alcohol, tobacco, pork, gambling or pornography. While limiting investment strategy might seem a hindrance, there are advantages to this "ethical" investing. For instance, Islamic funds were little affected by the scandals afflicting companies such as Enron and WorldCom several years ago, as these companies' highly leveraged balance sheets restricted Shariah funds from buying them. In fact, some conventional managers have adopted Shariah law for strategic purposes.

Today, there are over 250 Islamic financial institutions with assets around $230 billion. However, the vast wealth of Islamic funds under management is not well-diversified; Saudi Arabia controls 70% of all assets under management. The primary fund management companies that cater to these investors are Citibank (Saudi American Bank), HSBC (Saudi British Bank/Al Amanah), Al Rahji and Al Ahli. Outside the Muslim world, London is the world's hub of Islamic banking activity; however, its banks offer few retail products to the Muslim community.

12 The article was published in the magazine “Money Plus” of daily English newspaper The NATION.

In Southeast Asia, Malaysia is the aggressive force, holding 9% of Muslim finances. Reciprocally, Islamic banking comprises 10% of Malaysian finances. With a dominant force like Saudi Arabia in the mix, Malaysia's goal of being the number one player in the Islamic fund industry remains a daunting challenge. However, with industry liberalisation following the 9-11 attacks, its efforts to woo rich Saudis have given it a decisive regional advantage.

One of the key factors towards propelling Islamic investment management into the mainstream is to acquire non-Muslim funds and clients, a trend which has already materialised in Malaysia: 70% of Malaysia's Islamic banking customers are Chinese. However, this trend may owe more to the distribution of wealth in Malaysia than to demographic preferences. Singapore also intends to throw its hat into the ring, according to the MAS' new chairman, Goh Chok Tong (Singapore's ex Prime Minister), who plans to attract more Islamic businesses to the country. In addition, OCBC, DBS and UOB - Singapore's three principal banks - which manage Islamic funds, are exploring opportunities in Malaysia and, to a lesser extent, the Middle East.

The world of Islamic finance extends far beyond basic fund management, particularly in Sukuk (Islamic bonds) and hedge funds. In fact, the first Shariah-compliant hedge fund - the Shariah Equity Opportunity Fund - was launched on October 10 in the Gulf, although the Shariah restrictions reduce its risk and speculative structure. Given the recent surges in oil prices, private wealth in the Middle East is expanding at unprecedented rates, and currently stands at about $1.5 trillion, much of which is more inclined to invest domestically, as long as there is supporting infrastructure. To the victor who can capitalise on these investment opportunities, the spoils will undoubtedly be tremendous.

In Pakistan Islamic Income / Money Market funds, Meezan Cash Fund (MCF) recorded the largest increase in fund size, of 24.28% from PRs1.14bn in August’09 to PRs1.42bn in September’09. Within the same category of funds, KASB Islamic Income Fund (KIIF) provided the highest monthly return of 15.86% while United Islamic Income Fund (UIIF) provided the highest annualized return of 12.07% for FY10.

For Islamic Equity Funds, Meezan Islamic Income Fund (MIIF) recorded the largest increase in both, its fund size and annualized return. While the fund size increased by 9.49%, the annualized return was 28.12%. UTP-Islamic Fund (UTPISF’s) monthly return

performance was highest amongst its peers at 6.86%. While Alfalah GHP Islamic Fund (AFISF) displayed the highest increase in its fund size within the Islamic Asset Allocation Funds Category by increasing from PRs0.40bn to PRs0.42bn on M-o-M basis, United Comp. Isl. Fund (UCIF) outperformed its peers in both, the monthly returns and annualized return with returns of 5.00% and 19.79% respectively.

Impact of Terrorism on World’s Economy13

Terrorism has shaken the world economy badly. Now it’s over a decade we have seen terrorism in diverse forms like state terrorism (American so-called war on terrorism) and Economic terrorism. IMF defines Financial terrorism in this way “Financial institutions could be involved in financial crime as victim, as perpetrator, or as instrumentality: financial institutions can be subject to different types of fraud or abuse; they can directly commit financial crimes; or they can be used by third parties to commit crime”. There are109 available different definitions of terrorism, which are obtained in a survey of leading academics in the field. In all these definitions the following words appear most often: violence and force (83:5%); political (65%); fear, emphasis on terror (51%); threats (47%); psychological effects and anticipated reactions (41:5%); discrepancy between the targets and the victims (37:5%); intentional, planned, systematic organized action (32%); methods of combat, strategy, tactics (30:5%). Anyhow there is no exact definition of terrorism. And if in the one perspective a country or a group is labeled of terrorists, from another perspective they are given the labels of heroes. This complex phenomenon is yet to be decided which will take a long time. Here I am only concerned with the impact of terrorism on the world economy.

In recent years, terrorism has shown new prototypes, shifting increasingly from military targets to civilian targets, including individuals and business activities. Terrorist attacks pretentious both the national and the global economy. The economic cost can be largely broken down into short-term direct effects; medium-term confidence effects and longer-term productivity effects.

The direct economic costs of terrorism, including the destruction of life and property, responses to the emergency, restoration of the systems and the infrastructure affected, and the provision of temporary living assistance, are most pronounced in the immediate aftermath of the attacks and thus matter more in the short run. Direct economic costs are likely to be proportionate to the intensity of the attacks and the size and the characteristics of the economy affected. While the 11 September attacks on the United States caused major activity disruption, the direct economic damage was relatively small in relation to the size of the economy. The direct costs resulting from the terrorist attacks were estimated by the Organization for Economic Co-operation and Development at $27.2 billion ($14 billion for the private sector, $1.5 billion for the state and local government enterprises, $0.7 billion for the US federal government, and $11 billion for rescue and clean-up operations), which represented only about 1/4 percent of the US annual GDP.

The indirect costs of terrorism can be important and have the potential to influence the economy in the medium term by discouragement consumer and investor confidence. A

13 The article was published in 2006 in the magazine “Money Plus” of daily English newspaper The NATION.

deterioration of confidence associated with an attack can reduce the incentive to spend as opposed to save, a process that can spread through the economy and the rest of the world through usual business cycle and trade channels. Likewise, falling investor self-confidence may trigger a generalized drop in asset prices and a flight to quality that increases the borrowing costs for riskier borrowers. The size and allocation of the effects over countries, sectors, and time would depend on a range of factors, including the nature of the attacks, the multi-layered effects, the type of policies adopted in response to the attacks, and the resilience of the markets

Here I will continue this topic under different segment of the economy.

1- Financial marketsFinancial markets have been directly and indirectly the wounded of terrorist attacks. Striking at the core of the world's main financial center, the terrorist attacks of 11 September aimed at undermining the stability of international financial system. In the aftermath of the attacks, the financial markets were not only confronted with major activity disruptions caused by the massive damage to property and communication systems, but also with soaring levels of uncertainty and market volatility.

The bang on financial markets is usually widely discussed in the media. Stock prices are a potentially informative measure of the economic damage of terrorism. Stock prices reflect predictable future gains of a company, as well as the likelihood that these expected gains materialize. Terrorist attacks influence both:

(i) Expected profits are lower if security measures increase the costs of production and doing business, and if consumers’ fear reduces demand, like in the airline industry.

(ii) The risk premium is higher when terrorism leads to increased uncertainty about a firm’s prospects on the market. Empirically, the difficulty is in disentangling investors’ decentralized evaluation of a firm’s costs from terrorism, as reflected in the stock price, from a host of other factors.

When look for a contra factual market capitalization, one has; for example, to take into contemplation that stock prices already reflect expected terrorist attacks before any event actually occurs. Previous research, therefore, has determined on single unforeseen events or intensifications of terrorist activities. This can be taken to be a natural experiment to estimate the cost of the terrorist conflict in terms of its effect on the stock value of a sample of Basque and non-Basque firms. If the terrorist conflict was perceived to have a negative effect on the Basque economy, stocks of firms with a significant part of their business activity in the Basque country should exhibit a positive relative performance when the truce began and a negative relative performance when the truce ended. Basque stocks did indeed outperform non-Basque stocks as the truce became credible.

In a extensive event study for 14 terrorist/military attacks, returns on the US capital market are analyzed. Empirically, deviations of the Dow Jones Industrial stock index returns from past average returns (30 to 11 trading days before the event) are studied for different time frames. Military attacks in the past, like the invasion of France (May 12, 1940), or the one in North Korea (June 25, 1950), led to substantial negative cumulative abnormal returns when measured over 11 trading days. In contrast, there are no abnormal returns even on the actual day of the event of terrorist bombing attacks on Pan Am (December 21, 1988), the World Trade Center (February 26, 1993), Oklahoma City (April 19, 1995) or the US Embassy in Kenya (August 7, 1998). The single recent terrorist event, that even after six trading days showed statistically significantly negative swelling abnormal returns, was September 11, 2001. It is, however, difficult to relate the size and duration of abnormal returns to fundamental economic costs. Stock market

fluctuations are likely to be larger than the underlying changes in fundamental values, because investors also buy and sell based on expectations about others’ behavior. Some multiplier of terrorist attacks on firm values lies in the capital market itself. As far as events affect the technological performance of capital markets, for example, by episodic interbank payments, liquidity shortages can lead to reduced system stability, even with the danger of consumer panic. Recent experience with the mature US banking system, however, shows that a sufficient provision of liquidity by the central bank can prevent such potential injure. After September 11, 2001, the Federal Reserve at one point injected more than $ 100 billion in additional liquidity.

2- InvestmentThe effect of terrorism on collective consumption and savings is important as it influence the investment level and, hence, economic growth. In addition, one can conjecture that political violence not only affects the level of investments but also the composition of investments. Investments in non-traded capital goods, or non-residential construction, are mainly risky in an environment of political instability. Such investments may, therefore, be abridged more than investments in machinery and equipment if political violence increases. To analyze the impact on the composition of investments, two investment equations, one for non-traded capital goods and one for machinery and equipment, are estimated. As an increase in investment in one group has a positive effect on investments in the other category, the dynamic effect between these two categories is important in calculating the total effect. In an alternative approach, lower consumption growth and higher volatility in consumption due to terrorist attacks could be directly translated in a fraction of the level of initial consumption that households would be willing to give up in order to get a peaceful lane.

3- Foreign direct investment (FDI). Terrorism affects the portion decision of firms investing money in real foreign assets. Terrorists can fairly easily attack and damage foreign owned firms, gravely troublesome their activities. As the foreigners have a large choice of countries to invest in, even quite mild terrorist activities tend to significantly decrease the inflow of capital to a terror-stricken country. This has been well documented in the case of Spain and Greece, again using VAR methodology and quarterly terrorism data. In Spain, terrorism is estimated to have reduced annual FDI inflow by 13.5% on average for the period 1975- 1991. This translates into a decline in real FDI of almost 500 million dollars. In a similar period of time (1976-1991), Greece was plagued by two major terrorist organizations, the November and the Revolutionary Popular Struggle. Both are extreme left-wing movements. The reduction of FDI was estimated to be, on average, 11.9% annually. This translates into a loss amounting to almost 400 million dollars. As FDI is an important source of savings, investment and economic growth are negatively affected. Moreover, the transfer of technological know-how into the country is reduced, again putting a damper on growth. Thus, the economic costs are considerable.

4- Tourism. Tourists have become a recurrent target of terrorist activities in recent years, generating enormous resonance in the media. Examples are the Luxor massacre in 1997,

in which members of an Egyptian Islamic group shot dead 58 foreign tourists visiting the temple of Queen Hatshepsut in the Valley of the Queens, and the bombing of a disco inIt is argued that tighter security events for military and government facilities made tourists relatively more attractive for terrorist attacks.

Bali in 2002, costing the lives of almost 200 tourists. There is a simple underlying principle for these attacks. Individuals planning their holidays are less likely to choose a purpose with a higher threat of terrorist attacks. Host countries providing tourism services, which can be easily substituted are, therefore, negatively affected by terrorist attacks to a substantial extent. The expected reactions from consumers make the bombing, shooting and kidnapping of tourists attractive strategies for terrorists who want to inflict economic damage, when pursuing their political goals. There is a fast rising literature evaluating the effects of terrorism on tourism, focusing on the number of tourists and lost revenues in the industry. Special notice is given to substitution issues and the temporal structure of the effects. In an early, influential paper, by Enders and Sandler study the relationship between international terrorism and tourism in Spain. They use monthly data on terrorist incidents and combine it with the number of foreign visitors in Spain between 1970 and 1988, applying VAR methodology. It is estimated that a typical terrorist act in Spain scares away over 140,000 tourists, when all the monthly impacts are combined. In 1988, 5.392 million foreigners visited Spain and 18 international terrorist incidents took place. Hence without these incidents, 1.5 times as many tourists would have visited Spain in 1988. Careful econometric analyses reveal similar repercussions from terrorism on other tourist destinations. In a time-series analysis based on quarterly terrorism data and the ARIMA technique, to quantify the present value of loss in tourism revenues for a sample of European countries. According to their calculations, Austria, Italy and Greece lost $4.538 billion, $1.159 billion and $0.77 billion respectively between 1974 and 1988 (in 1988 terms, using a real interest rate of 5%). For comparative purposes, total revenues in these countries in 1988 amounted to $11.149 billion, $19.311 billion and $3.29 billion respectively. For the same period, continental Europe as a whole lost $16.145 billion due to terrorism (total tourist revenues in 1988 were $74.401 billion).

5- Savings and consumption. Apart from foreign direct investment, the investment rate is mainly constrained by the domestic savings rate. Consumption and, hence, savings rates may be affected by terrorist activity in different ways. On the one hand, political violence might increase perceived risks associated with savings, either because legal claims on assets are compromised or because individuals are prevented from spending the money their savings have earned. On the other hand, terrorism may induce individuals to place their money in safe havens rather than buy, for example, durable consumer goods. The two effects point in opposite directions; how consumption is affected by terrorism is, therefore, ultimately an empirical question. However, the empirical evidence is also ambiguous.

6- Foreign trade.

Terrorist activities can affect foreign trade in more than a few ways. First, the costs of doing business are raised by a general increase in diffidence as a result of terrorism. Second, amplified security measures in response to a terrorist campaign increase transaction costs. Third, there is the risk of a direct destruction of traded goods. The repeated attacks on oil pipelines in Iraq after the fall of Saddam Hussein, which temporarily paralyzed oil exports, are a recent example of the latter risk. Another example is the attack launched on the French supertanker “Limburg” off Yemen’s coast in October 2002. In many countries one of the largest export industries is the tourism industry. As already discussed, this industry is directly affected by terrorism. Countries targeted by terrorism trade significantly less with each other than countries not affected by terrorism. Moreover, the effect is economically large: a doubling of the number of terrorist incidents reduces the bilateral trade flows by 4%.

7- Urban economy. Terrorism may sway the relative advantage of living in a city compared to living in the countryside, and may thus have an effect on urbanization: cities can take advantage of the positive economies of scale of protecting their population. At the same time, the high population density makes cities an attractive target for terrorists. Finally, violence and terrorism raise transport costs. Transport costs can be substituted by closer physical vicinity. The last two influences are most relevant for modern terrorism, but they point in opposite directions. Similarly, cross-country proof suggests that the overall impact of terrorism on urbanization is likely to be small. While there is a positive relationship between terrorism and the extent of urbanization.

Various studies have estimated the economic effects of the terrorist attacks on September11, 2001. The direct costs consist of the annihilation of infrastructure and human capital.The collapse of the twin towers destroyed 13 million square feet of real estate, and 30% of superior office space in downtown New York. But this accounts for only 4% of the total office space situated in Manhattan. One estimate of the real and human capital costs ranges from 25 to 60 billion dollars. Another study estimates the human capital loss to be 40 billion dollars, and the property loss to be between 10 and 13 billion dollars. Yet another estimate of the total direct loss is 21.4 billion dollars. Looking at the extent of 12 Destruction relative to the overall US productive capacity indicates that the damage was minor. The estimates of between 10 and 60 billion dollars worth of damage resulting from the attacks of September 11, 2001 is relatively small compared to the American GNP of 10 trillion dollars. However, the indirect costs may be considerable. They consist of the induced cost of doing business, for instance longer waitings at airports, higher friction and transactions costs in international trade, as well as the cost of the military and civilian possessions used to fight terrorism. To achieve a momentous reduction in the probability of falling quarry to a terrorist attack is certainly expensive. The part of the economic potential that can be used for consumption today and in the future is considerably reduced. But it is impossible to attach any serious figure to these factors. This is predominantly so if the effects outside the United States are also taken into account. Based on a quantifiable general equilibrium model, it has been estimated that the indirect cost of increased economic friction in international trade is larger for other regions of the world than for North America.

8- National income and growth. Estimating the overall effect of terrorism on the economy is faced with the problem of how the economy would have developed if there had been less terrorism or no terrorism at all. To construct a counterfactual is not easy. An interesting attempt has been made for the Basque country, with a “synthetic” control region made up of other Spanish regions, but in many ways resembling the relevant economic characteristics of the Basque country before the onset of political terrorism by the ETA in the 1970s. The subsequent economic development of this counterfactual synthetic region is compared to the actual experience. The effect of general political instability (or stable political institutions, alternatively) on the growth of national income has been analyzed. The studies also address the problem of reverse causality: as argued that political instability may not only be a cause but also an effect of economic fluctuations. The same might be true in the case of terrorism. A notable study analyzing the effect of income and education on terrorism is a paper by Krueger and Maleckova

It is estimated that, after the outbreak of terrorism, the per capita GDP in the Basque country fell by about 10 percentage points relative to the control region. This gap tends to widen when terrorist activities are on the increase. If the terrorist activities by the ETA had a negative economic effect on other Spanish regions (included in the synthetic control), the GNP gap estimated for the Basque country is a lower bound. In contrast, if the terrorist activities unfocused investment from the Basque country to other Spanish regions, the magnitude of the gap is artificially increased.

Bloomberg uses a panel set with annual comments for 177 countries from 1968 to 2000. It controls for the interactions between terrorism and other forms of internal and external conflict and is therefore able to make a distinction between similar types of political disruptions. On average, terrorism (captured by the ITERATE data) is found to depress economic growth in a noticeable, and statistically significant, way. However, this effect is considerably smaller and less persistent than that exerted by external wars and internal conflicts. Spending is diverted from investment to public expenditures. Fascinatingly enough, the negative association between terrorism and economic growth is small and statistically insignificant for advanced (OECD) economies, which are most affected by terrorism. The depressing effect of terrorism on economic growth appears to be most significant for developing countries. Overall, the relationship between terrorism and economic growth can mainly be attributed to country fixed effects.

These belongings of terrorist actions on the a variety of sectors and the overall economy do not capture the total costs of terrorism. Non-market values are, by definition, excluded from these measures. The fear of individuals and the grief of the victims and the bereaved are disregarded. It follows that the damage perpetrated by terrorism may be significantly underestimated. If policy makers take the estimates discussed above seriously, they would allocate too little money to dealing with terrorism and rather use the funds and their energy for pursuing other goals.

Pakistan's Debt Crisis14

Gone are the days when one was forcefully advised, "neither a borrower nor a lender be". Ongoing is the age when either a borrower or a lender one has to be. This is more particularly true about nations which today are identified either as borrower or lender, there being no third species. Moreover, there are international credit giving agencies which lend out of the pooled funds subscribed by different nations as per arrangement.

High and rising external debt burden constitutes a serious constraint for development; a major impediment to macroeconomic stability and hence, to growth and poverty reduction; a discouragement to foreign investment because it creates a high risk environment and exchange rate depreciation; and a discouragement for government to carry out structural reforms in the various sectors of the economy. Empirical evidence suggests that external debt slows growth only if it crosses the threshold level of 50 percent of GDP or in net present value terms, 20-25 percent of GDP. Pakistan has experienced serious debt problems in the recent past and accordingly witnessed deterioration in the macroeconomic environment, leading to deceleration in investment rate and economic growth and the associated rise in the incidence of poverty.

Pakistan foreign debt is reported $43.23 billion (31 December 2008 est.) which is now crossed $ 50 billion appox. Borrowing from within and outside the country is a normal part of economic activity. Developing countries, like Pakistan, would need to borrow to finance their development; however, they need to enhance their debt carrying capacity as well. In other words, the borrower must continue to service its external debt obligations in an orderly and stable macroeconomic framework. Furthermore, the borrowed resources must be utilized effectively and productively so that it generates economic activity. Prudent debt management is therefore, essential for preventing debt crisis. Fiscal indiscipline is the root cause of rising debt burden leading to macroeconomic imbalances. A large fiscal deficit worsens current account deficit by strengthening aggregate demand which, in turn, is translated into higher imports. Fiscal discipline is therefore, vital for preventing debt crisis and maintaining macroeconomic stability – a critical element for promoting growth and poverty reduction.

Historical Perspective

The debt problem faced by Pakistan today is the result of poor economic management and deteriorating governance over the last two decades. In the 1980s, large aid flows, as a consequence of Pakistan's role in the war in Afghanistan against the Soviet Union, allowed the Government to postpone much-needed macroeconomic reforms. During the 1980s the fiscal deficit averaged over 7 percent of gross domestic product (GDP), and current account deficit averaged almost 4 percent. In addition, the nationalized commercial banks and state-owned development finance institutions were used as instruments of patronage to provide cheap credit to favored entrepreneurs and politicians.

14 The article was published in the magazine “Money Plus” of daily English newspaper The NATION.

Tariffs were kept at a high level and exports of agricultural raw materials were heavily taxed, thus ensuring excessive profits for those able to get investment licenses. Inefficient industries flourished; corruption was institutionalized; the financial sector was weakened; and loss-making public enterprises, as well as public debt, expanded.

With the withdrawal of Soviet Union from Afghanistan in the late 1980s, foreign aid flows to Pakistan declined sharply, precipitating the first of several economic crises during this period. Between 1988 and 1998, Pakistan negotiated three programs with the International Monetary Fund, but because of frequent changes of government and lack of political will these were never fully implemented. The fiscal deficit continued to average over 7 percent of GDP, and the average current account deficit increased to almost 5 percent. Public debt expanded rapidly, and debt servicing even more so because of the increasing use of expensive short-term debt to finance the external deficit, and high cost national saving schemes to finance the domestic deficit. The impact of the 1998 economic sanctions, in the aftermath of the nuclear tests, resulted in the collapse of the exchange rate and the beginning of a full-blown economic crisis. In 1998, total debt (both domestic and external) exceeded the GDP, total debt servicing accounted for 67 percent of all Government revenues, and external debt servicing accounted for 55 percent of export earnings, i.e., Pakistan's debt indicators were worse than most heavily indebted poor countries. The situation has improved somewhat since 1998, and in 2001 the ratio of total debt servicing to Government revenues had declined to 57 percent and external debt servicing to exports to 37 percent.

External debt and liabilities (EDL) at the end of March FY08 stood at US$ 45.9 billion. This represents an increase of US$ 5.4 billion, indicating a 13.3 percent increase over the stock at the end of FY07. Borrowing from multilateral and bilateral lenders accounts for

80 percent of outstanding debt, and are mostly in the form of medium and long-term debt. The share of short-term debt, on the other hand, is extremely low at 1.3 percent. Pakistan took advantage of an earlier Paris Club rescheduling to re-profile its debt at a more favorable term.

It is important to note that from a policy perspective, a critical appraisal of the external debt and liabilities should not be entirely focused on the variation in the absolute stock but, instead, it should focus on the incidence of the debt burden. The external debt and liabilities (EDL) declined from 51.7 percent of GDP at the end of FY00 to 26.9 percent of GDP by end-March 2008. Similarly, the EDL were 297.2 percent of foreign exchange earnings but declined to 127.1 percent during the same period. The EDL were 19.3 times of foreign exchange reserves at the end of FY00 but declined to 3.4 times by end March 2008. Interest payments on external debt were 11.9 percent of current account receipts but declined to 2.5 percent during the same period. The maturity profile also showed an improvement over the last eight years as short-term debt was 3.2 percent of EDL but declined to 1.3 percent during the period under review.

Outstanding External Debt and Liabilities

Pakistan’s external debt and liabilities (EDL) is comprised of all Government debt denominated in foreign currency, loans contracted by enterprises with Government ownership of more than 50.0%, as well as the external debt of the private sector which is registered with the State Bank of Pakistan (SBP) and finally benefits from a foreign exchange convertibility guarantee from the SBP. Pakistan’s total stock of external debt and foreign exchange liabilities grew at a compound average rate of just 1.2 percent per annum during 2001-07 – rising from $ 37.2 billion in 2001 to $ 40.5 billion by end June 2007. However, in the first nine months of fiscal year 2007-08, the stock of external debt and liabilities grew by 13.3 percent.

Impact of Exchange Rate Fluctuations

Pakistan’s external debt is contracted and thus denominated in multiple currencies but for accounting purposes, it is reported in equivalent US dollar. Thus shifts in cross exchange rates among various currencies, especially against dollar are translated into changes in the dollar value of the outstanding stock of external debt. The change in the outstanding stock of the external debt is normally explained through new disbursements adjusted for amortization plus revaluation impact of non-US dollar debt. During July-March 2007-08, total disbursements amounted to $ 2.065 billion and repayment of principal was amounting to $ 878 million. The net impact of these two factors increased the stock of public and publicly guaranteed debt (PPG) by $ 1.187 billion.

The rest of the net addition of $ 4.163 billion in the total addition in the external debt stock of $ 5.4 billion was the result of depreciation of US $ against hard currencies like Japanese yen (JPY), Euro, SDR and others. Pakistan benefited from the exchange rate fluctuations for many years in the past, particularly when major currencies were depreciating against the dollar. Unfortunately, in the current fiscal year, Pakistan was on the receiving end of the valuation impact. For the period July-March 2007-08, the exchange rate applied was of end-June 2007 and end-March 2008. During reporting period July- March 2007-08, US dollar depreciated against Japanese yen, Euro and SDR by 18.7 percent, 14.9 percent and 8.2 percent, respectively. Thus the exchange rate movements during the period have caused changes in the reported US dollar equivalent amount of $ 4.2 billion while net new disbursement impact was just $1.2 billion. The outstanding stock in yen alone witnessed a rise of $2.2 billion because of massive appreciation of yen against US dollar. The exchange rate variation in Euro cost an additional $915 million to the external debt.

Composition of External Debt and Liabilities Public and Publicly Guaranteed Debt

The contribution of Paris Club debt stock in total public and publicly guaranteed debt was declining since FY04, when its share in the EDL stood at 45.4 percent and by end-March 2008, its share has declined to 35.9 percent. Between FY06 and FY07, the stock of Paris club debt fell by another $ 100 million, but in the first nine months (July-March) of the current fiscal year saw a huge increase of US$ 1.8 billion dollars in its outstanding stock. Since a large chunk of Paris Club debt is denominated in Euro and Japanese yen, the recent weaknesses of the US dollar against these currencies had a significant impact in raising debt to the tune of $1.8 billion. This increase can be attributed to the exchange rate depreciation of the U.S dollar in terms of other major currencies over the course of the year.

This re-evaluation impact has adversely affected Pakistan’s Paris club debt stock. The US$ 182 million rise in the stock of other bilateral debt was principally due to higher receipts from China. The major projects for which these loans were acquired include: the Gwadar deep water port project (US$ 36.8 million) and the acquisition of railway locomotives (US$ 23.95 million).As of end-March 2008, medium and long-term public and publicly guaranteed debt amounted to US$ 40.08 billion, of which almost 53.7 percent or US$ 21.5 billion is owed to multilateral creditors and 36.3 percent, or US$ 14.5 billion, is owed to Paris Club official creditors. Medium and long-term public and publicly guaranteed debt also included US$ 1.2 billion owed to official creditors that are not represented in the Paris Club, as well as US$ 2.7 billion of international bonds and US$ 124.0 million of commercial bank loans. Public and publicly guaranteed short-term debt amounting to US$ 614.0 million was owed to the Islamic Development Bank.

Multilateral Debt

The borrowing from multilateral agencies, mainly from the World Bank and the Asian Development Bank (ADB) has outpaced the borrowing from the Paris Club since 1999-2000. Its share in total public and publicly guaranteed debt has increased from 37.5 percent in FY 1999-00 to 52.9 percent in Jul-March FY 2007-08. The stock of debt from multilateral agencies amounted to $21.4 billion by end-March 2008. A detailed analysis of recent developments in commitments and disbursement in respect of bilateral and multilateral external assistance is given in the subsequent section.

Short-term-IDB Loan

After declining substantially during 2003-04, the stock of IDB loans rose during 2004-05 but again started to decline. The short-term IDB loans are obtained largely for financing oil and fertilizer imports and the rise is a consequence of the termination of the Saudi Oil Facility (a grant that covered a major share of oil imports) in 2003-04, which coincided with the extraordinary rise in crude oil prices in the international market. Resultantly, the stock of short-term debt rose from $ 22 million in 2003-04 to $ 271 million in 2004- 05 but declined drastically to $ 25 million by the end of FY 2006-07. However, by end-March FY08, it has shot up to $ 614 million.

49.8% of GDP (2008 est.)

A Rescue Plan for a Depressed Economy15

The forecast for 2009 is clearly “economic challenge”, but the collective media assessment of 2008 is clearly “economic crisis” the past few months have been extremely difficult for the global economy. The “credit crunch” actually started in 2007 and the downturn has been apparent in many sectors and countries. From the last 12 months to August 2008, many headlines would have been very different. A year that ended with oil priced at US$37-40 a barrel also saw record highs of US$135-140. A year that saw sterling fall to record lows started with discussions about the flight from the dollar. A year that saw grandiose statements about the “reversal of globalization” and the final emergence of the “emerging economies” ended with the worst fall of Chinese stock market seeing the new Russian economic powerhouses grinding to a halt under the weight of debt. Volatility and rapid change make the task of management even harder.

Key questions for management

How can I address my immediate financial issues faster and better than my competitors?

How can I protect what I have... so my business is stronger? How can I get the most from current assets... and out perform the sector? How can I reshape my business to fit the new reality to become faster and leaner? How can I exploit the new market to find growth where others may have taken

their eye off the ball? How can I sustain my business going forward so that I am the best prepared to

cope with change?

No longer fuelled by cheap and large loans, property prices have fallen and many business models have come under great stress. Consumer spending falls and so do the prospects for employment and export-led economies. Without disputing the poor state of the economy or minimizing the real depression that many individuals are experiencing, The Times of London reported the top investment fund in the UK saw returns of 80%.

Some complexity is best not avoided. There is opportunity in the adversity of the worst of markets. Here are some key questions those are being discussed in every local or Multinational Organization.

A number of factors are impacting business around the world:

Financing costs have increased as banks tighten their lending standards.

Slowing economic growth: the IMF expects the world economy to grow on average by only 0.5% in 2009, revising its forecast down significantly. Developed economies are expected to contract to an average of -2% in 2009 — the first such

15 The article was published in the magazine “Money Plus” of daily English newspaper The NATION.

fall since the 1940s. Growth in emerging economies will slow to an average of 3.3% in 2009.

Rising unemployment and falling consumer confidence are impacting revenue growth.

Falling profits: analysts are lowering corporate forecasts as the recession bites.

Government intervention and potential regulation is changing the operation of the market. Equally, market volatility has increased significantly, making planning difficult:

Risk spreads on corporate bonds have soared to record levels and ratings agencies have downgraded many corporates, greatly increasing financing costs for firms seeking credit.

Many currencies have suffered volatility as global investors continue to assess strength of economies thus undermining financial arbitrage strategies.

Commodities and energy: the slowdown in global demand has led to a fall in commodity prices to six-year lows. Oil has fallen over US$100 a barrel based on the gloomy economic outlook and falling demand.

As a consequence, we are seeing an increase in stressed companies across the world. A record number of companies are expected to go bankrupt in 2009 with 200,000 insolvencies predicted in Europe alone — according to world’s largest credit insurer Euler Hermes. In the US there is likely to be an explosion of failed businesses as an estimated 62,000 firms go under this year compared with 42,000 in 2008. More companies are likely to breach their loan covenants in 2009 as the slowdown intensifies, prompting a surge in company restructuring and failures.

Now many companies are facing a future of great uncertainty. Time is limited and Management is stressed. Change in the market has impacted their performance and that of their suppliers and customers. It is critical that management ensures that they are going in the right direction. How badly has the company been hit, how fundamentally has their world been changed? It is critical that management ensures that they are going in the right direction. The search for understanding must be deep, broad and focused. Deep — as management seeks to it is critical that management ensures that they are going in the right direction. In surrounding firms look at the impact on customers, suppliers and critically competitors. In the primary matter short-term goal in a credit crisis must be cash.

Stress pendulum that focuses especially on the issue of cash. The primary but not the only driver of management actions is the amount of cash that the company has and is generating. If you are burning cash during a credit crisis, your priorities are clear. If you

are generating cash through operations, the opportunities are many. It is equally important to recognize that this model can be applied within many larger companies which may have business units at very different places on the spectrum. Our belief is that “one size” does not always fit all and frequently does not fit any. Management should seek to drive programs of action related to where they sit on this spectrum.

Working capital is the lifeblood of a company, and the ability to manage it becomes even more important in a downturn due to falling revenue and restricted access to new funds. Indeed the years of high liquidity and “cheap credit” initially encouraged and have now left many businesses in a highly leveraged state.

Companies need to be protected their positions by identifying and resolving serious issues quickly to protect against value erosion, or to be well placed to take advantage of opportunities. A holistic review of a company’s ability to access liquidity, manage and release cash and control costs is essential to managing overall risk from changes in market forces.

There are six key areas that companies examine to reduce expenses and support revenue growth without sacrificing corporate strategy. These are customer portfolio, contracts, finance operations, supply chain, information technology and real estate.

Customer portfolio represents more than just the people and companies to whom you sell. To a large extent it also represents your profitability. Invest in customer portfolio management.

Establish and implement a process of regular assessment and monitoring of contractual partnerships.

Organizations look to the finance function in times of downturn to provide business insight and lead the way with sound financial management. The finance function needs to be agile enough to respond effectively and drive the changing business agenda.

A large portion of a company’s expenses may flow through its supply chain so it is no surprise that a close examination can yield saving opportunities. But supply chain also presents an opportunity to increase revenue by selling into markets that may not be as affected by the downturn.

Information technology is another significant budget area for a company. As leading companies look for increased value and cost improvements there is an interest in understanding where IT investments are occurring, the value derived and the alignment with strategic objectives.

For many companies, more capital is tied up in real estate than in most other assets. Opportunities for disposal may be limited but should be explored.

Key questions to generate Cash

1. What steps are being taken to manage cash more tightly and improve cash flow forecasting? What are the potential sources for improving liquidity?

2. Are there plans in place to divest non-core businesses to increase liquidity and satisfy lenders? Is the company prepared for potential bid approaches?

3. Is there a disciplined working capital management program in place?

4. What are the objectives of cost reduction efforts? Is a cost reduction or management program needed and in place?

5. Who is at risk in the customer or supply chain? Key questions — Cash preservation and generation.

It has been observed that good risk management systems should have helped mitigate the crisis. Research in many areas has found that many companies had inadequate risk management systems, they either didn’t do risk management or did it inadequately in scope or frequency. Had these gaps been addressed, the risks would have been mitigated and the surprise minimized. Too often, however, risk management appears to have become an act of management compliance rather than the exercise of leadership judgment the wrong people looking for the wrong things at the wrong time.

The present crisis is the time for companies to form a strategic view of the risks that they are facing and build up the necessary action plans required should the event they fear actually happen. The situation is rapidly varying and can get worse. A number of the highest profile casualties of the current crisis, confidently and honestly predicted that they were through the worst only weeks before their worlds caved in. Risk management needs to be taken back from the compliance function into the boardroom.

Management needs to be attentive and lively, prepared to define their risk craving and lenience, and keep an eye on it. Keeping a company strong is not just about the bottom line, a company’s value is now defined by a wider picture where both good governance, transparent reporting and communication form an important part of investor decision making processes. Once lost, a company’s standing can be hard, and sometimes impossible, to recover. Investors have told us that in the event of a reputational problem, they expect quick, clear communication which addresses the issues and outlines the remedial action taken

How to protect your assets

What is required in many companies is a new approach to assessing the possible risks that now present themselves. This will make certain that processes are in place to ensign issues early and at the same time, and identify opportunities for getting ready for the rebound whether they are strategic growth or operational cost reduction related.

1. When was your last risk assessment conducted and has this been updated to take into account current economic circumstances?

2. Have you determined your risk tolerance? Do you have a thorough understanding of your degree of flexibility and critical assets to protect?

3. Has due diligence been re-visited for key suppliers and major contracts? What’s your “plan b” if a supplier or major contractor goes into administration?

4. What controls are in place to improve early warning?

5. What scenario planning have you conducted? What balance is there in your risk assessment? Does your organization have plans B and C in line with the above scenarios?

6. At what point will you move from short term firefighting/ cost cutting mode towards a strategic midand longer-term modelling?

A time to perform, an improvement in your performance

Management should always be seeking to maximize the effectiveness of their operations but in times of broad economic growth and profitability, this goal can sometimes be downplayed against other worthy goals of achieving market and reputation share, strengthening client relationships or long term strategic positioning. In the current market conditions, however, improving performance effectiveness becomes critical to business survival. Whilst the first response to a more difficult market is to seek to improve efficiency and by reducing costs, slowing recruitment, reducing inventory — the risk of reduced effectiveness is real. Cost cutting though difficult to achieve in reality — is frequently at best a short term solution. Leading companies, who want to win in the market longer term, cannot lose sight of the effectiveness agenda — however hard the conditions get. In addition therefore to reducing resources used they must move to reexamine the processes they adopt.

A time for change — reshaping your business

The impact of the market changes has clearly been significant — many businesses have been damaged and some business models have been radically changed.

Management must take action to change their operations and assets to reflect their new world and prospects. Whilst current economic conditions change, many long term trends do not change at all. Business models have been undergoing a deep-seated restructuring as long-term trends challenge models that have been the norm for many years. Companies are being forced to review their methods of organization due to a range of macro influences:

Diversification, globalization and (de)regulation are challenging the current organization model.

Business models need to be increasingly flexible to facilitate adaptation to changing market dynamics across both geographic and product divisions.

Niche specialists are increasingly prevalent in specific business divisions such as logistics, HR, IT and back office functions. These specialist players compete with vertically integrated businesses operating across all operating divisions, bringing their viability into question.

Innovations in information technology are facilitating the emergence of new players, new organizational models and increased competition. Even in favorable market conditions, business remodeling requires careful planning. With growing economic uncertainty, structural adjustments require an even higher level of due diligence and analysis. But the demand is, if anything accelerated rather than changed as a robust and flexible model is critical to achieving the same results in less favorable conditions.

In response to the economic crisis, companies may be tempted to put aside long term strategic plans and opt for what seem to be quick fix solutions, in an attempt to deal with burning issues. Businesses that emerge strengthened from the current crisis will be those that reshape intelligently, not those tempted to move quickly to extract additional value. They will be able to benefit from increased flexibility, which is key in these uncertain times. However, the advantages extend beyond this and represent the necessary adjustments to stay ahead and respond to the long term, underlying change in the business operating environment. In the current environment, companies need to see a discernible short-term impact of their decisions — although business reshaping can and must deliver quick fix solutions. Robust implementation processes however are critical to ensure that companies adopt sustainable models and do not increase their level of risk or impair performance. It is anticipated that the current uncertainty would lead to management delaying programs of re-shaping. Far from being frozen into inactivity, however, companies seem to be using current conditions to accelerate.

It is clear that in 2009 there will be unparalleled opportunities to acquire assets at very modest valuations. Any company with access to capital will be in a very strong position to make value enhancing acquisitions. The main question will be one of timing. Given the unprecedented nature of the current economic situation, predictions on when the economic spiral will reach a bottom are meaningless. The key attribute to taking advantage of attractive opportunities will be flexibility and preparation.

Many executives react instinctively during economic slowdowns by cutting discretionary spending across the organization. They often fail to distinguish between short-term operational and the long-term strategic programs which are still vital to build capabilities for long-term competitive advantage and future growth. Here we focus on three key themes for a sustainable future — maintaining a sustainable business model; capitalizing on growth opportunities in emerging markets and taking advantage of opportunistic deals.

A sustainable business model

In research this has been experienced has identified the characteristics that determine those businesses that are best positioned for growth coming out of a market downturn.

There are four key areas of focus; The business model Clear strategic decision-making Customer loyalty Capitalizing on opportunities in emerging markets

The business modelA successful model will be flexible and scalable (across people, process and technology) to take advantage of opportunities that emerge. It can adapt to changes in volume rapidly without being dependent on large scale recruitment, training and capital investment.As organizations find their path through the current economic downturn, many executives tend to focus on staff efficiency and headcount. In a survey, 60% reported that they were currently or planning to implement headcount reduction strategies and 42% reported benefits from rationalization programs within their companies.

The war for talent doesn’t stop during a downturn — it is exacerbated. Forward-thinking organizations can use more innovative talent-management approaches to gain a competitive advantage that can help them ride out the downturn and create a strong platform for recovery and growth. People remain a key priority. Treating them in a fair and transparent way during volatile times becomes even more important to their future loyalty. Holding on to high quality talent and capitalizing on the growing pool is often the real source of competitive advantage and sends a clear message to the market that this company is resilient.

Corporate alliances, which are growing and account for about a third of revenues at many companies, need even more care and handling during a recessionary business climate. The interdependence between companies that may be competitors with different operating styles and cultures becomes even more acute as the immediate market pressures take hold. Product development, technology and innovation budgets are likely to have been reduced under the cost reduction banner.Experience from previous downturns has been that those who stick with a focused investment program have emerged stronger than their peers. This requires a clear

understanding of where the opportunities are and in particular a heightened understanding of where the competitors are weakened through the downturn.

Clear strategic decision makingOrganizations that are successful in a downturn have absolute clarity of their proposition, strategic direction and brand positioning combined with responsive decision making.They leverage existing management information more smartly to take advantage of market changes and quickly exclude those opportunities that do not fit with the strategic direction.

Investing in customer loyaltyResponding to and staying close to your customers has never been more important for businesses than during times of economic instability. Research shows that recessionary periods provide a good opportunity to retain and develop customer loyalty through investing in and developing effective customer relationships as a vehicle for future growth. It follows on that by aligning pricing strategy and products/services to reflect the changing circumstances of customers, companies can more readily deliver a strong growth value proposition. Identifying pricing, channel and value opportunities across brands and markets, developing pricing strategies optimizes shareholder value and return on brand equity.

Capitalizing on opportunities in emerging marketsWhile most emerging markets are likely to experience slower growth in 2009, many of them are still expected to grow by 5% — a stark contrast to most developed countries. Businesses will be keen to find opportunities offering greater exposure to these markets, particularly as valuations are likely to be considerably below recent levels.

A time for actionIn times of great uncertainty and stress, there is a temptation to wait and see. Maybe tomorrow there will be more clarity as to risks, maybe things will have improved and tough decisions can be delayed. And a survey shows some evidence of that — the almost 30% of respondents who have not increased their focus on their customers, the 16% who have not begun to think about cost savings or the 40% who are taking increased time to action their plans concerning reshaping their business.At the other end of the spectrum there are those who have panicked into a burst of activity — any activity. It has, fortunately, been some time since we experienced a deep recession and perhaps some managers have not experienced market conditions that are this difficult. But our survey also saw a number of respondents who seemed to be answering “all of the above” to every list of possible actions. There is certainly no doubt that many executives are working increasingly hard, but wasted effort is more the consequence of clouded thinking than a solution to economic hardship.

From our perspective, we believe it is necessary to recognize that the crunch has happened, and that its consequences will continue to emerge. Past actions can be regretted but they cannot be reversed. The future, however, can be different and that is where management must focus:

To quickly focus on cash and your exposure to the downturn. The greater your liquidity, the greater your options and your prospects of success. Understand the impact on your clients and your suppliers. Seek to understand the impact on your competitors.

To seek to know your situation and your options. Now is the time to be serious about risk management — not as procedural compliance but as the process for evaluating future actions and consequences.

To focus on the performance of your team and your assets. When markets are tough and resources are scarce, this is the time to be ensuring that you are making both efficiency and effectiveness gains. Performance is relative — for even the most distressed of companies.

To focus on driving the changes in the organization to match the changed environment that we have entered and to deliver the performance that will shape the market of the future.

To be bold about the opportunities that does exist to fundamentally change the competitive position of your organization to not just survive the economic downturn but to thrive and build a position to rebound when conditions change.

Evil Genius of Financial Capitalism 16 16 The article was published in the magazine “Money Plus” of daily English newspaper The NATION.

The world is desperately looking for a strong financial system which can fulfill the requirements to run global economy. The Group of Twenty (G-20) met in London 2 April 2009 to discuss and possibly give direction to the global financial system. The important question is that possible to save this system even if they wanted to. The total value of global financial assets is several times the size of global gross domestic product (GDP) and almost four times the overall GDP of the European Union and even more of the United States. Here it very important to understand why the world is facing this problem what is a root cause of this financial crisis.

17

17 Courtesy: Google images

Financialisation of world’s economy has become a big threat to “real” economy. And now the task should be to understand this definancialise the economy of the world so the “real” economy can bring security, stability, prosperity, sustainability and vitality in this world.

In 1980s when Capitalism was emerged as single dominant economic system after defeating the Communism, the extremely complex financial instruments made a new way in the form of Financial Capitalism. To run this complex financial system evil genius people of finance were hired, who created some of the most complicated financial instruments, which are even now unthinkable over the vast majority of this world. Even now these evil genius are busy to develop new financial derivatives (I call them financial parasites) so that suck the scanty savings of modest households. These households were offered credit for goods and the owing of all luxuries they may not need them.

The aim has been to create as many credit holders in many forms like credit-card holders, mortgage-holders, auto-loan holders etc. the aim was to bundle their saving of hard earned money into investment instruments. If we look at this consumption-led growth which has brought the world economy into this phase of depression, the evil was hidden inside.

The majority of the people either belong to developed countries or developing countries do not need these luxuries like lavish houses, cell phones, expensive clothing, expensive cars and all sorts of these things which many of us have on the expense of our lives. But unfortunately these luxuries are made necessities which is another kind of evil genius by the marketing people.

When hard earned money of people is consumed in one of these luxuries infect, here people bundled themselves into investment instruments. And now investors has no concern either people can repay their credit money, the collected money is bundled into complex sequence of products.

Investors earn trillion-dollars profits by investing this money through investment banks and hedge funds; this is a major reason of financial crisis. In the United States which is hub of this crisis, averages of 10,000 homeowners have been loosing their homes every day. According to estimation 10- to-12 million households in the US will not be able to pay their mortgage over the next four years. The International Labor Organization (ILO) calculates that 50 million could lose their jobs as the recession deepens, as 50 million are already globally unemployed.

This portrays a very bad picture and a form of financial brutality. At the same time is a lesson for developing countries and those who are less affected by this crisis like Pakistan that do not be a keen follower of Western Financial System. This system is flayed and could not deliver even to those people who developed this system in centuries then how this could be possible to deliver poor or developing nations. This system can server only

few people or few families. The concentration of wealth in few hands is a spirit of capitalism.

Here its not end of this crisis this is going to last many years. The aftermath of crisis will also appear in other sectors of the world economy. Indeed capitalism is a permanent crisis. It is true when everything is being financialised, finance can no longer extract value. By September 2008 as the crisis exploded with the collapse of Lehman Brothers the global value of financial assets were $ 160 trillion three-and-a-half times larger than the value of global GDP.

18

18 Courtesy: Google images

In a research report by McKinsey Institute (Oct. 2008), the value of financial assets in the United States had reached 450% of GDP, which is 4.5 times of total GDP and in the European Union it stood 356% of GDP. Thus even a capitalistic logic this is undesirable economic system her amount of financial assets is four times the value of GDP.

This would be surprising information for readers that in September 2008, the total value of credit-default swaps (CDS) which give a commitment to compensation for losses on defaults stood at almost $ 60 trillion which is a sum larger than global GDP. CDS is a Made-in-America product in Sep. 2008 the outstanding debt due on CDS was over 400% of GDP.

The total value of outstanding financial derivatives (a form of debt which derive its value from other assets) and a very common financial instruments was almost 640 trillion fourteen times the GDP of all countries in the world. In the United States there have been five bailouts since the 1980s and billions of dollars from taxpayers’ money is pumped to continue its leveraging flight.

Financial markets perform two vital roles in the economy:

(1) they take money from those with no immediate use for it, such as people saving for retirement and the hereditary rich, and put it into the hands of firms and entrepreneurial individuals with productive investment ideas but a shortage of cash to finance them;

(2) They allow individuals and institutions to reapportion risk to those more willing to bear it. If Wall Street didn't exist, another method of allocating savings and risks would have to be found. One alternative is diktat, but the history of the Soviet Union and other Communist countries amply demonstrated the difficulties involved in centralizing economic decisions.

The benign view of markets owes much to three Chicago economists: Milton Friedman, Eugene Fama, and Robert Lucas. Friedman best known for his work on monetary theory and his excited support of capitalism, early in his career had played a key part in developing the "efficient markets hypothesis," which, together with its younger sibling the "rational expectation hypothesis"—see below—provided the intellectual underpinning for more than two decades of financial deregulation. Briefly put, the efficient markets hypothesis states that prices of stocks, bonds, and other speculative assets necessarily reflect everything that is known about economic fundamentals, such as inflation, exports, and corporate profitability. The proof proceeds by contradiction.

Suppose stock prices have risen above levels justified by the fundamentals. If stocks fall below their fundamental value, speculators will step in and buy them.

Friedman actually formulated the efficient markets hypothesis in an analysis of currencies. It was Fama, one of his students, who applied it to the stock market and pointed out an interesting consequence: if stock prices already reflect everything that is known and knowable, then investors can't hope to outperform the market using trading strategies based on publicly available information. Rather than wasting time and effort trying to pick individual stocks, they would be well advised to place their savings in a broadly diversified mutual fund that tracks the daily movement of the market. Largely thanks to Fama and his followers, so-called index funds today have a central part in many Americans' retirement planning.

Lucas, the third member of the Chicago triumvirate, was arguably more influential even than Friedman. In a series of clever papers published in the 1960s and 1970s, he and several colleagues extended the hyperrational methodology underpinning the efficient markets hypothesis to other parts of the economy, such as the job market, the output decisions of firms, and the formulation of economic policy. By the time they were done, Lucas et al. had invented a new way of doing macroeconomics, known as the rational expectations approach, which enshrined in higher mathematics the stabilizing properties of unfettered markets. You don't have to spend much time in any financial market to recognize that expectations are what drive the markets. If investors anticipate good news, they buy; if they expect bad news, they sell.

Where, though, do these economic expectations come from? According to Lucas, they reflect a predefined, externally grounded, and commonly agreed upon reality. In his models, the economy's equations of motion are well defined and known to all—from Ph.D. economists at the University of Chicago to nurses and cab drivers. Utilizing this common knowledge, people form "rational expectations" of things like inflation and interest rates. They don't always get things right—a certain amount of arbitrariness is allowed for—but they are prohibited from making methodical errors. If in one period the economy gets out of sync, in the next period it jumps back to the "equilibrium" defined by the model.

Not content to create new models, Lucas also disparaged older theories that viewed financial capitalism more skeptically. Keynesianism wasn't merely wrong, he declared at one point: it was no longer intellectually respectable.

On the side George Soros who has been an active investor for more than half a century. He was already a leading hedge fund manager. Not many people understood hedge funds back then, but for those in the know Soros's Quantum Fund, which he founded in 1973, was the model: year after year, it had achieved returns in excess of the broader market. Soros had neither the inclination nor the technical ability to challenge the Chicago school's formal arguments. What he does have, however, is voluminous amounts of firsthand knowledge gained in the financial markets, together with a keen interest in formulating a theory on the basis of his observations. Academic criticism on his fist book

The Alchemy of Finance didn't put him off that effort. "My conceptual framework remained something very important for me personally," he writes. "It guided me both in making money as a hedge fund manager and in spending it as a philanthropist: and it became an integral part of my identity."

Outside the idealized world of Lucas's theory, knowledge is imperfect, people stick to wrongheaded ideas, and there is no agreed version of how the economy works. In these circumstances, Soros rightly points out, economic expectations, even biased ones, can help to determine economic fundamentals.

One way to grasp what Soros is saying, “Reflexivity can be interpreted as a circularity, or two-way feedback loop, between the participants' views and the actual state of affairs. People base their decisions not on the actual situation that confronts them but on their perception or interpretation of that situation. Their decisions make an impact on the situation (the manipulative function), and changes in the situation are liable to change their perceptions (the cognitive function).

This was very important to understand these conceptual works of Financial Capitalism but now leaving the academic discussion of both, The Chicago School of Economics and a leading financer George Sores one ordinary person either belongs to East or West judges a system upon its deliverability to the society. Financial Capitalism and the way it works does not satisfies, now this is need to definancialise the major economies and economic activities should be backed by physical assets rather by fake assets.

Economic Landscape and Islamic Banking19

Economic landscape of the country continued to show varied trends during January ’10. Amongst the macro-economic indicators, country’s trade deficit registered a decline of 21.99% as compared with the same of the last fiscal year. According to the figures, trade imbalance was registered at US$8.44bn from July’09-Jan’10 as against US$10.83bn in the same period of FY’09. During the first seven months of FY’10, exports showed a slight increase of 0.46% as compared with the same period of FY’09. During this period, exports reached US$10.87bn as compared to US$10.82bn a year earlier. On the other hand, the country’s imports showed a decline of 10.77% and totaled at $19.32bn in July’09-Jan’10, as against US$21.65bn during the same period last fiscal year. Trade deficit is said to be improving as exports grow despite the gas and power load shedding while imports decline – all in all, taken as a positive sign.

Remittances from abroad continued to show a rising trend; US$5.20bn was received so far in FY’10 as against US$4.28bn during the same period of last fiscal year, translating into an increase of 21.53%. During January’10, a sum of US$667.90mn was received as compared to US$637.30mn a month earlier, up by 4.80%.

On the revenue collection side, the government continued to fail in meeting its revenue collection target. According to provisional tax collection figures for January ’10, the collection again missed the target of PRs124.00bn by a considerable PRs20.00bn and stood at PRs104.00bn. Going forward, the economy is still exposed to an array of endogenous and exogenous risks like rising international commodity prices and prevailing structural weaknesses e.g. energy crisis giving way to more inflation, dubious political and law and order scenario affecting overall economic environment, substantial resource gap in terms of inadequate revenues to cover expenditures and resultant fiscal slippages and diminishing options to finance them and other significant investment requirements in infrastructure.

SBP announced its monetary policy during the month under review keeping its discount rate unchanged at 12.50%, in line with its cautious easing of the monetary policy given inflation concerns stemming from rationalization in utility prices and the lack of visibility with regard to external inflows from “Friends of Democratic Pakistan” pledges. Headline

19 The article was published in the magazine “Money Plus” of daily English newspaper The NATION

inflation increased for the third consecutive month on Y-o-Y basis as it rose to 13.68% in January’10. On M-o-M basis, this rate has risen by 2.42% on the back of several factors including an 18.00% hike in gas prices, a 12.00% rise in power tariffs and on an average 8% surge in petroleum prices. During the month under review, the WPI increased by 4.23%, from 221.43 in December’09 to 230.80 in January’10. The spike in inflation is likely to spill over into February’10 on account of the hike in domestic end-user oil product prices, lower base effect of Food inflation and the second round impact from the 16.50% hike in power tariffs over this fiscal year.

KSE 100 index gained 2.42% during the month under review, closing at 9,614.19 points; on the back of rise in heavy weights and upcoming results season, the market touched the 10,000 level twice in intra day trading during the month. It touched a high of 9,954.41 but, unable to sustain these levels, it lost 3.42% on the last trading day of the month. Trend of political undercurrent, continued insurgency in the country, fears of law and order situation and NRO judgment issues were factors affecting the local bourse in the later half of the month. Further, poor performance of companies also hampered investors’ sentiments.

Average daily volumes stood at 187.18mn, while the top traded scrips for the month were LOTPTA, FFBL, PTC, JSCL and TRG; amounting to 33.16% of the month’s total volumes.Foreign investors remained in the market with net investments of US$4.79mn during the month, heavier on the buy side with purchases worth US$17.16mn and sales of US$12.36mn. The net foreign investment in the country in the seven months of the FY’10 fell by 34.40% to US$1.47bn as with US$2.23bn in the same period of FY’09. Out of total foreign investment, foreign direct investment fell 54.60% to US$1.17bn in the first seven months of FY10, from US$2.59bn in the previous year. The foreign portfolio investment flows however reversed with a US$290.70mn inflow in FY’10 so far compared with an outflow of US$355.80mn in the same period of the last fiscal year.

During the month under review, MIF constituted the highest fund size of PRs4.46bn and grew by 2.48% from last month. MCF displayed the highest increase in fund size on M-o-M basis, from PRs3.28bn to PRs4.42bn in the current month, translating into a monthly return of 10.49% while MCF yielded the highest annualized return of 10.09%

increase of 34.95%. With in the Islamic income and cash funds, POAIIF showed a

Under the other remaining categories of Islamic Equity and Asset Allocation funds, MIF yielded both, the highest monthly and annualized return of 3.81% and 36.03% respectively.

increase of 34.95%. With in the Islamic income and cash funds, POAIIF showed a

Under the other remaining categories of Islamic Equity and Asset Allocation funds, MIF yielded both, the highest monthly and annualized return of 3.81% and 36.03% respectively.

Capitalism: A Flawed System20

In an interesting book by John Girling, Corruption, Capitalism and Democracy, the author suggested that there is an inherent contradiction, or clash, between the public service ethos of democracy and the private gain imperative of capitalism, resulting in corruption wherever the latter is not held under strong control.

‘Corruption’ represents the normative perception of capitalist ‘excess’: the culmination of the systemic process of collusion among economic and political elites that results contrary to democratic theory in the ‘re-confusion’ of public and private spheres.

Normative definition provides the starting-point from which to consider two major forms of corruption: corruption in relation to democratic theory and historic practice (‘power corruption’) and in relation to democratic practice in the age of capitalism (‘political-economy corruption’). The implications of normative definition point, first, to the modern distinction between ‘public’ and ‘private’, which is basic to legal-rational politics and administration; and second, to the debate over restricted (legalistic) definition or broad (social) definition of corruption.

The normative element in the notion of corruption remains crucial. It explains Lord Acton’s well-known aphorism, ‘Power tends to corrupt, and absolute power corrupts absolutely’, which stems from his belief in ‘conscious rectitude’ as the abiding standard of judgment of all persons in authority. Acton’s rather simple assumption that democratic (and ethical) constraints on the power of rulers will reduce the tendency to corruption has of course only partially been borne out in practice. Nevertheless, the two essential conditions that he proposes— checks on power and high moral standards—had, and still have, a strong public appeal, both in the West and in the developing world.

The prevention of absolutism by a complex system of checks and balances, for instance, is characteristic of American democratic pluralism, under which executive power is offset, or even fragmented, by a separately elected legislature, the influence of voluntary associations, and the federal system. Even so, the corruption of American office-holders was a byword in the nineteenth-century heyday of voluntarism and laissez-faire (that is, the supposedly ‘arm’s length’ relationship between wealth and power). In an American scenario, corruption points out the urban political ‘machine’, in particular, has been part of an entire system of electoral and financial influence, in which legal patronage, pork-barrel legislation and lax regulation of city-based business interests are also important features.

It is evident, then, that neither the existence of ‘checks and balances’ nor insistence on ethical performance necessarily leads to ‘honest’ government serving the ‘common interest’. Yet the moral aspect is, crucial to the explanation: corruption is defined normatively, as a ‘deviation’ from the public good. Now, the expansion of democracy,

20 The article was published in the magazine “Money Plus” of daily English newspaper The NATION.

itself normatively defined—‘government of the people, by the people, and for the people’, in Lincoln’s famous phrase—has enhanced that definition, by sharpening the distinction between ‘public’ and ‘private’. For, in a democracy, politicians become ‘people’s representatives’ and bureaucrats ‘public servants’ precisely because these functions are deemed to be conducive to the common good. Corruption— ‘improper’ behavior—denotes deformation of this norm. It is the abuse of public office, for private gain, that constitutes corruption. Complementing the normative definition of corruption, a distinction can be drawn between the ‘morality of wealth’ (individual freedom and initiative) and what we have seen to be the ‘morality of power’ (responsibility for the common good). For the morality of wealth concerns the individual producer (the unproductive are discounted) and the individual consumer (freedom of choice). The morality of power, to the contrary, emphasizes the role of the state in achieving social goals. The ‘perversion of power’ is its negative side: the abuse of political power for private ends, or ‘power corruption’ in Acton’s terms. Similarly, the perversion of wealth is the abuse of economic power, which takes the form both of exploitation of the powerless (so-called ‘free labor’) and penetration of the (ostensibly independent) political system: that is, political-economy corruption. Paradoxically, democratic theory and democratic institutions, which were expressly designed to counter power corruption, have for this very reason (the almost exclusive concentration on politics) fallen easy victims to political-economy corruption—precisely because of the practical need, theoretically disavowed, for an accommodation between political and economic systems.

Two major characteristics of political-economy corruption, emphasized by a French analyst in an illuminating study, are corporate funding of the political process; and the penetration of market values into the social and political spheres. The dramatic evidence of these two features, revealed in major scandals from Italy to Japan, points to the systemic character of corruption, rather than as being simply a matter of individual responsibility, assumed by the legalistic definition of corruption. The implications of these two different perspectives are of great significance. They can be set out broadly in this way:

• Social character of corruption: capitalism-democracy interaction: importance of values; • Individualistic character of corruption: theoretical disregard for the interaction in practice of economics and politics: importance of procedures.

The systemic or dynamic conception of corruption is meaningful only in terms of the whole society; the individualistic or static conception only in terms of breach of legal procedures. The latter is inadequate, in my view, in understanding the interaction of democracy, capitalism and corruption in modern society. The difference between the two conceptions is therefore central to the discussion that follows. First, I consider the modern ‘re-confusion’ of public and private, resulting from the growth of government and the ascendancy of capitalism; second, the distinction between substantive and procedural definitions of democracy; correspondingly, third, the normative and positivist definitions of corruption; fourth, the social context of capitalism, democracy and corruption, that is, the interaction of economics, politics and values (here, normative

conceptions of society); finally, fifth, this social interaction points to, and returns to, the systemic rather than aberrant character of corruption.

First, the conditions of modern democracy have given rise, specifically, to corporate political funding and, generally, to the penetration of market values, because ‘public’ office has expanded greatly, in regard to the functions of politicians and the scope of government activity. The latter requires an elaborate centralized administration, financing important public works and welfare programmes; while the competitive growth of political parties involves increasingly costly electoral contests. At the same time, moreover, the opportunities for ‘private’ gain legitimate or otherwise have increased exponentially under modern capitalism. It is the resulting ‘overlap’ of capitalism and democracy— the re-confusion of private and public—that creates the ‘tendency’ of unchecked power to corrupt.

Corruption reflects this clash of values. ‘Public service’ is the raison d’être of officials: to serve the common interest, as defined by the electoral majority and its political leadership. The raison d’être of the capitalist system, to the contrary, is private profit, derived from the operation of a competitive market. Market values guide behavior. Thus, buying voters, legislators and state officials is ‘good business’ if it produces cost-effective results. Obviously such a procedure, from the normative standpoint of democracy (the sovereignty of the people) is corrupt: it is a deformation of the norm. Yet, in realistic terms, the economic system has an undeniable impact on the political, who in democratic theory it should not have: it should be the other way round. One way of bridging the gap between theory and practice is by establishing either legal or ‘acceptable’ (informal) channels of influence between wealth and power; corruption is another way.

Such are-confusion’ of public and private, which undermines the very basis of modernity (the ‘legal-rational’ requirements of effective public administration) raises, in the second place, the crucial question of

In the light of the drip-drip of revelations over recent weeks and months about the behaviour of business leaders, particularly in the financial institutions, a number of commentators have suggested that what has been demonstrated is that unregulated capitalism will become inherently corrupt, as the instincts of the key movers and shakers in a capitalist economy are corrupt and they are only held in check through effective regulation.

The ideology of unfettered markets promoted over the past three decades must now be judged a failure. The era of liberalisation contained seeds of its own downfall in the form of tendencies such as frenetic financial innovation and bubbles in asset prices. Naked greed, lax regulation, excessively loose monetary policy, fraudulent borrowing and managerial failure all played a role in bringing about the crisis. Richard Layard of the London School of Economics weighs while arguing that “we should stop the worship of money and create a more humane society where the quality of human experience is the criterion.”

Amid the worst financial and economic crisis in decades, the world tends to get caught up in the daily fluctuations of the stock and commodities market. Tackling the crisis and planning for the post-crisis order requires political leadership. Even more important, it demands international co-operation. In this respect, networks matter as much as individuals. What are the patterns of co-operation that have so far emerged; who are the most influential movers and shakers; and how can they restore the confidence necessary to turn the tide?

It could be thought that the news over recent times gives strong credence to that argument. How can anyone justify the apparent lunacy into which financial institutions slipped for no better reason than the maintenance of bonus payments for managers; or what we have just heard about personal (but carefully disguised) loans by a bank to its chairman? Not to mention all the stuff we discovered a few years ago about Enron and WorldCom.

And yet, it is facile to suggest that corruption is somehow symptomatic of capitalism, or even of capitalism only. When the Soviet Union and its satellite states went under in the early 1990s, one of the initial things we discovered was the systematic corruption which had pervaded the upper levels of the system. Furthermore, we know that a number of countries with authoritarian but left-leaning governments (Zimbabwe being an extreme example) have demonstrated huge and often violent levels of corruption.

It seems to me that corruption is always a risk that we run, under any system of government, when there is a sustained period of untroubled economic or political development, such as a sustained boom in a market economy, or a dictatorship without any visible or effective opposition. Recent events have demonstrated the need for vigilance, but perhaps also suggest that every so often a disturbance is needed to clean out unacceptable practices and wholesale lapses of ethics. And while of course it is a disaster when a recession deprives people of jobs and security, it may at least have the side effect of pushing to the surface the  reprehensible behaviour of those who have become arrogant.

The sometimes suggested response – greater levels of regulation – is not always ideal, as its main effect tends to be to bureaucratise behaviour and inhibit initiative; but vigilance is always needed, and the determination to ensure that corruption is never accepted as one of the normal characteristics of public or private conduct. And no system can afford the complacency of a belief that it is immune to such risks.

A “Creative” Form of Naked Capitalism 21

A demoralizing role of Hedge Funds in Financial Crisis

In fact the markets for stocks, bonds, commodities, futures, options, currencies, mortgages, money markets, are now one huge market. The hedge funds use these all tools of Options, futures, swaps, forwards, other derivatives, and all tools of hedge funds, are only the buyer betting that something will go up and the seller that it will go down; neither has a stake beyond the gamble.

The $700 trillion derivatives-hedge funds market is leveraged anywhere from 35 to 70 times. For example Citibank was leveraged at 280:1; the $2 trillion derivatives crisis at Citibank required that they be essentially nationalized. With close to $3 trillion pledged to throw at what could easily be a $10 trillion or even a $30 trillion problem, we have yet to see if money circulation increases or if investors running for the exits reduces the circulation of money (effectively destroying it) faster than money is thrown at the problem.

A major loss such as Bear Stearns was facing, those investors cannot pay up, hedge costs jump, and that bankrupts more derivative funds. As they are not paid, the intermediary bank cannot pay the winner of that bet so they go broke. The unpaid winners of those bets are on margin so they go broke. Just like Mafia betting, those who loaned the money for those bets go broke because nobody is able to pay them. Thus the Federal Reserves of USA engineered the $30 billion plus rescue of Bear Stearns-JP Morgan to prevent a total meltdown of the then $526 trillion hedge fund-derivatives market which would have extinguished the entire banking structure operating those hedge funds off book. The little problem at Bear Stearns was just a little bump in the road. In the consequence America’s 20 largest banks were essentially bankrupt and being kept afloat by the Federal Reserve.

The history of speculations in options, futures, and other simple bets are dwarfed by the derivative markets of the late 20th to early 21st century which evolved to bypass the market’s margin limitations.

Long-Term Capital Management’s bankruptcy crisis in 1998 uncovered the unsettling reality that “this small hedge fund with a capital base of only $2 billion had over $1 trillion in bets in the derivatives markets, betting primarily on the Russian Ruble whose value had been successfully destroyed. This was a margin of only 0.02% and many of the estimated 400 other hedge funds then operating would have had similar slim margins bet on similarly volatile currencies.”

By late 2007, derivatives bets by the then 10,000 hedge funds created a $416 trillion house of cards, eight times the GDP of the world economy, which climbed to $526 trillion even as 20 of America’s largest banks were facing insolvency and the world economy was shrinking.

21 The article was published in the magazine “Money Plus” of daily English newspaper The NATION.

The $200 billion written off by the banking system in February 2008, means roughly a $2 trillion shrinkage in circulating money (circulation of base money is the money supply).

So a financial bubble dependent upon continued expansion can unwind very fast and these same banks are now considered to have at least $800 billion more in bad paper to write down. For that to happen would mean a $20 trillion shrinkage in circulating money (the money supply) which would be a total collapse of the economy.

Thus it is obvious why the Federal Reserve/Treasury is desperately bucketing money at those banks and other sectors of the economy.

To avoid throwing “the world’s financial markets into turmoil … bankrupt hundreds of hedge funds … wipe out big-name financial institutions … sabotage the investments of pension funds … and scramble the portfolios of millions of average investors,” the world’s central banks are pushing huge sums of created money at the financial markets. All aspects of the markets “have become chips in a casino game, played for high stakes by people who produce nothing, invent nothing, grow nothing and service nothing.”

Sharp traders have leveraged world markets with stock and currency options, futures on options, meaning options on options, futures on interest rates, warrants, a form of option, and thousands of other similar subdivisions of instruments, called derivatives, designed to lay claim to wealth properly belonging to your, me, and all other productive citizens.

Hedge funds betting on everything in the markets, and sometimes outside the market (weather for example) will go, leveraging those bets up to 70 times (meaning betting with borrowed money) and, as said above, doing all this to the tune of $526 trillion worth of derivative bets is what has all markets of the world holding their breath.

The collapse of the huge housing bubble in America triggered the crisis but was not the cause. Interest rates were kept low, borrowers with poor credit or no credit were loaned money on houses that were rapidly appreciating in value due to those lax standards.

Speculators were borrowing against their homes to buy more expensive homes and condominiums which were rising 10 to 20% a year in price. Most of those speculators started out with good credit. But when the rise in home prices topped out and the bubble burst they were stuck with paying mortgages on homes priced higher than their mortgage.

Those subprime loans were sold to Fannie Mae and Freddie Mac, the primary financing for home loans, and others. The two FMs, banks, and other traders packaged those subprime loans in with prime loans, gave them a triple A rating, and sold those bundled debt instruments, collateralized debt obligations (CDOs) and structured investment vehicles (SIVs), etc, on the markets. Those toxic debt instruments functioning as bonds were bought by investors worldwide.

Problems arose when word leaked out that many of the debts within those bonds were uncollectable. Quickly the markets seized up. The forced revaluations became the first $200 billion dollar write down of major banks addressed above.

Central bank funds pouring $2 trillion to $3 trillion at the ethereal world of high finance instead of at the real economy indirectly includes those hedge funds. If these publicly provided trillions of dollars do not turn the financial markets around, those central banks will have to loan directly to the real economy, a right that, in an emergency, the U.S. Federal Reserve has always had. If investor and consumer confidence collapse, those funds distributed, not loaned, directly to consumers and which may be required to restart the economies.

This would be interesting to notice that Wall Street bankers used the above described derivative tools to crash the Japanese land and market bubbles and vulture funds bought up Southeast Asian properties. By printing ¥35 trillion in 2003-04, equaling $50 for each person on earth, which was converted to dollars to buy US treasuries, Japan partially evened the score.

It is also important to understand where derivatives and hedge fund monies come from. One must start after the last financial crash which typically destroys massive sums of unearned wealth.Here we will be challenged because entrenched wealth has a larger share of a nation’s wealth than in normal times. But entrenched wealth owners are essentially non-producers. It is the knowledge and talents of productive manager-owners and labor who rebuild a society after a financial crash. In that process, they own the largest share of increased wealth.

After the Great Depression, entrenched wealth slowly increased their excess rights and kept claiming a larger and larger share of the wealth produced. In fact between 1974 and 2000 entrenched wealth claimed all the wealth created by efficiencies of technology, about 30% gain per decade, plus a part of what once went to labor. Labor was lower paid in 2000 while entrenched wealth had increased their annual profits by roughly 75%.

Under current property rights law as applied to nature’s resources and technologies, denying others their rightful share, unearned finance capital piles up higher and ever higher. Much is exported buying up properties around the world. Much of it bids stocks up higher and ever higher. And there is still more unearned finance capital than can be safely invested.

More gambling games must be devised to absorb all that massive finance capital that has no place to be safely invested. Thus hedge funds and the derivatives market, totally zero sum games, meaning they produce no wealth, grew like mushrooms. Before an economy can rebalance and care for everyone somewhat equally, an economy must crash and destroy massive sums of that unearned wealth. That is happening in the current, 2008-09, financial crash.

Protecting their wealth and power, private bankers, having control of Federal Reserve policy even though it is socially owned and are pointing all created money at that unproductive ethereal world of high finance. But that financial balance cannot last long. Wealth has not been redistributed, massive finance capital with no safe to invest still exists, and these massive unearned sums will resume accumulating. Hedge funds, derivatives, and other non-productive endeavors–will rapidly expand, and another financial crisis will be upon us.