seminar notes 1

8/10/2019 Seminar Notes 1

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FISCAL POLICY

What is Fiscal Policy?

The use of the government’s tax and spending policies in an effort to influence the behavior ofsuch macro variables as GDP, National Savings, Investment, Emploment and Economic

Gro!th"

According to Pakistan Economic Survey

#iscal polic is an instrument of economic development that can have ma$or impacts on incomedistribution and povert through taxes, public borro!ings and public expenditures"

#iscal Polic is concerned !ith all those arrangements !hich are adopted b government tocollect the revenue and ma%e the expenditure so that economic stabilit could beattain&maintained !ithout inflation and deflation"

Scoe

#iscal polic considers'

(" Imposition of taxes

)" Government expenditures

*" Public debt

+" anagement of public debt

O!"ectives

The ob$ectives of fiscal polic are to'

(" Promote savings, investment and economic gro!th

)" Influence the consumption pattern

*" -aise the emploment level

+" -edistribution of income

." Price stabilit

Instruments o# Fiscal Policy

The instruments of fiscal polic are'

$% &a'es

Taxes are compulsor contributions of !ealth levied upon persons, natural or corporate, to pafor the expenses incurred in conferring common benefit upon the residents of the state"

Taxes can be classified as'



Direct Taxes

Indirect Taxes

(irect &a'

• / direct tax is a tax !hose impact and incidence is on the S/E person"• Impact means that the initial burden of the tax is on the one !ho first pas the tax"• Incidence means that the burden is on the one !ho finall pas the tax and cannot pass

this burden to someone else"• #or example, !hen an individual pas income tax, he cannot shift the tax burden to

someone else as he is being taxed for his personal income" Thus, he bears the impact as!ell as the incidence of the tax"

Indirect &a'

• /n indirect tax is a tax !hose impact and incidence is on a DI##E-ENT person or entit"• #or example, if a tax is imposed on sugar, the dealer !ho first pas it, charges it from the

next buer till ultimatel it is borne b the final consumers of sugar" Thus the tax has been shifted"

)% Su!sidies

• onetar assistance granted b a government to a person or group in support of anenterprise regarded as being in the public interest"

*% (e#icit Financing

• Government borro!ing from various sources including central and commercial ban%s"

+% &rans#er Payments

• Paments made b a government to individuals for !hich the individuals perform nocurrent service in return, such as unemploment allo!ances, stipends and scholarships"

Structure o# ,udget

The federal budget plas a %e role in fiscal polic formulation as it prioriti0es the government’sexpenditures for a given ear and the sources of revenue needed to finance these expenditures"

The budget is composed of t!o parts, namel'

-evenue 1udget

2apital 1udget

-evenue ,udget

-evenue budget consists of total revenue 3tax and non tax4 and largel current expenditure !hichis essentiall public 3government4 consumption" 5hen !e tal% of budget deficit or surplus !etal% of revenue budget 6N78 because the total overall budget must balance"

Total revenue is e9ual to'



-evenue -eceits .net/ 0 &otal ta' revenue 1 non2ta' revenue 2 trans#ers to rovinces

&otal E'enditure 0 Current e'enditure 1 develoment e'enditure

,udget Surlus

1udget surplus is the amount b !hich a government, compan or individual:s IN26Eexceeds its spending over a particular period of time" ;ence, budget surplus < excess of totalrevenue over total expenditure"

,udget (e#icit

The amount b !hich a government, a compan or individual:s SPENDING exceeds its incomeover a particular period of time"

This is also called deficit or deficit spending"

3ence4 !udget de#icit 0 e'cess o# total e'enditure over total revenue%

Sources o# Financing ,udget (e#icit

Internal sources

a" 1orro!ing from the ban%ing sstem such as the State 1an% and scheduled ban%s"3inflationar4

b" Non ban% borro!ing such as National Savings Schemes also %no!n as borro!ingfrom people"3 non inflationar4

E'ternal sources

a" #oreign 7oans & borro!ing

b" Grants

c" Debt -escheduling

d" Privati0ation Proceeds



-easons #or Pakistan5s Fiscal (e#icit

-easons #or Lo6 -evenue 7eneration

$% 8arro6 ,ase and Lo6 &a' to 7(P -atio

•

Pa%istan’s public finances are primaril dominated b a stagnant tax=to=GDP ratio"• The current ratio stands at >".? !hich is one of the lo!est in the !orld"• In comparison, Sri 7an%ans pa (. ? of their GDP in taxes, Indians pa (@ ?, Tur%s pa

)+ ?, /mericans pa )> ? and S!edes pa .A ?"

)% &a' E'emtions

• The lo! contribution of agriculture and services sectors in the tax=to=GDP ratio pointsto!ards immediate need of documentation of these untapped sectors"

• #1-’s first 9uarterl report for the ear )A((=() identified @> activities&commodities that!ere exempted from the lev including local sales and imports of textile, leather, sports,surgical goods, carpets and fertili0er products"

*% &a' evasion

• /ccording to a report b the 2arnegie Endo!ment for International Peace Bfe!er thanthree million of Pa%istan’s (@. million citi0ens pa an income taxesC and out of the >million adult populations onl )". million are in the tax net"

• /ccording to a conservative estimate, tax evaders annuall deprive the countr ofrevenue of over (A billion"



+% Leakages

• 7ea%ages and loopholes in the tax structure need to be plugged in to bring the informal &underground econom into the tax net"

• It has been estimated that the informal econom currentl exists in the range of *A=.A ?of the recorded GDP in Pa%istan and there are studies that sho! that it is expanding"

9% -egressive in 8ature

• Taxes in Pa%istan are regressive in nature as indirect taxes constitute the ma$orcomponent of the tax revenue"

• This results in the tax burden falling more heavil on the poor than the rich"

-easons #or 3igh E'enditures

$% (e!t Servicing

• Pa%istan’s current public debt est" is *? of GDP, i"e", ()"F trillion in #8()"

• To service this debt, a ma$or chun% of revenues is dedicated to ma%ing heft paments inrespect of debt obligations"

)% (e#ence and the War on &error

• Pa%istan has been heavil burdened b the cost of fighting Taliban insurgents along its/fghan border !ith the countr’s defense expenditure" amounting to -s" *@>"( 1illion in#8 )AAF=)A(A"

Agenda #or ,udgetary -e#orm

It is 9uite clear that the current state of public finances is ver serious and unsustainable, and the

budgetar problems of the countr are deep rooted" The follo!ing structural reforms arerecommended to reduce the si0e of the deficit'

$% 7ood 7overnance

The first essential re9uirement for launching a program of sound long term economicmanagement in Pa%istan is the emergence and continuation of good governance, and of acompetent, stable and sincere government that'

a" adheres to the rule of la!

b" promotes social and economic $ustice

c" adopts austerit measures

d" strengthens institutional frame!or% and ta%es the nation into confidence forimplementation of tough economic polic choices

)% (ocumentation o# the Economy

• There has been a general resistance from po!erful lobbing groups to the documentationof the econom as !ell as lac% of serious effort to develop a program for documentation



on the part of the tax authorities, and both tax paers and tax collectors have ta%en undueadvantage of this vacuum"

• / genuine effort needs to be made for documentation of the econom and to improve thereporting sstem to the tax authorities for self=policing and for the introduction of chec%sand balances"

•

Documentation !ould expand the tax base, reduce tax evasion and improve taxcollection"

*% :niversal System o# Income &a'

• It is important for the government to overcome the constitutional and other hurdles in the!a of introduction of a universal sstem of income tax that covers all incomes atrelativel lo!er tax rates and that ensures progressivit in effect"

• Income taxation must be based on the universal principle of e9ual taxation of all at thesame income level 3hori0ontal e9uit4 and higher tax pament as a percentage of incomeat higher income levels 3vertical e9uit4"

• The agriculture and service sectors have so far escaped income tax paments and thus the

bul% of the econom is not even covered b income taxation"

+% &a' La6s

• Tax la!s must be simplified tax administration improved and tax lea%ages andcorruption controlled"

• Several studies indicate a substantial revenue generation potential of measures to plug thetax loopholes, improve tax administration and reduce the collusion bet!een tax paersand tax collectors that costs a heav revenue loss to the government"

• /n expansion of the tax base and lo!ering of tax rates and plugging of tax loopholes !illgo a long !a to improve tax collection and also increasing effective tax rates at alllevels"

9% Overhaul o# -evenue ; E'enditure Structure

• / long term program of a complete overhaul of the revenue and expenditure structure atall levels of government and public corporations !ould have to be carefull andtransparentl developed !ith a consensus b all political parties and sta%eholders"

<% Provincial E'enditure

• The current trend of unlimited appetite to spend of the provinces !ith no effort at all tomobili0e resources needs to be reversed"

• The provincial revenue base should be expanded and higher expenditure on health,education, provision of basic services and povert alleviation should be directl lin%ed!ith mobili0ation of resources at the local and provincial levels"

=% (ismantling the :nderground Economy

• The large underground econom must be dismantled and graduall brought in the tax net"• Smuggling, blac%=mar%eting and tax loopholes need to be effectivel dealt !ith and

policies reformed to ma%e the underground activities less attractive"



ECO8O>IC PLA88I87 I8 PAIS&A8

What is Economic Planning

“The making of major economic decisions, what and how much is to be produced and to whom it is to be allocated by the conscious decision of a determinate authority, on the basis of acomprehensive survey of the economic system as a whole.”

Imortance o# Economic Planning

$% (ecisions o# the Planning Authority are Suerior@

The planning authorit has a better insight into the economic problems of the countr" It canmobili0e and utili0e the available resources in the best interest of its citi0ens"

)% Coordinated Programme

In a countr there are millions of persons !ho are engaged in economic activities for earning

profit" The decisions ta%en b some of most of them ma be short sighted, irrational, self=frustrating and sociall disastrous" If machiner is created to coordinate the !or%ing of the businessmen, the econom can be set on the right lines and the countr can progress at themaximum possible rate of gro!th"

*% Eliminating ,usiness Fluctuations

/ll the mar%et economies of the !orld have faced and are passing through various phases oftrade ccle" The period of prosperit is follo!ed b a period of lo! activit" Planning has provedto be a po!erful instrument in eliminating business fluctuations"

+% -educing Economic Ineualities

In the capitalist countries, the gap bet!een the rich and the poor is !idening" This has createdsocial bitterness and heart burning among the have not" Planning has proved to be an effective!eapon in reducing the shoc%ing ine9ualities in income"

9% Provision o# Bo! Oortunities

5ith the aid of planning, the resources of countr are utili0ed to the maximum" /ll the able bodied persons are gainfull emploed" There is also securit of income, tenure andemploment"

<% Elimination o# Waste#ul Cometition

Planning is also advocated on the ground that it eliminates !asteful competition among the produces on advertisement, salesmanship etc" There is also no duplication of staff and machiner

as it is the mar%et econom"

=% Proer (istri!ution o# -esources

In the mar%et econom, the resources of the countr are utili0ed for the production of onl thosecommodities !hich ield more profits" The items ma be cream, po!der, lipstic%, fridge, car,cloth etc" In a planned econom, ho!ever, !ill be proper distribution of resources, bet!een the production of essential and non=essential goods"



% Prevents Arti#icial Shortages

In an unplanned econom, the industrialists and businessmen !ithhold the suppl of goods andcreate artificial scarcit !ith a vie! to ma%ing profits" Planning discourages such malpracticesand through planned production and proper suppl of goods, the prices of the commodities arenot allo!ed to fluctuate" The formation of trusts, cartels, patents, price agreement, mar%et

sharing etc is completel banned"

D% eeing do6n the Social Costs

In a mar%et econom, the social costs !hich normall ta%e the form of industrial diseases,industrial accidents, smo%e atmosphere, overcro!ding, cclical unemploment etc" are passed onto the societ as a !hole b the capitalists" 1 planning, it is possible to eliminate or %eep do!nthese social costs b ta%ing over the industries and extending the range of public o!nership intovarious sectors of econom"

$% Creating Favoura!le &erms o# &rade

If the terms of trade are persistentl unfavourable, it adversel affects the rate of economicgro!th of the countr" The state, through planning can control the volume and direction of

foreign trade, so that the terms of trade remain favourable and the countr moves rapidl on the path of economic development"

$$% >aking >a"or Economic Changes

In a free enterprise econom the mar%et mechanism fails to create ma$or economic changes suchas industrial revolution, rationali0ation movement in the countr" The government measuresfacilitate, stimulate, guide and control the means of production through planning"

$)% 3igh -ate o# Caital Accumulation

/s planning ma%es optimum allocation of a countr’s resources, it can, therefore, secure forgreater rate of capital accumulation than is possible in a mar%et econom"

>ain O!"ectives

Increase in national income

In underdeveloped countries li%e Pa%istan the planning is to maximi0e national income" 6nlconcentrated and planned effort can raise national income" So a better living standard can beachieved onl b increasing national income"

Achievement o# #ull emloyment

In economicall developed countries the aim is to provide full emploment !hile inunderdeveloped countries the main ob$ective of the planning is to create emploment

opportunities b proper allocation of resources and reduction in unemploment"

-aid industrialiation

-apid industriali0ation is a desirable aim for the planners of under developed countries becauseagriculturall predominant economies are bound to remain bac%!ard" It is the industriali0ationthat ma%es a more significant contribution in raising the national income and increases thechance of emploment"



-educing im!alances in the economy

Economic planning in under developed countr aims to reduce the imbalances in the econom" If onl one sector is chosen for development and the other is neglected a countr !ill not achieve

the highest level of gro!th" So planners must pa attention to the various important sectorssimultaneousl"

-educing ineualities

In underdeveloped countries ine9ualities of income, !ealth and opportunities have !idenedmasses are on the border line of starvation and fe! rich people and families are rolling in allconceivable luxuries" The plans of all the developing countries aim at reducing ine9ualities ofan tpe"

Long term economic gro6th

The ob$ective of planning can be achieved b mobili0ing resources for development purposesthrough self help basis and a decentrali0ed administrative set up !hich provides the foundationfor long term economic gro!th"

Plan Periods in Pakistan

Plan Period

2olombo Plan 3Six ear plan4 (F.(=.@

(st #ive 8ear Plan (F..=A

)nd #ive 8ear Plan (FA=.

*rd #ive 8ear Plan (F.=@A

+th #ive 8ear Plan (F@A=@.

.th #ive 8ear Plan (F@>=>*

th #ive 8ear Plan (F>*=>>

@th #ive 8ear Plan (F>>=F*

>th #ive 8ear Plan (FF*=F>

Fth #ive 8ear Plan (FF>=)AA*



(A 8ear Perspective Development Plan )AA(=)A((

edium Term Development #rame!or% 3TD#4 )AA.=)A(A

Hision )A*A

(Ath #ive 8ear Plan )A(A=)A(.

Formulation and Imlementation o# Five Year Plans

Pa%istan came into being in (F+@, it !as considered a Economic 5asteland and man haddoubts about its economic survival" The industrial base !as virtuall non existent, !e !ere producers of some of the ma$or items of ra! material but did not have the processing facilities,the ne! state also !oefull lac%ed in administrative, and entrepreneurial, business and financial

expertise" eans of transport and communication !ere in shambles" illions of unexpectedrefugees s!armed the ne! state and re9uired rehabilitation at an enormous cost" The leadershipimmediatel too% up the tas% of amending the economic neglect of the past"

G(eveloment ,oardH !as established in (F+> under the inister for Economic /ffairs, !ithSecretaries of development ministries as members" D"1 !as directl ans!erable to the 2abinetor the Economic 2ommittee of the 2abinetC" / BPlanning /dvisor 2ommittee !as alsoestablished to render advice, revie! progress and to arouse public enthusiasm for plannedeconomic development"

The 2olombo Plan 3(F.A4, a regional plan formulated for member countries of the 2ommon5ealth belonging to the South and South East /sia, !as ho!ever put into effect under the aegis

of the Development 1oard" The 2olombo Plan in fact had follo!ed formulation of a,2ommon!ealth 2onsultative 2ommittee that had been assigned the tas% of accelerating the pace of economic and social development in the region" The pro$ects included in the 2olomboPlan !ere prepared in haste and !ithout proper home!or%" The implementation coincided !ithan outbrea% of the Jorean !ar, and hence necessitate revision&do!nsi0ing of the Plan in (F.("Due to the Jorean !ar, there !as a drastic negative impact on the economic scene in the regionincluding Pa%istan and the meagre foreign exchange resources had to be diverted for import offood grains etc" /ll this resulted in revising and recasting the ongoing pro$ects and shifting inemphasis of the policies" Due to failure, to deliver the goods, The Development 1oard !asreplaced b a ne! economic organ, BThe National Planning 1oard in Kul (F.*"

Due to Poor database, shortage of trained man=po!er, lac% of clear demarcation of its rights andresponsibilities in the po!er hierarch, continued opposition and resentment of other financialorgans and institutions and absence of a close rapport !ith the operating agencies, the NationalPlanning 1oard, among other assignments !as given the tas% of preparing a medium term National Plan starting /pril (F.+" Its approval and sanction b the government !as furtherdelaed due to political turmoil and 9uic% changes of the governments 3five governmentschanged in 9uic% succession(F.. to (F.>4"



The National Planning 1oard !as renamed as the :Planning 2ommission: and importantstructural changes !ere brought about to ma%e it more effective and viable"

The establishment of Planning 2ells in important ministries and departments, representation ofthe 2ommission on all important, economic decision=ma%ing organs led to the development ofSecond Plan 3(FA=.4 !hich greatl contributed to success"

This period 3(FA=.4 !as also characteri0ed b internal peace and political stabilit and the planning process received unstinted support of the Government" It !as therefore no !onder thatPa%istan came to be loo%ed upon as a model of planned development"

&he &hird Plan .$D<92=/ !as thus launched on an optimistic note in the bac%ground ofcredible performance of the econom during the Second Plan" The Third Plan had aninauspicious and disastrous start" #irst, s%irmishes bet!een armies of India and Pa%istan in -annof Jutch in earl (F. led to general conflagration in September (F. due to !hich resources!ere diverted from development to organi0ation of !ar efforts" The plan also suffered on accountof stoppage of economic assistance b its ma$or partner in development i"e" LS/

&he Fourth Plan .$D=2 =9/ !as therefore launched a mid great uncertainties and lac%ed vitalsupport and commitment of the government !hich !as preoccupied !ith the tac%ling of thetangled political scenario" The political conditions deteriorated after the elections, !hich sprangman surprises, and the #ourth Plan, !hich !as almost a non=starter from the ver beginning, became absolutel irrelevant under the dramaticall changed political landscape" The Plan !asthus buried in the debris of the Lnited Pa%istan !ithout an formal ceremonial rites"

&he Fi#th Plan .$D=2*/ also remained handicapped due to political unrest, /fghan !ar and therefugee influx, adverse developments in the 5orld econom such as oil crisis 3(F@F4, economicrecession in the 5est 3(F>A4 and increase in interest rates 3(F>(4, !hile the continued largeinflo!s of remittances and a number of polic measures aimed at reviving the confidence of the

business communit, helped to achieve a gro!th rate of "@? during the plan period"

&he Si'th Plan .$D*2/ !hich !as turned into a rolling plan during the last t!o ears of itslife, can be regarded onl a partial success"

&he Seventh Plan .$D2D*/ !as conceived as first, in a chain of three consecutive mediumterm plans or to be more precise !ithin the frame !or% of the second perspective plan ofPa%istan 3(F>>=F*4 7aunched simultaneousl !ith the Seventh Plan" Therefore the Plan entaileda long term vision of the societ and vo!ed to !or% for the realisation of the broad socio=economic ob$ectives spelt out in the Perspective Plan"

&he Eighth Plan@ The Eighth #ive 8ear Plan 3(FF*=F>4 !as launched at a crucial period" 5hile

the overall ob$ectives of planning !ere pivoted around the enhancement of social and economic!elfare of the people, the !ere pursued at a time of fundamental change in domestic and globaleconomies most notabl the redefinition of the government:s role in, the econom"

/part from addressing these basic concerns, the Eighth Plan aimed at redressal of certainimbalances, !hich had tended to distort the developmental process"



It !as to be more reliant to the pressing problems of toda, and the a!esome challenges oftomorro!" It must be more balanced in content and stle" It !as to reflect architecture and notmerel a mosaic of micro level proposals

It aimed at snthesi0ing dnamism !ith stabilit, creativit !ith discipline and encouragementlinear economic advancement, but a total transformation, so that Pa%istan:s polit could fulfil itsappointed destin in the more challenging !orld of the t!ent first centur"

&he 8inth Plan .$DD2)*/ The Planning 2ommission engaged in this tas% of ma%ing Fth #ive8ear Plan !hich !as to be made in the second half of (FFAs" 1ut the document of the Fth #ive8ear Plan !as not launched until the ear )AAA and !as subse9uentl abandoned due to thechanging socio=economic and global scenario"

$th Five Year Plan

The /pproach Paper for the Tenth #ive 8ear Plan 3)A(A=)A(.4 is being issued at a time !hennational imperatives and global developments provide compelling reasons to ma%e fundamentalchanges to the gro!th and development path that !e follo!ed in the past"

The follo!ing !ere the reasons for issuing the (A th #ive 8ear Plan'

(" 6ur past strategies have delivered spurts of high economic gro!th" Lnfortunatel, thesehave not been sustainable, and have onl led to boom=bust ccles" In most cases, thesespurts have been ignited b favorable international developments and increases in foreignassistance" ;istoricall, once these flo!s slo!ed do!n, so did the momentum ofeconomic gro!th" This is because gro!th has been consumption=led and import=dependent, and not driven b increasing investment and exports"

)" ore importantl, this gro!th has not met our people’s expectations and there is

increasing disillusionment !ith the development process" Progress in human and socialindicators has been disappointing" Povert levels remain high, $ob opportunities that meetthe citi0ens’ aspirations lac%ing, and glaring income ine9ualities have appeared in recentears"

*" Socio=economic tensions have been heightened on account of increasing disparities bet!een the provinces" 5ithin the provinces, significant areas feel deprived of the gainsthat should have accrued to them from economic gro!th"

+" Given this scenario, it is not surprising that Pa%istan is being described as a case ofeconomic gro!th !ithout real economic development"

." This situation must be rectified urgentl" The Tenth #ive 8ear Plan 3)A(A=(.4 is to pla a pivotal role in bringing about a fundamental change in the development paradigm" In thisne! paradigm, ordinar people, especiall those in less developed provinces and regions,must be at the centre of the development process and have o!nership in the economicdevelopment of the countr" The government too !ill need to redefine itself so that it can pla an effective part in steering the econom to!ards achieving these goals"

>ain Elements o# $th Five Year Plan



• oving to!ards Sustainable and Inclusive Gro!th that Generates Decent Emplomentand -educes Povert

• Priorit to -emoving Provincial and Intra=Provincial Disparities

• 6vercoming the Social Deficit 3i"e" Education, ;ealth, Gender E9uit and Safet Nets4

and eeting the illennium Development Goals 3DGs4

• Ne! 7eading Sector for Propelling Gro!th' /griculture and /gro=1usiness

• Increasing Industrial 2ompetitiveness' Development of the Pa%istani #irm

• -educing povert' Empo!ering the Poor so that the 1oth 1enefit and 2ontribute toEconomic Gro!th

• Strategic Interventions' Ne! Initiatives to Lnleash Lntapped & Lnderutili0ed Potentialand 6vercome Je Gaps & Imbalances

•

Sound Economic Policies, Good Governance and Strengthened Institutions

• S%ills and Technolog for a Jno!ledge Driven Econom

• Integrated Planning for Energ Development

• Infrastructure for Development

• Protecting the Environment and Preparing for 2limate 2hange

• onitoring and Evaluation' Improving deliver of Public Services

• Promotion of ;eritage and 2ulture



$D+2$D9@ >AC-OECO8O>IC POLICIES ; P-O,LE>S

Introduction

In (F+@, Pa%istan !as underdeveloped, ne!l independent nation, !ith little industr, fe!services, and no infrastructure" Pa%istan !as therefore faced !ith a number of problems, someimmediate and others long term" The overall gro!th for Pa%istan for the period (F+F=.A to (F.A=A !as )".? per annum" Per capita income gro!th !as negative in East Pa%istan and onlmoderatel positive in 5est Pa%istan"

Pa%istan !as carved out in desperate urgenc" It came into existence !ith horrible loss of life and propert, and the migration of millions of da0ed and destitute men, !omen, and children" Thecost !as heav in terms of human suffering" 1ut !hat the uslims !anted and !hat theachieved !as a homeland of their o!n" The no! had the freedom to !orship, practice theirreligious faith and develop their culture" oreover, independence had opened up a bright futurefor the uslims, !ho hoped for a better standard of living, economic development, prosperitand a fuller life" 1ut it seemed in those earl ears 3(F+@=.>4 that the immense sacrifices mighthave been in vain for Pa%istan had been struggling from one ma$or crisis to another, fighting to!ard off the multiple problems that threatened the nation"

Pro!lems Faced At the &ime o# Partition

$% -e#ugee Pro!lem

Till the end of (F.. it is estimated that about @ million refugees entered 5est Pa%istan 3in EastPa%istan it !as ("). million4 as compared to about ." million ;indus and Si%h refugees !hohad left Pa%istan for India" The extent of the impact of the refugee influx on the local population

can be gauged b the fact that 3according to the (F.( census4 the migrants, as a percentage of thetotal population of Jarachi, !ere .. per cent and, in the case of the Pun$ab, )." per cent" Totalcentral government expenditure on refugees b (F.> !as almost -s +F( million

In order to help the artisans and craftsmen among the refugees, the government established a-efugee -ehabilitation #inance 2orporation to provide credit facilities gave (@ million in loans,invested * million in industrial colonies, distributed se!ing machines !orth + million andsupplied ra! materials !orth () million to refugees at cheap rates"

)% Poor Industrial ,ase

Statement of Industrial Polic of /pril (F+>, stated'

“A country producing nearly 75 per cent of the world's production of jute does not possess a

single jute mill. There is an annual production of over 15 lac [1.5 million !ales of good

"uality cotton# !ut very few te$tile mills to utili%e it. &n laying down any policy of

industriali%ation# note has to !e taen of these deficiencies and handicaps# and a concerted

effort made to overcome them(

Pa%istan at the time of partition in (F+@ had negligible industrial base" #ormer East Pa%istan !asthe main producer and supplier of $ute" 1ut there !as not a single $ute factor, cotton !as



produced but it had no big factories to process and manufacture cotton" The !ere all situated inthe areas !hich !ent to the share of India" 6ut of F)( industrial units operating in the 1ritishIndia, Pa%istan got onl *+ industries i"e" +of the total industries

*% Collase O# ,anking System

6f the ninet=nine scheduled ban%s listed on the Second Schedule of the -eserve 1an%, onl onehad its office in Pa%istan "Lnited India had *,+F branches of scheduled ban%s, but onl *(!ere located in the areas that !ere to become Pa%istan 3East and 5est4" 6f the *( branches before partition, onl (F. !ere functioning !hen Pa%istan came into being" The paid=up capitaland reserves of these ban%s amounted to no more than (A per cent of the total paid=up capital andrevenues of undivided India" These ban%s !ere small compared to their counterparts in India,and their share of deposits, advances, and bills discounted !as $ust one=tenth of the total"

+% &he Indus Water Issue

The most explosive of Indo=Pa%istan disputes !as the 9uestion of sharing the !aters of the Indus basin" 6n /pril (, (F+>, India cut off the suppl of !ater from the t!o head !or%s under hercontrol" #ortunatel, Eugene 1lac%, President of the International 1an% for -econstruction andDevelopment offered the offices of the 1an% for the solution of the !ater problem in (F.)" /solution acceptable to both governments !as agreed upon in (FA at the Indus 1asinDevelopment #und /greement at Jarachi" This treat is commonl %no!n as the Indus 5aterTreat" The treat allo!ed for a transitional period of (A to (* ears, after !hich the threeeastern rivers !ould fall exclusivel to India:s share and the three !estern rivers to Pa%istan"During the transitional period, Pa%istan !ould construct a sstem of replacement !or%sconsisting of t!o dams, five barrages and seven lin% canals financed b the Indus Development#und"

9% Accession O# Princely State

Prior to partition, there existed in 1ritish India man semi=autonomous Princel states !hosefuture had to be settled before 1ritain !ithdre! from India" There !ere some .A such states allover the Sub=continent" Some fell !ithin Indian Territor, others in Pa%istan"

6n Kul )., (F+@, 7ord 7ouis ountbatten 3the last Hicero of India4 in his address to the2hamber of Princes advised them that in deciding the 9uestion of accession, the should ta%einto consideration communal composition and the geographical location of their states" Nearlall the states accepted the realit of the situation and opted either for Pa%istan or Indiaaccordingl" 1ut there !ere four states, Kunagadh, ;derabad, Kodhpur and Jashmir, !hichdefied the principle of partition

I" Bunagadh@ The ruler of Kunagadh !as a uslim but >A percent of his sub$ects !ere ;indus"6n September (., (F+@, the Na!ab acceded to Pa%istan, despite the fact that his state did not fall!ithin the geographical grouping of Pa%istan" India protested, stormed in her troops, and forciblreversed the Na!ab:s decision and Kunagadh became a part of India"

II" 3ydera!ad@ ;derabad, the second of the defiant states !as the largest and richest in India"Its population !as >. percent ;indu but the ruler 3Ni0am4 !as a uslim" ;e !as reluctant to



accede either to India or Pa%istan but !as dismissed b ountbatten for adopting this course"The Ni0am !as forced b the Indian government and 7ord ountbatten to $oin India" / standstillagreement !as concluded bet!een India and ;derabad" The ;indu sub$ects !ere incited torevolt against the Ni0am:s desire to be independent" The !hole province suffered turmoil andviolence" ;derabad filed a complaint !ith the Securit 2ouncil of the Lnited Nations" 1efore

the hearing could be started, Indian troops entered ;derabad to restore order, and under the pretext of police action ;derabad !as forced to $oin India" The ;derabad arm surrenderedon September (@, (F+>, and finall ;derabad !as annexed into the Indian Lnion"

III% Bodhur@ 8et another prince, the ahara$a of Kodhpur, expressed a !ish to $oin Pa%istan butountbatten !arned him that his sub$ects !ere mostl ;indus and his accession to Pa%istan!ould create problems" /s a result Kodhpur, too, acceded to India"

<% (ivision O# >ilitary And Financial Assets

In order to embarrass Pa%istan financiall, India did a lot of honest in the matters of Pa%istan!hich !ere concerned !ith its benefits" Pa%istan !as promised to get -s" @.A million but the

Indian Government refused to give" Pa%istan received onl )AA million" Pa%istan also did notreceive the due share of the militar assets" This dishonest attitude put Pa%istan into greatdifficulties"

=% Economic Pro!lems

5hen Pa%istan came into existence, it mostl consisted of economicall bac%!ard andunderdeveloped areas" The agricultural sstem !as obsolete and outdated !hich added to theeconomic bac%!ardness of the areas forming part of Pa%istan" 1efore partition the ;indus, !iththe blessings of the 1ritish Government, had ac9uired complete monopol in trade andcommerce" The entire capital !as in the hands of the ;indus" Lnfortunatel, the ban%s and otherfinancial institutions !ere located in Indian Territor" The ma$or industries !ere also in those

areas !hich !ere part of India" 1esides these factors the technical experts and labors, !hooperated the industries, !ere all ;indus because the uslims extremel lagged behind ineducation and financial capabilities" The inade9uate sstem of transportation and communicationalso made its adverse affect on economic development of the countr" The rail!a sstem andriver transportation in East Pa%istan !as in depleted condition" The roads !ere in shabb andirreparable condition" The communication and transportation sstem in 5est Pa%istan,comparativel, !as in better position" The po!er resources in the t!o !ings !ere scarce andnegligible !hich !ere insufficient to meet the national re9uirement"

% Administrative Pro!lems

Pa%istan came into being under the most appalling conditions" The Government of Pa%istancould not get enough time to set up !or%able administrative machiner because of the greatdifficulties created b 2ongress" The Indian Government adopted delaing tactics n transferringthe Government servants and official record !hich aggravated the situation" Therefore theimmediate tas% before the nation !as to establish a !or%able administrative and Governmentmachiner to run the affairs of the ne!l born state" The biggest administrative problem facingPa%istan !as the acute shortage of competent and experienced personnel in the 2entral andProvincial Governments" #urthermore, there !eren:t enough chairs, tables or even stationar and



paper pins for administrative purposes" ;o!ever, Muaid=e=/0am paid his immediate attentionto!ards setting up of administrative machiner and too% a number of steps to overcome theadministrative problems of the ne! state"

D% Constitutional Pro!lem

/t the time of establishment of Pa%istan the Government of India /ct (F*. became the !or%ingconstitution of Pa%istan !ith certain changes" 1ut the need of a constitution framed b theelected representatives of the people !as necessar for free people" So the first constituentassembl !as formed and !as given the tas% to frame the constitution for the countr" 1ut theconstituent assembl failed to frame a constitution even in eight ears" 7ac% of a permanentconstitution created chances of corrupt interference in democratic progress of Pa%istan" 6n theother hand, the constituent assembl conferred extra ordinar po!ers on Governor General!hich after!ards led to future constitutional crisis"

$% Electricity Pro!lems

Due to transfer of uslim ma$orit areas to India and of unfair demarcation, electricit sstem of 5est Pun$ab !as disrupted, because all po!er stations !ere at undi, a predominantl uslimma$orit area, gifted to 1harat but Muaid=e=/0am said

“&f we are to e$ist as a nation# we will have to face the pro!lems with determination and

force(

$$% ashmir (isute

Jashmir dispute is the most important and unsolved problem" Jashmir is the natural part ofPa%istan because at the time of partition >.? of the Jashmir’s total population !as uslim" The;indu dogra rule, !ho !as secretl !ith the Government of India, declared Jashmir as a part of

India" Pa%istan has continuousl insisted that Jashmir must get their right of self determination but due to non=cooperation of India, Jashmir issue still remain unsolved"

Pakistan 2 Structure o# the Economy

Pa%istan attained nationhood under difficult circumstances" /t the partition of 1ritish India in(F+@ resulting in the creation of the independent nations of India and Pa%istan, Pa%istan !as anagrarian econom in !hich a small number of po!erful lando!ners !ith large holdingsdominated the countrside" The ma$orit of the population consisted of tenant farmers !hocultivated small plots for a meager existence" Scant rainfall in 5est Pa%istan 3present=daPa%istan4 forced farmers to rel on the extensive irrigation sstem developed b the 1ritish" The

head!aters of the Indus -iver and its main tributaries, ho!ever, !ere under Indian control"Disputes arose bet!een the t!o nations and !ere not settled until the Indus 5aters Treat of(FA !as signed"

Pa%istan had almost no industr in (F+@" Lnder 1ritish rule, the area that became Pa%istansupplied agricultural products for processing to the territor that became the independent India"Energ sources !ere rudimentar, !ith !ood and animal dung furnishing the bul% of the energconsumed" Ports, transportation, and other services, such as ban%ing and government, !ere



underdeveloped" ore than (,AA %ilometers of Indian Territor separated the East 5ing and5est 5ing of Pa%istan until the former became independent 1angladesh in (F@(" In (F+F adispute over exchange rates halted the flo! of goods bet!een Pa%istan and India, disrupting thecomplementar nature of their economies that had developed under 1ritish colonial rule"

Despite formidable problems, Pa%istan achieved rapid economic expansion" #rom #8 (F.( to#8 (F>, the GDP gro!th rate measured at a constant #8 (FA factor averaged .") percent"-ates of gro!th averaged *"( percent in the (F.As==!hen agriculture stagnated==but rose to "> percent in the (FAs" The fell to *"> percent bet!een #8 (F@( and #8 (F@@ but rebounded to"> percent bet!een #8 (F@> and #8 (F>" #rom #8 (F>@ to #8 (FF(, gro!th averaged ."> percent, and a rate of @"> percent !as achieved in #8 (FF)" Provisional data indicate that GDPgre! onl )" percent in #8 (FF*" This decline is mainl a result of the floods in September(FF), !hich reduced agricultural output" -apid gro!th substantiall altered the structure of theeconom"

Policies :ndertaken

>onetary Policy

6ne of the ob$ectives of monetar polic !as to develop the various aspects of financial sector particularl the ban%ing sstem" In the earl ears of the countr:s economic histor si0e of private sector !as small and ban%s !ere ver conservative in lending so the private sector usedonl ).? of the total ban% credit during (F+@=.>" Government used @.? of the ban% creditduring (F+>=.> to finance their administrative and development expenditures"

The demand for ban% credit from the Public Sector originated from the follo!ing factors'

Gro!ing need of li9uidit in the econom

Governments heav expenditure on the development of infrastructure



Pa%istan Industrial Development 2orporation 3PID24 !as setup to ma%e up for

investment in pro$ects !here private sector !as reluctant to come

#unds for commodit operations

Economic Planning

The )olom!o *lan

It !as estimated that -s" ),AA million !ould be spent on development programmes of Pa%istanduring this plan period" *)? of this !as incurred on agriculture, )A? on transport andcommunication, (*? on industr, (>? on fuel and energ and remaining ((? on social !elfare"It !as also estimated that -s" (,@AA million !ould be provided from internal resources and-s"FAA million from external resources" To implement the plan, machiner !as set up in the formof economic council, a planning commission and various sub=commissions"

In /pril, (F.( a t!o ear priorit programme !as formulated" The main ob$ective of this plan!as to increase the rate of development in various sectors" -s" .A". crore !ere sent under this programme" In /ugust (F.* the programme of the plan !ere evaluated and total expenditure !asincreased from -s" ),AA million to *,>AA million"

/ccording to the statistics collected b the planning board, industr made remar%able progress,though agriculture remained relativel neglected" The index of industrial production rose from(AA in (F.A to )>. in (F.+" P"I"D"2" !as established in (F.) and various pro$ects !ere started bthis corporation"

(ra6!acks

The #irst #ive 8ear Plan, (F.. to (FA, although a ver impressive document !as neverseriousl implemented" It !as officiall published as late as arch (F.@ and !as never givenapproval b the legislature" The 1udgets and Plans during (F.=@ and (F.@=> !ere said to follo!the broad priorities given in the first ear Plan document, in realit, after the t!o ears had passed, it !as exceedingl difficult to follo! the strateg as outlined Plan document" 6ne ma$orfactor contributed to!ards this !as the fre9uent changes of political governments during this period"

E'change -ate Policy

+on ,evaluation ,ecision in 1-

In September (F+F, the pound sterling !as devalued b *.?, as !ere the currencies of numerous

countries including that of India, Pa%istan’s main trading partner" Pa%istan decided not to devalueits currenc" 6ne reason !h this decision !as ta%en !as to announce to the !orld that Pa%istan!as an independent countr and did not mimic Indian economic polic" 6ther reasons !ere tocontinue to sell ra! $ute to India 3since Pa%istan had no $ute mills4 at a higher price, and to beable to import machiner and capital goods at a cheaper price" ;o!ever, India punished Pa%istan b suspending trade bet!een the t!o countries and refusing to accept Pa%istan:s independentstand" In (F+>&F, India imported .."> per cent of Pa%istan:s exports, but all such exports !eresuspended in September (F+F"



&he Commencement o# orean War in $D9

The Jorean 5ar bro%e out in Kune (F.A"2ountries began stoc% piling and storing ra! materialsand as demand for them increased so did their price" Kute and cotton !ere both in heav demandand Pa%istan !as able to ma%e spectacular profits on its exports" Pa%istani exports consisting of $ute and cotton rose b (AF?" 16P improved"

Li!eral Imort Policy

Import controls that had been imposed onl a fe! months before !ere again liberali0ed after theJorean 5ar began" The government liberali0ed trade to the extent that b Kune (F.( as much as>. per cent of the imports= !ere virtuall !ithout license" India also recogni0ed Pa%istan:s ne!exchange rate, and trade !as resumed after a suspension of eighteen months, but on a smallerscale than earlier"

End o# orean War and #all in E'ort Earnings

1 mid (F.( !orld prices of ra! materials began to decline and export earnings also sa! a

decrease" There !ere clear signs that the mar%et !as heading for a recession, but Pa%istan !astoo slo! to react" In (F.) $ute and cotton prices fell, as did export earnings and Pa%istan !asfacing a serious balance of paments crisis and sharpl falling reserves"

Industrial (eveloment

1ac%ground

The Jorean 5ar export boom resulted in traders and merchants amassing considerable amountsof !ealth" 2onversion of merchant capital into industrial capital occur due to collapse in prices"5ith controls imposed on imports, especiall on consumer goods, the Prices of these goodsincreased sharpl in the domestic mar%et !hich changed the terms of trade in favor of industr

and against agriculture"

&he &rade Policy

Three ma$or aspects are'

6vervaluation of the rupee relative to other countries

Lse of 9uantitative controls on imports to regulate the level and composition of imported

goods

;ighl differentiated structure of tariffs on imports, and export taxes on the=t!o principal

agricultural exports' $ute and cotton



2ascaded tariff structure

Imort

Licensing

The principal determinant of the structure of imports and the set of domestic relative prices !asthe import licensing sstem" 7icensing !as used explicitl as a protective or exchange=savingdevice" Direct 9uantitative controls !ere dominant in setting prices and incentives"

Through their substantial impact on relative prices, these controls speeded the process ofstructural change both b imposing the inducements to invest in various industries and btransferring substantial amounts of income to industrialists !ho reinvested them in the profitablemanufacturing sector" 7e!is said'

“/icensing system was a largely a mirror of the decision to invest in different industries(

Imort Su!stitution

-estrictions !ere placed on the imports of non essential goods mostl consumer goods" ;ighincentives for domestic production !ere given to those items for !hich the domestic mar%et !asthe smallest' luxur consumer goods and consumer durables"

Import substitution progressed easil and ver rapidl in those industries that had the highest protection, i"e" consumption goods, and those that had cheap and read access to domesticall produced, primaril agricultural, ra! materials, such as cotton, $ute and leather"

/nother reason !h consumer goods gre! is provided b 7e!is, he argued that Bthe si%e of

domestic maret at partition and well into the 1-50s was decidedly larger for consumer goodsthan for most intermediate and investment related goods(.

These !ere also those industries in !hich India imports made a significant contribution toPa%istan’s domestic mar%et" Pa%istan in (F.A’s !as erratic and not thought through" ;o!ever as!e have sho!n above, even the decision not to devalue seems to have a clear logic behind it"



The pattern of investment and import substitution influenced the decision of licensing authoritiesabout !hat sorts of import and !hat sort of industrial development should ta%e place"

PI(C

Pa%istan Industrial Development 2orporation 3PID24 set up in (F.)=.*, !hich pioneered in

industries and areas !hich !ere neglected b private investors" During the earl fifties the PID2set up a number of industrial pro$ects in the area of cement, pharmaceuticals, iron and steel!hich !ere then handed over to the private sector"

-eha!ilitation o# ,ank

State 1an% of Pa%istan 3S1P4, !hich too% over central ban%ing from the -eserve ban% of India3-1I4 !ith effect from Kul (, (F+> "The paments sstem !as strengthened b establishing the National 1an% of Pa%istan 3N1P4" The State 1an% of Pa%istan began operations on ( Kul (F+>and became the sole note=issuing authorit but the government of Pa%istan at that time had nonote printing press to print them on" The State 1an% of Pa%istan !as faced !ith the huge tas% ofestablishing a ban%ing sstem after the collapse at the time of partition

Several 1an%s and #inancial Institutions !ere set up"

>C, in (F+@

8,P .8ational ,ank o# Pakistan/ !as set up in (F+F" The role of the National 1an% of

Pa%istan until Kune (F.A !as restricted to financing $ute operations" A(FC .Agricultural (eveloment Finance Cororation Act/ !as set up in (F.)" It

!as set up to meet credit needs of the agriculturalists and to provide long term finance for the purchase of mechanical and other e9uipment"

PIFC .Pakistan Industrial Finance Cororation/ !as set up in (F+F" Important tas%

!as to ma%e medium and long=term credit available to industrial concerns in Pa%istan"

,ank Credit -edistri!ution

/t the time of partition, a completel ne! currenc sstem !as to be set up and an entirel ne! paments sstem had to be organi0ed" The 1an% felt that the inade9uac of credit !ascontributing to price instabilit b adversel affecting production and suppl side of theeconom" In the process of the !ithdra!al of Indian Notes from circulation in Pa%istan the State1an% faced a number of difficulties of unusual character" The demand for currenc at this stage!as ver high since currenc constituted not onl the bul% of paments sstem but !as alsodemanded for store of value purposes" 7o! income groups could not afford to bloc% theirsavings in relativel illi9uid but remunerated financial assets and tended to hold their savings inthe form of currenc notes" The State 1an% developed the necessar net!or% for ade9uateavailabilit and distribution of currenc throughout the countr"



>AC-OECO8O>ICS POLICIES OF >:S3A-AF

Challenges #or >usharra#5s -egime

5hen Perve0 usharraf too% a charge in 6ctober (FFF, he faced man challenges including'

• Stagnant Economic Gro!th

• Deteriorating Institutional #rame!or%

• 5ea% Governance Structure

• 5ea% 1alance of Pament !ith Stagnant Export

• ;igh fiscal Deficit

• assive Povert

Policy O!"ective

/fter assumed po!er in 6ctober (FFF, the challenges faced b the government !as to put theeconom bac% its pre (FFA trac%" The militar regime under President Perve0 usharraf’sgovernment set for!ard four ma$or polic ob$ectives on the economic front'

• Privati0ation

• 6verhauling the Taxation Sstem

• Improve Mualit of Economic Governance

• -estructuring the Public Enterprise and 1an%ing Sectors

• acroeconomic Stabilit and the -estoration of !or%ing -elationship !ith #inancial

Institutions mainl International onetar #und 3I#4, 5orld 1an% and /sianDevelopment 1an% 3/D14"

• Povert /lleviation• Stabili0e the 2ountr’s Debt Situation

Economic 7ro6th

The last five ears of the usharraf era 36ctober (FFF=arch )AA>4 are generall touted as a period of economic boom characteri0ed b robust economic gro!th, stabili0ation of theexchange rate and record increase in !or%ers’ remittances and foreign direct investment 3#DI4"

Structural polic reforms combined !ith an improvement in economic governance laid thefoundations for accelerated gro!th from )AA) to )AA@ and embraced the globali0ation !ith openinvestment and trade"

The economic gro!th rate averaged @ percent, up from *"( percent in )AA( to )AA)" Theunemploment rate also fell from >"+ percent to ". percent and approximatel (("> million ne! $obs !ere created bet!een (FFF and )AA>"

The countr’s real GDP increased from A billion in )AAA=A( to (@A billion in )AA@=A> !ith per capital income rising from under .AA to over (AAA" During the same period, the volume of international trade increased to nearl A billion from )A billion"



In (FFF, Pa%istan remittances !ere as against LS ("A billion and during )AA=A@, LS .". billion !ere received" The increase in remittances !as not onl a ver po!erful source of economic expansion but it also provided strong support to the balance of paments"

The total #oreign Direct Investment 3#DI4 during (( ears from (F>>=FF amounted to LS +">@

billion" The same during the subse9uent > ears registered enormous gro!th and amounted toLS (*"(F. billion"

&he (eveloment Strategy

1. A more active role o# the u!lic sector in economic develoment 6hile acceting the

dominance o# the rivate sector as the main engine o# the economic gro6th%

2aptured in the often repeated slogan Bde=regulation, liberali0ation and privati0ationC, Gro!th confidence of the private sector had been built up b speeding the process of privati0ation in the ban%ing sector to encourage domestic and foreign investment and more liberal trade for imports

and other inputs"

)% &he mega ro"ects #or in#rastructure develoments%

/ number of pro$ects !ere started li%e the hdropo!er, dam and canals, ports and high!as toensure regional connectivit" / high!a net!or% !as to be developed to connect Pa%istan andthe central /sian economies through the building of G!ader Port !hich !as costl ". dams!ere to be built at a cost of )A billion "

*% Emhasis on higher education%

The increased emphasis on higher education !as reflected in the TD# )AA.=)A(A"Theresources !ere to be increased from -s" (("@ billion to -s" )> billion In #8 )A(A, !hile the shiftto!ard higher education as long overdue it still remains the most effective means for brea%ingout of povert for a ver large number of men and !omen !ho are belo! the povert line" Theaim should be to improve the 9ualit of education not the number of poor 9ualit P;D degreeholders

+% Investing in ne6 technology%

It !as an aim for the countr to be able to compete in the global econom b raising the%no!ledge content and competitiveness of agriculture, manufacturing and services sector" There!as a significant overall increase in the resources allocated for technolog development and-D"

9% (evolution

The ne! structure changes include much po!ers being given to the local leaders !ho !ereearlier exercised b the civil bureaucrac" The aim of the government !as to increase local participation in decision ma%ing, strengthening accountabilit and thereb improving service



deliver, so as to reduce povert" It !as still thought that the ne! sstem did not ta%e an firmroots and et there is a lot to commend in the devolution plan"

Poverty -eduction Strategy

In order to reduce povert, government launched the follo!ing schemes'

(" hushali !ank established in )AAA primar ob$ective !as to providesustainable microfinance services to the poor through communit building"

)" 8ational Internshi Program launched in )AA@"*" -ogar Scheme O launched in )AA, it !as expected to give eas loans

to people"

Fiscal Policy

#iscal deficit !as to be reduced b pursuing a combination of four set of polic measures'

3i4 obili0ing additional tax revenues

3ii4 -educing subsidies to public enterprises and corporations3iii4 1ringing about a significant decline in debt servicing paments and

3iv4 2ontaining defense expenditures"

In order to reduce fiscal deficit, government did ta%e some fiscal measures including'

• Pa%istan entered into a stand=b arrangement !ith the I# in )AAA for nine month period

follo!ed b a three ear Povert -eduction and Gro!th #acilit 3P-G#4"

• Some foreign debts have been !ritten off" 6thers have been rescheduled" /ccordingl,

Pa%istan en$oed fiscal space and conse9uentl the burden of debt servicing for )AA*=A+reduced to +A?"

• Defense Expenditure dropped from ? of GDP in earl (FFAs to *">? of GDP b )AA)=

A*"

• T/ -E#6-S' The tax reform is the other measure that government too%" Tax reforms

have attempted to !iden the tax base, strengthen tax administration, promote self=assessment, reduce multiplicit of taxes and tac%le the culture of tax evasion andcorruption" / ne! income tax 6rdinance !as introduced in )AA(" Tax surves anddocumentation drive resulted in (*+,AAA ne! income tax paers, *A,AAA ne! sales tax paers and profiling of AA,AAA tax paers to ma%e assessment more efficient"

>onetary Policy

onetar polic !as %ept tight during the first t!o ears !ith mone suppl gro!th at about F percent" /s the monetar conditions improved the interest rate came do!n graduall to a single

digit and demand for credit b the private businesses pic%ed up resulting in higher capacitutili0ation in manufacturing and increased industrial production"

The monetar easing not onl brought do!n the benchmar% =month T=bill rates to an all=timelo! but also led to a ("F percent drop in the !eighted average lending rates" #oreign exchangereserves !hich used to hover around LS ( billion in (FFF have risen to LS ."* billion inarch )AA)"Since 6ctober (FFF, a polic of building reserves b purchasing excess suppl of



foreign exchange from the %erb mar%et has been the main channel of mobili0ing Pa%istani!or%er’s remittances from overseas"

Since September ((, a number of developments have accelerated the process of reserve building"These includes, the lifting of economic sanctions b the LS, European countries and Kapan, grant

assistance from the LS and Kapan, approval of the P-G# b I#, sustainable debt relief from bilateral creditors, and a rise in !or%ers’ remittances through the ban%ing sstem" Thesemeasures enabled reserves to touch LS +"> billion b the end=December )AA("

The premium in the %erb mar%et has narro!ed significantl from an average of + to . percent, toless than ( percent" This narro!ing do!n of the %erb premium and the strict controls over the;undi&;a!ala business in L/E and the LS have led to higher inflo!s of !or%ers’ remittancesthrough the ban%ing channels during Kul O #ebruar period this ear, remittances doubled toLS ("+ billion, compared to LS @>A million in the same period last ear"

Pa%istan has successfull shifted from a fixed and managed e'change rate to a free floating

regime" The -upee=Dollar parit, the %e indicator of exchange rate movements, remained stable bet!een Kul )AA( and September ((, )AA( after !itnessing a steep depreciation of (>". percentover the preceding t!elve month period"

Foreign &rade Policy

The General usharraf too% some ma$or measures in the area of foreign trade" The measures!ere to explore different mar%ets and to reduce imports" In the area of trade diversification,Pa%istan improved its trade ties !ith different countries" Some results, even if small, !ereevident' Pa%istan:s exports to 2hina !ent up b @. percent to the Lnited /rab Emirates 3L/E4and Saudi /rabia b ). percent each to 1angladesh b )A percent to Indonesia b (( percentand to Jorea and /ustralia b F percent each" Imports remained stable at (A billion in the same

period, thereb reducing the trade deficit"



WO-L( &-A(E O-7A8IJA&IO8 .W&O/ ; I&S O,BEC&IKE

Introduction

The 5orld Trade 6rgani0ation Q the 5T6 Q is the international organi0ation !hose primar purpose is to open trade for the benefit of all" The 5T6 provides a forum for negotiatingagreements aimed at reducing obstacles to international trade and ensuring a level plaing fieldfor all, thus contributing to economic gro!th and development" The 5T6 also provides a legaland institutional frame!or% for the implementation and monitoring of these agreements, as !ellas for settling disputes arising from their interpretation and application" It !as established in(FF. as a successor institution to the General /greement on Tariffs and Trade 3G/TT4"

3istory o# W&O

The origin of the 5T6 can be traced bac% to the creation of the International Trade 6rgani0ationat the (F++ 1retton 5oods: 2onference" 5hile the terms of the IT6 charter !ere being draftedand debated 3a process !hich began in #ebruar of (F+ and lasted until their a final draft !as produced in arch (F+>4 and countries pondered !hether the !ould $oin the organi0ation,representatives from a group of (@ nations assembled in Geneva and concluded an interimagreement 3G/TT4 to lo!er trade barriers and tariffs among themselves" The agreement, !hich!as to ta%e effect on ( Kanuar (F+>, !as not meant to be a permanent trade bod but rather astopgap agreement to serve until the time that the IT6 !ould be put in place"

;o!ever, !hen the Truman /dministration decided not to submit the charter creating the IT6 tothe LS Senate for ratification 3since there !ere not enough votes in the Senate in favor ofratification4 the plan to create the IT6 !as abandoned leaving the G/TT Treat in its place"

The General /greement on Tariffs and Trade 3G/TT4, !hich !as signed in (F+@, is amultilateral agreement regulating trade among (.* countries" The G/TT !as a post=5orld 5arII institution intended to promote nondiscrimination in trade among countries, !ith the vie! thatopen trade !as crucial for economic stabilit and peace" /ccording to its preamble, the purposeof the G/TT is the substantial reduction of tariffs and other trade barriers and the elimination of preferences, on a reciprocal and mutuall advantageous basis"

The G/TT functioned de facto as an organi0ation, conducting eight rounds of tal%s addressingvarious trade issues and resolving international trade disputes" The Lrugua -ound, !hich !ascompleted on December (., (FF* after seven ears of negotiations, resulted in an agreementamong ((@ countries 3including the L"S"4 to reduce trade barriers and to create morecomprehensive and enforceable !orld trade rules" The agreement coming out of this round, the#inal /ct Emboding the -esults of the Lrugua -ound of ultilateral Trade Negotiations, !assigned in /pril (FF+" The Lrugua -ound agreement !as approved and implemented b the L"S"2ongress in December (FF+, and !ent into effect on Kanuar (, (FF." This agreement alsocreated the 5orld Trade 6rgani0ation 35T64, !hich came into being on Kanuar (, (FF."

-easons o# moving #rom 7A&& to W&O@



5hile the G/TT functioned !ell enough, the leading members !ished to replace it !ith a !orld=!ide trade=regulating bod li%e the 5T6 for a number of reasons" #irst, the G/TT rules appliedto trade onl in merchandise goods" In addition to goods, the 5T6 covers trade in services andtrade=related aspects of intellectual propert 3through the agreement on Trade=related /spects ofIntellectual Propert -ightsQT-IPs4" Second, !hile G/TT !as a multilateral instrument, b the

(F>As man ne! agreements of a plurilateral, and therefore selective nature had been added" Theagreements !hich constitute the 5T6 are almost all multilateral and, thus, involve commitmentsfor the entire membership" Third, The 5T6 dispute settlement sstem is faster, more automatic,and thus much less susceptible to bloc%ages, than the old G/TT sstem"

1ut beond these practical and functional reasons for establishing the 5T6, there !ere alsomore philosophical and smbolic reasons" The G/TT !as a set of rules, a multilateral agreement,!ith no institutional foundation, onl a small associated secretariat !hich had its origins in theattempt to establish an International Trade 6rgani0ation in the (F+As" 1 contrast, the 5T6 is a permanent institution !ith its o!n secretariat" oreover, the G/TT !as applied on aprovisional basis even if, after more than fort ears, governments chose to treat it as a permanent commitment !hile the 5T6 commitments are full and functionall permanent"

Structure and (ecision making o# W&O

5T6 has (.F member countries 3on ) arch )A(*4, representing over F.? of !orld trade flo!s"It has budget of (F million S!iss francs for )A(( and +A Secretariat staff members" The ;eadof 5T6 is Pascal 7am 3Director=General4"

/ll 5T6 members ma participate in all councils, committees, etc, except /ppellate 1od,Dispute Settlement panels, and plurilateral committees" Decisions !ithin the 5T6 are made bmember countries, not 5T6 staff, and the are made b consensus, not formal vote" ;igh=level polic decisions are made b the inisterial 2onference, !hich is the bod of politicalrepresentatives 3trade ministers4 from each member countr" The inisterial 2onference mustmeet at least ever t!o ears"

6perational decisions are made b the General 2ouncil, !hich consists of a representative fromeach member countr" The General 2ouncil meets monthl, and the chair rotates annuall amongnational representatives"

The next in line to General 2ouncil is the Goods 2ouncil, Services 2ouncil and IntellectualPropert 3T-IPS4 2ouncil report to the General 2ouncil" 1esides that there are numerousspeciali0ed committees, !or%ing group and !or%ing people that deals !ith individualagreements and other areas such as the environment, development, membership applications andregional trade agreements"



Organiation chart

W&O o!"ective and #unctions

The 5T6’s overriding ob$ective is Bto help trade flo! smoothl, freel, fairl and predictablC"This ob$ective is achieved through follo!ing functions'

$% Administering trade agreements



5T6 facilitates the administration, operations and implementations of multilateral tradeagreements and provides the frame!or% for the countries to act accordingl"

)% Acting as a #orum #or trade negotiations

5T6 acts as a trade negotiating forum !here the member countries appear to resolve their issuesregarding trade barriers, multilateral trade" /nd these countries then have to abide b the policiesand regulation imposed b 5T6"

*% Settling trade disutes

Dispute settlement is the central pillar of the multilateral trading sstem and the 5T6’s uni9uecontribution to the stabilit of the global econom" The dispute settlement is based on clearldefined rules !ith timetables for completing a case" The point is not to pass a $udgment but tosettle disputes through consultation, if possible"

+% -evie6ing national trade olicies

5T6 monitors the trade policies of member countries and sees that ho! the designed provisionsare conducive for developing countries develop guidelines for technical cooperation, increased participation of developing countries in the trading sstem" ember countries have to inform5T6 about special programs involving trade concessions for products from developingcountries"

9% Assisting develoing countries in trade olicy issues4 through technical assistance and

training rogrammes

Developing countries have fe!er human and technical resources so in order to bring

development to these countries 5T6 Secretarial provides technical assistance b arrangingtraining programs for developing countries" Trade and development committee deal !ith thetransfer of technolog to developing countries"

<% Cooerating 6ith other international organiations

5T6 co=operate !ith other international organi0ations li%e 5orld 1an% and I#, in order toformulate policies regarding international trade that benefits the developing countries andenhance their trading capacit resulting in an economic gro!th and development"

7uiding rinciles o# W&O

#undamental principles of 5T6 are as follo!s'

$% 8on2discrimination

/ countr should not discriminate bet!een its trading partners and it should not discriminate bet!een its o!n and foreign products, services or nationals"

)% >ore oen



7o!ering trade barriers is one of the most obvious !as of encouraging trade these barriersinclude customs duties 3or tariffs4 and measure such as import bans or 9uotas that restrict9uantities selectivel"

*% Predicta!le and transarent

#oreign companies, investors and governments should be confident that trade barriers should not be raised arbitraril" 5ith stabilit and predictabilit, investment is encouraged, $obs are createdand consumers can full en$o the benefits of competition Q choice and lo!er prices"

+% >ore cometitive

Discouraging Runfair’ practices, such as export subsidies and dumping products at belo! cost togain mar%et share the issues are complex, and the rules tr to establish !hat is fair or unfair, andho! governments can respond, in particular b charging additional import duties calculated tocompensate for damage caused b unfair trade"

9% >ore !ene#icial #or less develoed countries

Giving them more time to ad$ust, greater flexibilit and special privileges over three=9uarters of5T6 members are developing countries and countries in transition to mar%et economies" The5T6 agreements give them transition periods to ad$ust to the more unfamiliar and, perhaps,difficult 5T6 provisions"

<% Protect the environment

The 5T6’s agreements permit members to ta%e measures to protect not onl the environment but also public health, animal health and plant health" ;o!ever, these measures must be applied

in the same !a to both national and foreign businesses" In other !ords, members must not useenvironmental protection measures as a means of disguising protectionist policies"

,ene#its o# W&O

There are (A benefits that account for the involvement of 5T6 in order to facilitate tradingsstem amongst developing countries that are as follo!s'

$% &he system hels romote eace

Peace is partl an outcome of t!o of the most fundamental principles of the trading sstem'helping trade to flo! smoothl and providing countries !ith a constructive and fair outlet for

dealing !ith disputes over trade issues" It is also an outcome of the international confidence andcooperation that the sstem creates and reinforces"

)% (isutes are handled constructively

/s trade expands in volume, in the number of products traded, and in the numbers of countriesand companies trading, there is a greater chance that disputes !ill arise" The 5T6 sstem helpsresolve these disputes peacefull and constructivel" If there a trade barrier bet!een the t!ocountries the have to ta%e the matter to 5T6 for dispute settlement rather than settling



unilaterall" If the matter of dispute is brought to 5T6 it !ill $udge the situation based on the predefined rules and decide the right and !rong" 6nce the $udgment is made the countries has toabide b the decision"

*% -ules make li#e easier #or all@

Decisions in the 5T6 are made b consensus" The 5T6 agreements !ere negotiated b allmembers, !ere approved b consensus and !ere ratified in all members’ parliaments" Theagreements appl to everone" -ich and poor countries ali%e have an e9ual right to challengeeach other in the 5T6’s dispute settlement procedures" This ma%es life easier for all, in severaldifferent !as" Smaller countries can en$o some increased bargaining po!er"

+% Freer trade cuts the costs o# living@

The 5T6’s global sstem lo!ers trade barriers through negotiation and applies the principle ofnon=discrimination !here all rich and poor countries both are tantamount to one another" This

result in the reduced costs of production 3because imports used in production are cheaper4 andreduced prices of finished goods and services, and ultimatel a lo!er cost of living"

9% It rovides more choice o# roducts and ualities@

This benefit is directl lin%ed !ith the import and the export of a particular countr" If importsare ta%en a!a from a countr it is left !ith nothing" Imports do give choice of products andservices" It too increases the !ide range of 9ualit, besides that the 9ualit of domestic productalso improvises !ith the imports" 5here one is ta%ing products from some countr, on theopposite end there !ould be ta%ing products from ou therefore increasing our exports"

<% &rade raises incomes@

Trade poses challenges to domestic producers as the face competition from imports" 1ut the factthat there is additional income means !here resources are available for governments toredistribute the benefits from those !ho gain the most for example to help companies and!or%ers adapt b becoming more productive and competitive in !hat the !ere alread doing,or b s!itching to ne! activities"

=% &rade stimulates economic gro6th@

It is a strong argument that trade enhances the economic gro!th !hich is directl proportional tothe $ob availabilit" There are factors li%e technological development, efficient productivit etcthat helps in increasing the $ob opportunit" The countries those are highl responsive to!ardsadopting changes experiences high gro!th and increased $ob availabilit !hereas countries thatare slo! to react to changing environment experience lo! economic gro!th"

% &he !asic rinciles make li#e more e##icient@

Trading allo!s a division of labor among countries" It too allo!s the resources to be used toincrease efficienc" 5T6 provides much higher benefits than this, to lead an efficient trade, itannounces that it !ill charge the same dut rates on imports from all countries, and it !ill use the



same regulations for all products, no matter !here the come from, !hether imported or locall produced" 7ife for the compan !ould be much simpler" Sourcing components !ould becomemore efficient and !ould cost less" So the factors li%e non=discrimination, transparenc and tradefacilitation collectivel helps to ma%e life efficient, cut the cost and increase confidence in thefuture"

D% 7overnments are shielded #rom lo!!ying@

The G/TT=5T6 sstem covers a !ide range of sectors" So, if during a G/TT=5T6 tradenegotiation one pressure group lobbies its government to be considered as a special case in needof protection, the government can re$ect the protectionist pressure b arguing that it needs a broad=ranging agreement that !ill benefit all sectors of the econom" Governments do $ust that,regularl"

$% &he system encourages good government@

There are certain trade commitments and trade barriers amongst different countries !hich lead tocorruption and loss of protectionism" 6ne of such is a 9uota sstem therefore 5T6 protects the9uota sstem b imposing rules on imports and exports" The designed agreements of 5T6includes provision regarding he curbing of 9uota sstem and eradicating corruption amongst thecountries through non=discriminator acts as !ell as maintaining transparenc"

8egative asects o# W&O

The notion of 5T6 seems ver optimistic" /s there significant ob$ective is to promote free trade,settle the disputes of trade bet!een neighboring countries but still there are some loopholes thatreflect the gre shades 5T6" Some basic 5T6 negative aspects are narrated as follo!ing'

$% Adverse Working Conditions

/s underdeveloped countries attempt to cut costs to gain a price advantage, man !or%ers inthese countries face lo! pa, substandard !or%ing conditions and even forced labor and abusivechild labor" This Brace to the bottom,C as critics call this drive to cut costs at the expense ofhuman rights, is a %e target of protests aimed at the 5T6" 8et the 5T6 states it does notconsider a manufacturer’s treatment of !or%ers reason for countries to bar importation of thatmanufacturer:s products" The 5T6 notes developing countries insist an attempt to include!or%ing conditions in trade agreements is meant to end their cost advantage in the !orld mar%et"

)% Environmental (amage

/ccording to critics, the increase of corporate farms in developing countries increases pesticide

and energ use, and host countries ignore costl environmental standards" The GlobalDevelopment and Environmental Institute, ho!ever, finds the environmental impact mixed" Insome countries, for instance, replacing native crops !ith coffee and cocoa trees reduces erosion"The 5T6 is critici0ed for not allo!ing barriers to imports based on inade9uate environmentalstandards in countries !here goods are produced" 8et the 5T6 points to its ruling in the (FFAsallo!ing a L"S" ban on shrimp imports because the fishing methods threatened endangered seaturtles outside L"S" borders" The extent to !hich environmental standards should be consideredin free trade is an ongoing debate !ithin the 5T6"



*% Bo! Loss

5T6 is also highl responsible for the $ob losses in the countries" 7i%e !hen an multi=nationalcompan is dissatisfied b an countr !hat the do is the close their subsidiar and s!itchover to those countries !here the cost of production is lo! and the conditions are conducive forthem and secondl the do eat a!a the due rights of their !or%ers in an attempt to generatehighest return for their o!n self interest"

+% :nion Oosition

Lnions have strongl critici0ed the North /merican #ree Trade /greement 3N/#T/4 bet!eenthe Lnited States, exico and 2anada as criticall harmful to !or%ers and the L"S" econom" N/#T/ has harmed consumers and !or%ers in all three countries, contributing to a loss of $obsand drop in income !hile strengthening the clout of multinational corporations" The unionscontend that the increased capital mobilit facilitated b free trade has hurt the environment and!ea%ened government regulation"

5T6 an organi0ation formed to support the poor countries but apparentl the are supportingrich countries in terms of trade and gro!th" The Poor countries are becoming poorer and the richcountries are becoming richer" The poor countries cannot get their foot out of the povert because 5T6 as%s the consumer of these countries to bu or consume the products that isimported b the #irst !orld countries or rich countries"

In a nutshell !e can sa that the rich or #irst 5orld 2ountries are the ultimate beneficiar of5T6 framed policies regarding trade as the became even richer and rule the poor anddepressed countries" The farmers from Third 5orld 2ountries remain sic% and underdeveloped asthe !ere forced to bu cheaper and imported product from the !ealth countries" This purchasing of cheap imported products b farmers, results in the loss of demand for the domestic product !hich is produced b local farmer thereb affecting their motivation"

W&O imlication in Pakistan

Pa%istan !as one of the founders of G/TT in (F+@" It activel participated in all the subse9uentG/TT negotiations and !as involved in the Lrugua -ound that resulted in the creation of the5T6" Pa%istan !as thus also one of the founding members of 5T6 that !as established in(FF."

5T6 an international trade organi0ation has a considerable impact on all sectors of Pa%istan:seconom, particularl, its industr, textile, agriculture and services" The nature of impact is predictable for some sectors, !hereas, it is difficult for others in vie! of global developments intrade and degree of complexit involved"

/s far as the industrial sector is concerned, Pa%istan’s main exports are textile and related products" The non=textile exports of Pa%istan are negligible but have a potential to gro!tremendousl under the 5T6 regime" 6n the import side, Pa%istan has been rationali0ing itstariff structure to a large extent under the trade liberali0ation principle as envisaged b 5T6"

The complete integration of all textile and clothing products into the free trade environmentunder the /greement on Textile and 2lothing 3/T24 released on (st Kanuar )AA. !as one of the



most significant changes for Pa%istan under the !orld trade regime" Pa%istan as a countr !asheavil dependent on textile sector because it re9uires high labor and less technical s%ills"

Pa%istan in !hich textile contributes more than t!o=third of the exports !ill also lose unlessradical changes are brought about" Production costs, li%e high electricit costs, have to bereduced to save this industr" #ailure to secure the special dut O free trade preference fromEurope and further failures of our government !ill not onl lead to shrin%age of our mar%etabroad, it !ill also cause man industries to close !hich !ere $ust not able to compete !ith thelo! priced 2hinese and Indian goods"

Pa%istan is an agricultural countr there is great opportunit of gro!th in agriculture and livestoc%, so it needs to improve its irrigation sstem and assisting farmers in dair farming, providethem mil% treatment plants and meat processing plants" Provide them technolog to increase theagricultural productivit, so that Pa%istan can get benefit through fulfillment of domestic demandand international through exports"

Lnder the /gricultural sector, Pa%istan being an agrarian econom is still a net importer of food

items" The /greement on /griculture 3/6/4 of 5T6 has been significant in moldingagricultural policies of Pa%istan" The 5T6 /greement of Sanitar and Phtosanitar related tothe health issues and human protection enforced b agricultural imports"

Pertaining to the /greement on trade related aspects of intellectual propert rights 3T-IPS4,Pa%istan needs to ensure that the industr is encouraged to provide intellectual propert protection for its products and also ma%e certain that there is effective protection of theintellectual propert rights attached to imported products"

Pa%istan’s domestic industr also faces problems of increased imports and unfair practices underthe global trade regime" 5T6 /greements have an in=built mechanism providing for traderemedial measures to counteract the effect of dumping, subsidies and surge of imports"

The service industr of developing countries acts as transitional catalst for the development"Pa%istan has a ma$or contribution almost half of GDP comprises of service sector and our nationtoo has a large number of expatriates throughout the !orld"

In a nutshell, at present Pa%istan maintains a fairl liberal trade regime, !here all 9uantitativerestrictions on imports have either been removed or converted into tariffs" 7o! 9ualit productsfetch lo! price in the international mar%et" The obvious problems of 9ualit for Pa%istan arethose of technical precision, grading and speciali0ation

The 5T6 /greement on Technical 1arriers to Trade is relevant in this regard" Proper supportand prudent policies for the industr, along !ith intelligent balancing of imports and exports is

vital for the sustainabilit and gro!th of Pa%istan:s econom and is li%el to lead to!ards a bright future and trade enhancement under the 5T6 regime"

W&O >inisterial Con#erences

&he Singaore >inisterial Con#erence .D2$*(ecem!er $DD</



The #irst 5T6 inisterial 2onference !as held in Singapore bet!een F and (* December(FF"Trade, foreign, finance and agriculture inisters from more than ()A 5orld Trade6rgani0ation ember governments and from those in the process of acceding to the 5T6 participated in a inisterial 2onference in Singapore from F to (* December (FF" The2onference !as the first since the 5T6 entered into force on ( Kanuar (FF." It included plenar

meetings and various multilateral, plurilateral and bilateral business sessions" These examinedissues related to the !or% of the 5T6:s first t!o ears of activit and the implementation of theLrugua -ound /greements" The Singaporean Government !as the official host of theinisterial"

Other su!seuent con#erences 6ere held

• The Geneva, S!it0erland inisterial 2onference 3(>=)A a (FF>4

• The in Seattle, 5ashington State, LS inisterial 2onference 3 *A November= *

December (FFF4"

Then fourth ministerial conference !as held in Doha mar%ing important event in histor of 5T6

&he (oha4 atar >inisterial Con#erence .D2$+ 8ovem!er )$/

/t that meeting, the agreed to underta%e a ne! round of multilateral trade negotiations" 1eforethe Doha inisterial, negotiations had alread been under!a on trade in agriculture and trade inservices" These ongoing negotiations had been re9uired under the last round of multilateral tradenegotiations 3the Lrugua -ound, (F>=(FF+4" ;o!ever, some countries, including the LnitedStates, !anted to expand the agriculture and services tal%s to allo! tradeoffs and thus achievegreater trade liberali0ation"

There !ere additional reasons for the negotiations" Kust months before the Doha inisterial, theLnited States had been attac%ed b terrorists on September ((, )AA(" Some government officials

called for greater political cohesion and sa! the trade negotiations as a means to!ard that end"Some officials thought that a ne! round of multilateral trade negotiations could help a !orldeconom !ea%ened b recession and terrorism=related uncertaint" /ccording to the 5T6, theear )AA( sho!ed Bthe lo!est gro!th in output in more than t!o decades,C and !orld tradeactuall contracted that ear"

Especiall !orth noting is ho! the role of developing countries changed at the Dohainisterial"Since the beginning of the G/TT, the ma$or decision=ma%ers !ere almost exclusiveldeveloped countries" /t the preceding inisterial 2onference 3Seattle, (FFF4, developingcountries became more forceful in demanding that their interests be addressed" Some developingcountries insisted that the !ould not support another round of multilateral negotiations unless

the reali0ed some concessions up=front and the agenda included their interests" 1ecause of thegreater influence of developing countries in setting the plan of action at Doha, the ne! round became %no!n as the Doha Development /genda"

(oha (eveloment Agenda

The main goal of the Doha Development /genda is to reduce trade barriers among countries inorder to expand global economic gro!th, development and opportunit"



Parties involved in ((A

:nited States

The Lnited States favors retaining of subsidies to give a competitive edge to /mericanagricultural products over the agricultural products of EL and of the developing G=)A countries"

/n agricultural subsid is a governmental subsid paid to farmers to supplement their income,manage the suppl of agricultural commodities, and influence the cost and suppl of suchcommodities"

The Lnited States currentl pas around )A billion per ear to farmers in subsidies

The deal !ould involve LS doing more to cut farm subsidies, the EL offered more access foragriculture imports and emerging economies such as Pa%istan, 1ra0il and India offered reducingtariffs on industrial goods"

Euroean :nion

European Lnion offered to reduce its agriculture tariffs on condition that developing countriesagree to open their manufacturing and service sector" The EL needed to do more on mar%etaccess to provide significant ne! trade opportunities for developing countries"

The EL !as in conflict !ith the LS as it !anted reduction in LS subsid but !as un!illing to provide greater access to developing countries for its agriculture mar%et"

(eveloing countries

Developing countries have comparativel high tariff on imports of industrial products, servicesand several agricultural products" The developing countries need to open their mar%ets inservices and manufacturing"

The feared that if the !ere to lo!er industrial tariff, it !ill seriousl affect their efforts to!ardshigher value addition of their industrial as !ell as agriculture products and it !ould hardl bringgood mone for them"

&he (oha (eveloment Agenda

Doha -ound tal%s are overseen b the Trade Negotiations 2ommittee 3TN24, !hose chair isDirector=General Pascal 7am" The negotiations are being held in five !or%ing groups and inother, existing bodies in the 5T6" Selected topics under negotiation are discussed belo! in fivegroups' mar%et access, development issues, 5T6 rules, trade facilitation, and other issues"

>arket Access



• Agriculture

/griculture has become the linchpin in the Doha Development /genda" L"S" goals in the ne!round !ere elimination of agricultural export subsidies, easing of tariffs and 9uotas, andreductions in trade=distorting domestic support" The Doha inisterial Declaration included

language on all of these three pillars of agricultural support" It stated that the memberscommitted to Bcomprehensive negotiations aimed at substantial improvements in mar%et accessreductions of, !ith a vie! to phasing out, all forms of export subsidies and substantialreductions in trade distorting support"C

The EL reform largel addressed one of the three pillars of agricultural reformQdomesticsupportQbut did little in a second pillarQmar%et access" In the 5T6 negotiations on mar%etaccess, the Lnited States and the 2airns Group have supported a leveling, or harmoni0ing, oftariff pea%s, or high rates" In comparison, the EL and Kapan !ant flexibilit to cut some itemsless than others to arrive at an average total rate cut"

/nother difficult is Bgeographical indications,C or the protection of product names that reflect

the original location of the product" /n example is the use of B1ordeaux !ineC for !ines fromthe 1ordeaux region onl" Europeans, $oined b India and some other countries, !ant amandator registr of geographical indications that !ould prevent other countries from using thenames" The Lnited States and other countries refuse to negotiate a mandator list, but !ill accepta voluntar list !ith no enforcement po!er" 5hile the EL has said that it !ill not accept anagriculture agreement !ithout a geographical registr, it reportedl has lo!ered expectations toachieving a registr for !ines and spirits"

Developing countries vie! reform in agricultural trade as one of their most important goals"The argue that their o!n producers cannot compete against the surplus agricultural goods thatthe developed countries, principall the EL and the Lnited States, are selling on the !orld

mar%et at lo!, subsidi0ed prices" Some /frican countries also are calling for an end to cottonsubsidies, claiming that such subsidies are destroing mar%ets for the smaller /frican producers"

• Services

/long !ith agriculture, services !ere a part of the Bbuilt=in agendaC of the Lrugua -ound" TheGeneral /greement on Trade in Services 3G/TS4 mandates 5T6 member governments to progressivel liberali0e trade in services through successive rounds of negotiations" In arch)AA( the Guidelines and Procedures for the Negotiations on Trade in Services !ere adopted bthe 2ouncil for Trade in Services" /t the Doha inisterial 2onference in November )AA( theservices negotiations became part of the Bsingle underta%ingC under the Doha Development/genda, !hereb all sub$ects under the negotiations are to be concluded at the same time"

• 8on2Agricultural >arket Access .8A>A/

In the Doha Declaration, trade ministers agreed to negotiations to reduce or eliminate tariffs onindustrial or primar products, !ith a focus on Btariff pea%s, high tariffs, and tariff escalation"C

Tariff pea%s are considered to be tariff rates of above (.? and often protect sensitive productsfrom competition" Tariff escalation is the practice of increasing tariffs as value is added to acommodit" The tal%s are also see%ing to reduce the incidence of non=tariff barriers, !hich



include import licensing, 9uotas and other 9uantitative import restrictions, conformitassessment procedures, and technical barriers to trade" The sectoral elimination of tariffs forspecific groups has also be for!arded as an area of negotiation" Negotiators accepted the conceptof less than full reciprocit in reductions for developing and least=developed countries"

(eveloment Issues

Three development issues are most note!orth" 6ne pertains to compulsor licensing ofmedicines and patent protection" / second deals !ith a revie! of provisions giving special anddifferential treatment to developing countries" / third addresses problems that developingcountries !ere having in implementing current trade obligations"

$% Access to Patented >edicines

/ ma$or topic at the Doha inisterial regarded the 5T6 /greement on Trade=-elated /spects of Intellectual Propert -ights 3T-IPS4" The issue involves the balance of interests bet!een the

pharmaceutical companies in developed countries that held patents on medicines and the publichealth needs in developing countries" 1efore the Doha meeting, the Lnited States claimed thatthe current language in T-IPS !as flexible enough to address health emergencies, but othercountries insisted on ne! language"

Section of the Doha document Declaration on the T-IPS /greement and Public ;ealth 3T-IPSDeclaration4, recogni0ed that B5T6 embers !ith insufficient or no manufacturing capabilitiesin the pharmaceutical sector could face difficulties in ma%ing effective use of compulsorlicensing under the T-IPS /greement"C In Section , the trade ministers instructed the 5T6T-IPS 2ouncil Bto find an expeditious solution to this problem and to report to the 5T6General 2ouncil before the end of )AA)"C

6n December (, )AA), then=T-IPS 2ouncil chairman Eduardo Pere0 otta produced a draftthat !ould allo! countries that lac% the manufacturing capacit to produce medicines to issuecompulsor licenses for imports of the medicines" /ll 5T6 members approved of thechairman’s draft except the Lnited States" The L"S" position, representing the interests of the pharmaceutical industr, !as that the chairman’s draft did not include enough protections against possible misuse of compulsor licenses" The Lnited States sought a limit on the diseases that!ould be covered b the chairman’s text, but other countries refused this initiative" The LnitedStates decided to oppose the chairman’s draft and unilaterall promised not to bring a disputeagainst an least developed countr that issued compulsor licenses for certain medicines"

6ne concern of the pharmaceutical industr !as that the medicines sent to the developing

countr might be diverted instead to another countr" To address this problem, it !as suggestedthat the medicines be mar%ed so that the can be trac%ed" /nother concern !as that moreadvanced developing countries might use the generic medicines to develop their o!n industries"#or this problem, it !as proposed that countries voluntaril Bopt=out,C or promise not to usecompulsor licensing"

6n /ugust *A, )AA*, 5T6 members reached agreement on the T-IPS and medicines issue"



Hoting in the General 2ouncil, member governments approved a decision that offered an interim!aiver under the T-IPS /greement allo!ing a member countr to export pharmaceutical products made under compulsor licences to least=developed and certain other members" /naccompaning statement represented several B%e shared understandingsC of embers regardingthe Decision, including the recognition that the decision should be used to protect public health

and not be an instrument to pursue industrial or commercial polic ob$ectives, and therecognition that products should not be diverted from the intended mar%ets" The statement listeda number of countries that either agreed to opt out of using the sstem as importers or agreed thatthe !ould onl use the sstem in national emergencies or extreme urgenc"

)% Secial and (i##erential .S;(/ &reatment

In the Doha inisterial Declaration, the trade ministers reaffirmed special and differential 3SD4treatment for developing countries and agreed that all SD treatment provisions Bbe revie!ed!ith a vie! to strengthening them and ma%ing them more precise, effective and operational"C

The negotiations have been split along a developing=countr&developed=countr divide"

Developing countries !anted to negotiate on changes to SD provisions, %eep proposalstogether in the 2ommittee on Trade and Development, and set shorter deadlines" Developedcountries !anted to stud SD provisions, send some proposals to negotiating groups, and leavedeadlines open" Developing countries claimed that the developed countries !ere not negotiatingin good faith, !hile developed countries argued that the developing countries !ere unreasonablein their proposals"

*% Imlementation Issues

Developing countries claim that the have had problems !ith the implementation of theagreements reached in the earlier Lrugua -ound because of limited capacit or lac% of technical

assistance" The also claim that the have not reali0ed certain benefits that the expected fromthe -ound, such as increased access for their textiles and apparel in developed=countr mar%ets"The see% a clarification of language relating to their interests in existing agreements"

1efore the Doha inisterial, 5T6 embers resolved a small number of these implementationissues" /t the Doha meeting, the inisterial Declaration directed a t!o=path approach for thelarge number of remaining issues' 3(4 !here a specific negotiating mandate is provided, therelevant implementation issues !ill be addressed under that mandate and 3)4 the otheroutstanding implementation issues !ill be addressed as a matter of priorit b the relevant 5T6 bodies" 6utstanding implementation issues are found in the area of mar%et access, investmentmeasures, safeguards rules of origin, and subsidies and countervailing measures, among others"

&rade Facilitation

The first 5T6 inisterial 2onference, !hich !as held in Singapore in (FF, established permanent !or%ing groups on four issues' transparenc in government procurement, tradefacilitation, trade and investment, and trade and competition" These became %no!n as theSingapore issues" These issues !ere pushed at successive inisterials b the European Lnion,Kapan and Jorea, and opposed b most developing countries" The Lnited States !as lu%e!arm



about the inclusion of these issues, indicating that it could accept some or all of them at varioustimes, but preferring to focus on mar%et access"

In )AA(, the Doha inisterial Declaration called for further clarification on the four Singaporeissues to be underta%en before the .th inisterial in )AA* 3at 2ancUn4, and for negotiations to belaunched on the basis of a decision ta%en b explicit consensus at the .th inisterial" /t 2ancUn,deadloc% over the Singapore issues !as a contributing factor in the brea%up of that summit" /fter further negotiations during )AA+, a compromise !as reached in the Kul )AA+ #rame!or%

/greement' three of the Singapore issues 3government procurement, investment, andcompetition4 !ere dropped and negotiations !ould begin on three specific areas of tradefacilitation'

• To clarif and improve 3#reedom of Transit4

• #ees and #ormalities connected !ith Importation and Exportation

• Publication and /dministration of Trade -egulations

Trade facilitation aims to improve the efficienc of international trade b harmoni0ing andstreamlining customs procedures such as duplicative documentation re9uirements, customs processing delas, and nontransparent or une9uall enforced importation rules and re9uirements"

Discussions have also occurred concerning the technical assistance and trade capacit buildingneeded b developing countries to implement an subse9uent agreement" Developing countriesare in the process of assessing their o!n trade facilitation status, and !hat it !ill ta%e to bringthem up to international standards !ith the help of customs experts from organi0ations such asthe 5orld 1an% and the 5orld 2ustoms 6rgani0ation" Developed countries, including the LnitedStates and the European Lnion, favor the negotiation of a concrete rules=based sstem !ithappropriate accountabilit, !hile some developing countries prefer optional guidelines !ith

Bpolic flexibilit"C&he Cancun >inisterial .$2$+ Setem!er )*/

/n important milepost in the Doha Development /genda round !as the .th inisterial2onference, !hich !as held in 2ancUn, exico, on September (A=(+, )AA*" The 2ancUninisterial ended !ithout agreement on a frame!or% to guide future negotiations, and thisfailure to advance the round resulted in a serious loss of momentum and brought into 9uestion!hether the Kanuar (, )AA., deadline !ould be met"

&he Cancun >inisterial collased #or several reasons%

• #irst, differences over the Singapore issues seemed irresolvable" The EL had retreated on

some of its demands, but several developing countries refused an consideration of theseissues at all"

• Second, it !as 9uestioned !hether some countries had come to 2ancun !ith a serious

intention to negotiate" In the vie! of some observers, a fe! countries sho!ed noflexibilit in their positions and onl repeated their demands rather than tal% about trade=offs"



• Third, the !ide difference bet!een developing and developed countries across virtuall

all topics !as a ma$or obstacle" The L"S"=EL agricultural proposal and that of the Groupof )A,(A for example, sho! stri%ingl different approaches to special and differentialtreatment"

• #ourth, there !as some criticism of procedure" Some claimed the agenda !as too

complicated" /lso, the 2ancun inisterial chairman, exico’s #oreign inister 7uisErnesto Derbe0, !as faulted for ending the meeting !hen he did, instead of tring tomove the tal%s into areas !here some progress could have been made"

/t the end of their meeting in 2ancun, trade ministers issued a declaration instructing theirofficials to continue !or%ing on outstanding issues" The as%ed the General 2ouncil chair,!or%ing !ith the Director=General, to convene a meeting of the General 2ouncil at seniorofficial level no later than December (., )AA*, Bto ta%e the action necessar at that stage toenable us to move to!ards a successful and timel conclusion of the negotiations"C

The 2ancun inisterial did result in the creation of the so=called Derbe0 text" inisterialchairman Derbe0 invited trade ministers to act as facilitators in 2ancun and help !ith

negotiations in five groups' agriculture, non=agricultural mar%et access, development issues,Singapore issues, and other issues" The 5T6 Director=General served as a facilitator for a sixthgroup on cotton" The facilitators consulted !ith trade ministers and produced draft texts fromtheir group consultations" The inisterial chairman compiled the texts into a draft inisterialDeclaration(( and circulated the revised draft among participants for comment"

The Derbe0 text !as !idel critici0ed at 2ancun and it !as not adopted, but in the monthsfollo!ing that meeting, members loo%ed increasingl at this text as a possible negotiatingframe!or%" 6n agriculture, the Derbe0 text dre! largel on both the L"S"=EL and Group of )A proposals" It included a larger cut from domestic support programs than the L"S"=EL proposalmade, contained the blended tariff approach of the L"S"=EL proposal but offered better terms for

developing countries, and provided for the elimination of export subsidies for products of particular interest to developing countries" 6n the Singapore issues, it included a decision to startne! negotiations on government procurement and trade facilitation, but not investment or2ompetition"

&he W&O Frame6ork Agreement

In earl )AA+, then=L"S" Trade -epresentative 3LST-4 -obert Voellic% offered proposals on ho!to move the round for!ard"

• The LST- called for a focus on mar%et access, including an elimination of agricultural

export subsidies"

• Singapore issues could progress b negotiating on trade facilitation, considering furtheraction on government procurement, and possibl dropping investment and competition"This intervention !as credited at the time !ith reviving interest in the negotiations, andnegotiations resumed in arch )AA+"

6n Kul *(, )AA+, 5T6 members approved a #rame!or% /greement that includes ma$ordevelopments in the most contentious and crucial issueQagriculture" 1ecause of the importanceof agriculture to the -ound, the #rame!or%, !hich provides guidelines but not specific



concessions, !as regarded as a ma$or achievement" 5ith a broad agreement on agriculture andon other issues, negotiators !ere given a clearer direction for future discussions" ;o!ever, thetal%s settled bac% into a drift less stalemate, !here fe! but the most technical issues !ereresolved"

&he 3ong ong >inisterial .$*2$ (ecem!er )9/

5T6 Director=General Pascal 7am announced in November )AA. that a comprehensiveagreement on modalities !ould not be forthcoming in ;ong Jong, and that the tal%s !ould Bta%estoc%C of the negotiations and !ould tr to reach agreements in negotiating sectors !hereconvergence !as reported" The final inisterial Declaration of December (>, )AA., reflectedareas of agreement in agriculture, industrial tariffs, and dut=free and tariff=free access for leastdeveloped countries" Generall, these convergences reflected a step beond the Kul #rame!or%/greement, but fell short of full negotiating modalities"

Ne! deadlines !ere established at ;ong Jong for concluding negotiations b the end of )AA"

These deadlines included'

• /n /pril *A, )AA, date to establish modalities for the agriculture and N//

negotiations"

• Set for Kul *(, )AA, included the submission of tariff schedules for agriculture and

N//, the submission of revised services offers, the submission of consolidated textson rules and trade facilitation, and for recommendations to implement the Baid for tradeClanguage in the ;ong Jong declaration"

6n /pril )(, )AA, 5T6 Director= General Pascal 7am announced there !as no consensus for

agreement on modalities b the /pril *A deadline"

Trade negotiators li%e!ise failed to reach agreement at a high=level meeting in Geneva on Kune*A=Kul (, )AA" It !as agreed at those meetings, ho!ever, that Director=General Pascal 7am!ould underta%e a more proactive role as a catalst Bto conduct intensive and !ide=rangingconsultationsC to achieve agricultural and industrial modalities" Prior to the summit, 7am forthe first time in his tenure suggested the outline of a possible compromise" Jno!n as the B)A=)A=)A proposal,C the offer 3(4 called on the Lnited States to accept a ceiling on domestic farmsubsidies under )A billion, 3)4 proposed the negotiations use the Group of )A proposal of .+?as the minimum average cut to developed countr agricultural tariffs, and 3*4 set a tariff ceilingof )A? for developing countr industrial tariffs" This suggestion !as roundl critici0ed b allsides and !as not adopted at the Geneva meetings /t the G=> summit of leading industriali0ednations in St" Petersburg the leaders pledged a Bconcerted effortC to reach an agreement onnegotiating modalities for agriculture and industrial mar%et access !ith a month of the Kul (summit"

&he 7eneva >inisterial .* 8ovem!er M ) (ecem!er )D/



The Seventh Session of the 5T6 inisterial 2onference in Geneva, S!it0erland, too% placefrom *A November to ) December )AAF" The general theme for discussion !as BThe 5T6, theultilateral Trading Sstem and the 2urrent Global Economic EnvironmentC"

Agenda@

• Overvie6 o# Activities o# the W&O

Lnder this item of the agenda, !hich can be expected to occup most of the time of the PlenarSession, inisters !ill have the opportunit to revie! the operation and functioning of themultilateral trading sstem and to ma%e general statements related thereto" Documentationavailable to delegations for the overvie! of 5T6 activities !ill include reports from the General

2ouncil and other 5T6 bodies on activities under their respective mandates"

• Action !y >inisters

Lnder this item, !hich together !ith Items * and + !ill be ta%en up at the end of the PlenarSession on ) December, inisters are expected to ta%e an action !hich the ma deemappropriate, including on T-IPS non=violation and situation complaints and on E=commerce"

In his report to the General 2ouncil on (@ November )AAF, Pascal 7am said that !hile theupcoming 5T6 inisterial 2onference !ould not be a negotiating session, it !ould be Ba platform for ministers to revie! the functioning of this houseC, including the Doha -ound, andan occasion Bto send a number of strong signals to the !orld !ith respect to the entire 5T6

!aterfront of issues Q from monitoring and surveillance to disputes, accessions, /id for Trade,technical assistance and international governanceC"

&he 7eneva >inisterial .$92$= (ecem!er )$$/

The Eighth inisterial 2onference !as held in Geneva, S!it0erland, from (. to (@ December)A((" In parallel to the Plenar Session, !here inisters made prepared statements, three5or%ing Sessions too% place !ith the follo!ing themes' BImportance of the ultilateral TradingSstem and the 5T6C, BTrade and DevelopmentC and BDoha Development /gendaC" The2onference approved the accessions of -ussia, Samoa and ontenegro" In the final session,inisters adopted a number of decisions and the 2hair made a concluding statement"

Trade ministers at the >th 5T6 inisterial 2onference in Geneva on (@ December )A((,adopted a !aiver to enable developing and developed=countr embers to provide preferentialtreatment to services and service suppliers of least=developed countr 37D24 embers" 6f the(.* 5T6 embers, *( are 7D2s !ho stand to benefit from preferential treatment designed to promote their trade in those sectors and modes of suppl that are of particular interest to them"

6n the final da of the )A(( Geneva inisterial 2onference, (@ December )A((, Samoa andontenegro follo!ed -ussia in having their membership approved Samoa !ill have until (.



Kune )A() to ratif its accession pac%age and ontenegro until *( arch )A()" 1oth countries!ill become full=fledged 5T6 members *A das after the notif ratification of their respectiveaccession pac%ages to the 5T6 and ministers !rapped up their discussions on development andon the Doha -ound negotiations"

&he ,ali >inisterial .*2< (ecem!er )$*/

The Ninth inisterial 2onference !ill be held in 1ali, Indonesia, from * to December )A(*"The 6pening 2eremon !ill b e held on the afternoon of the first da, Tuesda * December,follo!ed b t!o !or%ing das, + and . December, !ith the 2losing 2eremon on the final da,#rida December"

-ecent meetings o# W&O

$* >arch )$*

&EC38ICAL ,A--IE-S &O &-A(E@ FO->AL >EE&I87

embers discuss guidelines for trade=friendl regulation and ST6P sign for R$un% food’ 5T6members, meeting as the Technical 1arriers to Trade 3T1T4 committee on .O@ arch )A(*, began !or% on guidelines for ho! to regulate in a trade=friendl manner Q commonl referredto as Bgood regulator practiceC" /greeing on such a list !ould promote convergence bet!eenmembers’ regulator sstems, shedding more light on unneeded divergences, and bringinggreater predictabilit and stabilit for business" 2hile’s proposed amendment to its #ood ;ealth

-egulation, !hich !ould place ST6P signs on fatt, salt and sugar foods and, a proposedEuropean Lnion Directive on tobacco products 3Tobacco Products Directive Q BTPDC !hich!ould introduce a range of ne! rules on pac%aging, composition and sale of tobacco products"

)$M)) >arch )$*

SA8I&A-Y A8( P3Y&OSA8I&A-Y >EAS:-ES@ FO->AL >EE&I87

embers note food label fraud, hear (@ concerns, as RSPS’ trainees top (A,AAA" eeting includedissues on fraud involving horsemeat in Europe, continuing concern about Indonesia’s portclosure, Kapanese pesticide limits for sesame, and perennial concerns related to mad co! disease!ere among the man issues discussed b the 5T6 committee dealing !ith food safet and

animal and plant health, )(O)) arch )A(*" The Sanitar and Phtosanitar 3SPS4 easures2ommittee Q !hich comprises all 5T6 members and deals !ith an area having an increasingimpact on trade Q also continued to struggle to agree on a !or%ing definition of privatestandards" Progress !as reported on consultations on ma%ing it easier for countries to use thechairperson’s services to mediate on problems members have about each other’s measures !iththe aim of avoiding the need to bring legal disputes against each other" This !ill be discussedagain at the next meeting in Kune" embers heard about preliminar findings from 5orld 1an%research suggesting least developed countries might find their exports constrained as emerging



economies set higher standards" /nd the learnt that the number of officials and others receiving5T6 training in SPS issues no! exceeds (A,AAA"

)= >arch )$*

A7-IC:L&:-E 8E7O&IA&IO8S@ I8FO->AL >EE&I87

embers start negotiating proposal on poor countries’ food stoc%holding" 6n )@ arch )A(*chair person Kohn /dan% said BThe 5T6 agriculture tal%s are no! read to discuss the substanceof a proposal to loosen price support disciplines for developing countries’ public stoc%s anddomestic food aidC" The move to bring in ambassadors and their experts follo!s nine fact=findingtechnical meetings in #ebruar and arch on ho! countries’ stoc%holding and food aid programmes !or%, and the implications for the proposal from the GO** group of developingcountries"

• &he 7M** roosal

The stoc%holding proposal !as submitted b the GO** group in November )A() and discussed inthe meetings in Kanuar and #ebruar" It is part of the group’s more general call for specialtreatment for developing countries to support their poor farmers" Indonesia is the GO**’scoordinator"

The group proposed amending the /griculture /greement to loosen disciplines on domesticsupport, notabl on price support lin%ed to public stoc%holding and food aid, in order to enhancefood securit and support poor farmers"

• Kie6s

/ll members support the need for stoc%holding to improve food securit" The differ over the

means of achieving this"The GO** proposal !ould give developing countries a relativel free hand to use price support,the group arguing that present 5T6 disciplines !ill become a constraint on their abilit toimplement these programs"

6thers are concerned that !ithout disciplines, some !as of implementing the programs coulddistort mar%ets Q inflating the prices farmers receive and the 9uantities the produce, andultimatel depressing !orld prices" The are unable to support the G=** proposal as it stands"1ut spea%ers on both sides said each other’s concerns are legitimate and deserve to be heard"



&3E WO-L( ,A8

What is World ,ank?

The 5orld 1an% !as established in Kul (, (F++ during a conference of ++ countries in 1retton5oods, Ne! ;ampshire" 1ut, 5orld 1an% came into formal existence on )@ December (F+.

follo!ing international ratification of the 1retton 5oods agreements"

7oals o# World ,ank

• -educing Povert• -educing 2orruption• -educing Debt• Education• Infrastructural Developments• ;IH /!areness• Environmental 2oncerns

7oals o# World ,ank

-educing Poverty

5or%ing in more than (AA countries is challenging, but the mission of the 5orld 1an% is simple Q to help reduce povert" 6ver the past )A ears, their focus has changed and so has theirapproach" The are no! dealing !ith ne!er issues li%e gender, communit=driven developmentand the rights and role of indigenous people in development" Their support for social servicesli%e health, nutrition, education and pensions has gro!n from . percent in (F>A to )) percent in)AA*" Toda, countries themselves are approaching them !ith their o!n plans for helping poor people, and the have adopted ne! !as of !or%ing !ith them"

-educing Corrution

2orruption is the single largest obstacle to development" It increases !ealth for the fe! at theexpense of societ as a !hole, leaving the poor suffering the harshest conse9uences b ta%ing public resources a!a from those !ho need them most" Since (FF, 5orld 1an% has launchedhundreds of governance and anticorruption programs in nearl (AA developing countries"Initiatives range from re9uiring government officials to publicl declare their assets andintroducing public spending reforms, to training $udges and teaching investigative reporting to $ournalists"

-educing (e!t

In (FF, !ith the International onetar #und 3I#4, 5orld 1an% launched the ;eavilIndebted Poor 2ountries 3;IP24 InitiativeQ the first comprehensive effort to cut the debts of the!orld’s poorest, most indebted countries" Toda, )@ countries are receiving debt relief that !illamount to LS.) billion over time" The ;IP2 Initiative, combined !ith other tpes of debtrelief, !ill cut b t!o=thirds the external debt in these countries, lo!ering their debt levels to belo! the overall average for developing countries" /s part of the initiative, these countries areusing government funds freed up b debt relief for programs to cut povert



Education

Education is central to development" 5orld 1an% has committed around LS** billion in loansand credits for education, and the currentl fund (.@ pro$ects in >* countries" The !or%closel !ith national governments, Lnited Nations agencies, donors, civil societ organi0ations3such as communit groups, labor unions, Non Governmental 6rgani0ations and faith=basedgroups4, and other partners to support developing countries in their efforts to ma%e sure that allchildren, especiall girls and disadvantaged children, are enrolled in and able to complete a primar education b )A(.

In#rastructural (eveloments

5hile most people in the developed !orld ta%e infrastructure 3for example clean !ater,electricit and transport4 for granted, it is a dreamed=of luxur in man parts of the !orld"/lmost ("+ billion people in developing countries do not have access to clean !ater" Some * billion live !ithout basic sanitation or electricit" Infrastructure is not simpl about theconstruction of large pro$ects" It is about delivering basic services that people need for everda

life, such as upgrading slums and providing roads to connect the poorest urban areas"Infrastructure is also an important part of 5orld 1an%’s efforts to help achieve the illenniumDevelopment Goals"

3IK A6areness

Each da (+,AAA people become infected !ith the ;IH virus" ;IH&/IDS is rapidl reversingman of the social and economic gains that developing countries have made over the past .Aears" /s a sponsor of LN/IDS 3the group that coordinates the international response to theepidemic4, in the past fe! ears 5orld 1an% has committed more than LS(" billion to fight thespread of ;IH&/IDS around the !orld" The have also been one of the largest financialsupporters of ;IH&/IDS programs in developing countries"

Environmental Concerns

Since (F>>, 5orld 1an% has become one of the largest international sources of funding of biodiversit pro$ects, !hich protect our !orld’s !ide variet of animals, plants and other livingthings" Even though the loss of biodiversit is an international concern, people !ho live in ruralcommunities in developing countries feel the greatest effects since the are most dependent onnatural resources for food, shelter, medicine, income, emploment and their cultural identit"

&he urose o# the World ,ank

• The 5orld 1an% is one of the !orld’s largest sources of funding and %no!ledge tosupport governments of member countries in their efforts to invest in schools and healthcenters, provide !ater and electricit, fight disease and protect the environment"

• /ll support to a borro!ing countr is guided b a single strateg that the countr itselfdesigns !ith help from the 5orld 1an% and man other donors, aid groups, and civilsociet organi0ations"

• /ssist development and reconstruction



• To promote long term balanced international trade• To lend for pro$ect development• To conduct its operations !ith due regard to business conditions• Promote private investment

Who control the 6orld !ank

• -obert Voellic% has been President of the 5orld 1an% since )AA@" Voellic% got his start!or%ing for President -onald -eagan:s Treasur Secretar , Kames 1a%er"

• ;e reports to a ).=member 1oard of Directors, five of !hom represent ma$or contributors#rance, German, Kapan the LJ and the L"S", !hile the other countries are represented b the remaining )A directors

• #or this reason, and the fact that the L"S" al!as selects the President, man memberscomplain that the 1an% represents the interests of the developed !orld, not the poorcountries it is supposed to help"

• The 1an% has more than (A,AAA emploees from over (A countries" T!o=thirds !or% in5ashington, D2, !ith the rest stationed in (AA countr offices in the developing !orld

(i##erence !et6een the World !ank and a commercial !ank

It is o!ned b (>@ countries" /nd unli%e commercial ban%s, the 5orld 1an% often lends at littleor no interest to countries that are unable to raise mone for development an!here else"1asicall, the 5orld 1an% borro!s the mone it lends" It has good credit because it has large,!ell=manages financial reserves" This means it can borro! mone at lo! interest rates fromcapital mar%ets all over the !orld and channel it to developing countries, often at much lo!errates of interest than !hat mar%ets !ould charge these countries"

&he World ,ank 7rou actually consists o# #ive institutions

•The International 1an% for -econstruction and Development 3I1-D"

• The International #inance 2orporation 3I#24"• The International Development /ssociation 3ID/• The ultilateral Investment Guarantee /genc 3IG/4• The International 2entre for Settlement of Investment Disputes 3I2SID

International ,ank #or -econstruction and (eveloment .I,-(/

The International 1an% for -econstruction and Development 3I1-D4 aims to reduce povert inmiddle=income countries and credit!orth poorer countries b promoting sustainabledevelopment through loans, guarantees, ris% management products, and analtical and advisorservices "I1-D raises most of its funds on the !orld:s financial mar%ets and has become one of

the most established borro!ers since issuing its first bond in (F+@" The income that I1-D hasgenerated over the ears has allo!ed it to fund development activities and to ensure its financialstrength, !hich enables it to borro! at lo! cost and offer client’s good borro!ing terms"

International (eveloment Association .I(A/

The International Development /ssociation 3ID/4 is the part of the 5orld 1an% that helps the!orld’s poorest countries" Established in (FA, ID/ aims to reduce povert b providing loans



3called BcreditsC4 and grants for programs that boost economic gro!th, reduce ine9ualities, andimprove people’s living conditions

International Finance Cororation .IFC/

I#2 provides more than mone" It blends investment !ith advice to help the private sector find

solutions to toda’s greatest development challenges" I#2’s three business O Investment services,/dvisor services and I#2 /sset anagement are mutuall reinforcing, delivering globalexpertise to clients in more than a (AA developing countries"I#2 provides both immediate andlong=term financing, and !e combine it !ith advice that helps companies gro! 9uic%l andsustainabl"

>ultilateral Investment 7uarantee Agency .>I7A/

Its mission is to promote foreign direct investment 3#DI4 into developing countries to helpsupport economic gro!th, reduce povert, and improve people:s lives" IG/’s operationalstrateg plas to our foremost strength in the mar%etplace = attracting investors and privateinsurers into difficult operating environments" It focuses on insuring investments in the areas!here !e can ma%e the greatest difference"

International Centre #or Settlement o# Investment (isutes .ICSI(/

I2SID is an autonomous international institution established under the 2onvention on theSettlement of Investment Disputes bet!een States and Nationals of 6ther States !ith over onehundred and fort member States"

&he World ,ank o##ers t6o tyes o# loans

Through I1-D and ID/, 5orld 1an% offers t!o basic tpes of loans and credit'

a4 Investment operations loans ' to support economic and development pro$ects b4 Development polic loans ' 9uic% disbursing of finance to support countries polic and

institutional reforms

7rants

In recent ears, ID/ grantsQ!hich are either funded directl or managed through partnerships Qhave been used to'

• -elieve the debt burden of heavil indebted poor countries• Improve sanitation and !ater supplies• Support vaccination and immuni0ation programs• #ight the ;IH&/IDS

7oans or grants for specific pro$ects are often lin%ed to !ider polic changes in the sector or theeconom" #or example, a loan to improve coastal environmental management ma be lin%ed todevelopment of ne! environmental institutions at national and local levels and toimplementation of ne! regulations to limit pollution"



Who makes the decision

The President of the 1an%, currentl -obert 1" Voellic%, is responsible for chairing the meetingsof the 1oards of Directors and for overall management of the 1an%" Traditionall, the 1an%President has al!as been a LS citi0en nominated b the President of the Lnited States, thelargest shareholder in the ban%" The nominee is sub$ect to confirmation b the 1oard ofGovernors, to serve for a five=ear, rene!able term"

The Executive Directors ma%e up the 1oard of Directors, usuall meeting t!ice a !ee% tooversee activities such as the approval of loans and guarantees, ne! policies, the administrative budget, countr assistance strategies and borro!ing and financing decisions"

The Hice Presidents of the 1an% are its principal managers, in charge of regions, sectors,net!or%s and functions" There are )+ Hice=Presidents, three Senior Hice Presidents and t!oExecutive Hice Presidents"

-ole o# World ,ank in the develoing countries

Developing countries have determined themselves that for their economies to gro!, to attract business and $ob the must'

• 1uild capacit ' strengthen their government and educate their business officials• 2reate infrastructure ' implement legal and $udicial sstems that encourage business,

protect individual, propert rights and honor contacts• Develop financial sstems ' robust enough to support endeavors from micro credit to

financing larger corporate venture• 2ombat corruption ' if not so no pro$ect can be carried out effectivel• -esearch, consultanc and training ' is extremel important for all the aspects of the

econom

Why do develoing countries go to World !ank

• / developing countr is a countr !ith a relativel lo! standard of living, undevelopedindustrial base, and moderate to lo! ;uman Development Index 3;DI4"

• 7o! saving !hich ma lead to lo! investment and countries cannot develop theambitious pro$ects !hich the intend fulfilling"

• 1alance of pament deficit !hich gives rise to imbalance bet!een countr’s import andexport"

• #or some developing countries li%e Pa%istan finance is not available easil and there ishave no mar%et credibilit"

Criticism o# the World ,ank

In asters of Illusion' The 5orld 1an% and the Povert of Nations 3(FF4, 2atherine 2aufieldargues that the assumptions and structure of the 5orld 1an% operation in the end harms southernnations rather than promoting them" 2aufield first critici0es the highl homogeni0ed and 5esternrecipes of development held b the 1an%" To the 5orld 1an%, different nations and regions areindistinguishable, and read to receive the uniform remed of development" She argues that toattain even small portions of success, 5estern approaches to life are adopted and traditional



economic structures and values are abandoned" / second assumption is that poor countriescannot moderni0e !ithout mone and advice from abroad"

6ne of the strongest criticisms of the 5orld 1an% has been the !a in !hich it is governed"5hile the 5orld 1an% represents (>+ countries, it is run b a small number of economicall po!erful countries" These countries choose the leadership and senior management of the 5orld1an% and as such, their interests are dominant !ithin the ban%



I8&E-8A&IO8AL >O8E&A-Y F:8( .I>F/

“The International Monetary und !IM" works to foster international monetary cooperation,

secure financial stability, facilitate international trade, promote high employment and

sustainable economic growth, and reduce poverty around the world. #reated in $%&', the IM is governed by and accountable to the $(( countries that make up its near)global membership”

What is I>F?

The I#, also %no!n as the B#und,C !as conceived at a Lnited Nations conference convened in1reton 5oods, Ne! ;ampshire, Lnited States, in Kul (F++" The I# is a speciali0ed agencstemming from the LN sstem, head9uartered in 5ashington D"2, as of )* a )A() it has (>>countries membership" Simpl put I# is the central institution of the international monetarsstemQthe sstem of exchange rates and international paments that enables countries 3andtheir citi0ens4 to conduct business !ith one another" This sstem is essential for promotingsustainable economic gro!th, increasing living standards, and reducing povert" #urthermore itaims to prevent crises in the sstem b encouraging countries to adopt sound economic policiesit is a #LND !hich can be tapped into !hen members need help to resolve balance of pamentissues"

I>F WO-L( ,A8

oversees the international monetar sstem see%s to promote the economicdevelopment of the !orld:s poorercountries

assists all members==both industrial and developing

countries==that find themselves in temporar balanceof paments difficulties b providing short= tomedium=term credits

assists developing countries through

long=term financing of development pro$ects and programs

supplements the currenc reserves of its membersthrough the allocation of SD-s 3special dra!ingrights4

encourages private enterprises indeveloping countries through itsaffiliate, the International #inance2orporation 3I#24

dra!s its financial resources principall from the9uota subscriptions of its member countries

ac9uires most of its financial resources b borro!ing on the international bond

mar%et



O!"ectives and #unctions

To maintain stabilit and prevent crises in the international monetar sstem the statutor purpose includes promoting the balanced expansion of !orld trade, stabilit of exchange rates,

avoiding competitive currenc devaluation and corrections of balance of pament issues'

• In order to serve these purposes, the I#• -evie!s countr policies, as !ell as national, regional, and global economic and

financial developments through a formal sstem %no!n as surveillance" Lnder thesurveillance frame!or%, monitors economic and financial developments and policies, in member countries and at the global level, and gives polic advice toits members, based on its experience"

• 7ends to member countries !ith balance of paments problems, not $ust to provide temporar financing but to support ad$ustment and reform policies aimedat correcting the underling problems"

•

Provides the governments and central ban%s of its member countries !ithtechnical assistance and training in its areas of expertise"

• The I# !ants to promote sound economic policies among member countries toma%e globali0ation !or% for everone’s benefit"

7overnance and the 6orkings o# I>F

The I# is accountable to the governments of its member countries" /t the top of itsorgani0ational structure is the 1oard of Governors, !hich consists of one Governor and one/lternate Governor from each member countr" The 1oard of Governors meets once each ear atthe I#=5orld 1an% /nnual eetings" T!ent=four of the Governors sit on the Internationalonetar and #inancial 2ommittee 3I#24 and normall meet t!ice each ear"

The da=to=da !or% of the I# is overseen b its )+=member Executive 1oard, !hichrepresents the entire membership this !or% is guided b the I#2 and supported b the I#staff" In a pac%age of reforms approved b the Governors in December )A(A, the /rticles of/greement !ill be amended so as to facilitate a move to a more representative, all=electedExecutive 1oard" The anaging Director is the head of the I# staff and 2hairman of theExecutive 1oard, and is assisted b four Deput anaging Directors"

I>F uotas

I# 9uotas, their functions and 9uota revie!s"

What are uotas?

The I#’s resources are provided b its member countries, primaril through pament of 9uotas,!hich broadl reflect each countr’s economic si0e"

Function o# uotas

Each member is assigned a 9uota !hich is expressed in SD- 3special dra!ing rights4" /countr’s financial and organi0ational relationship !ith I# is determined b 9uotas'



• Subscriptions are e9ual to its 9uota and determines the maximum amount offinancial resources the member has to pa to the I# 3should be paid in full4

• Hoting po!er' 9uota determines the number of votes each countr has about ).Aand one more for each SD- (AAAAA of 9uota"

• /ccess to finance the amount of finance that I countr can ta%e from the fund is

based on the 9uota

3o6 is the uota (etermined?

I# determines a countr’s 9uota relative to its position !ith other members" / number ofeconomic factors are considered !hile determining 9uotas including GDP, current accounttransactions, and official reserves"

3o6 are these revie6ed?

The I#:s 1oard of Governors conducts general 9uota revie!s at regular intervals 3usuall everfive ears4" /n changes in 9uotas must be approved b an >. percent ma$orit of the totalvoting po!er, and a member’s 9uota cannot be changed !ithout its consent"

There are t!o main issues addressed in a general 9uota revie!' the si0e of an overall increaseand the distribution of the increase among the members"

#irst, a general 9uota revie! allo!s the I# to assess the ade9uac of 9uotas both in

terms of members’ balance of paments financing needs and in terms of its o!n abilit tohelp meet those needs"

Second, a general revie! allo!s for increases in members’ 9uotas to reflect changes in

their relative positions in the !orld econom

ost resources for I# loans are provided b member countries, primaril through their pament of 9uotas" Since earl )AAF, the I# has signed a number of ne! bilateral loan and note purchase agreements to bolster its capacit to support member countries during the globaleconomic crisis"

ultilateral borro!ing arrangements provide a further bac%stop to I# resources" 2oncessionallending and debt relief for lo!=income countries are financed through separate contribution= based trust funds"

I>F #unctioning as a lender

The I# provides t!o primar tpes of financial assistance to lo!=income countries'

7o!=interest loans under the Povert -eduction and Gro!th Trust 3P-GT4, and

Debt relief under the ;eavil Indebted Poor 2ountries 3;IP24 Initiative, the ultilateral

Debt -elief Initiative 3D-I4, and Post=2atastrophe Debt -elief 3P2D-4"

I# does not lend for specific pro$ects, rather it enables the countries to rebuild theirinternational reserves, stabili0e their currencies and continue for paing imports !ithout havingto impose trade restrictions or capital controls



&he lending rocedure

I# loans are provided under BarrangementsC !hich clearl chal%s out conditions the countrmust meet in order to be eligible for the loan" /rrangements must get approval from theExecutive 1oard"

7etter of intent 376I4 is a letter from a government to the I# !hich mentions the arrangements based on economic reforms to be made in relation to receiving an I# loan" It includes a matrixof conditions that must be implemented in order to access the I#’s resources"

6nce an arrangement is approved b the 1oard, the loan is released in phased installments as the program is carried out"

8ature o# loans concessional and non2concessional

The I# has developed various loan instruments, tailored to address the specific circumstancesof its diverse membership" 7o!=income countries ma borro! on concessional terms through theExtended 2redit #acilit 3E2#4, the Standb 2redit #acilit 3S2#4 and the -apid 2redit #acilit

3-2#4 3see I# Support for 7o!=Income 2ountries4" 2oncessional loans carr 0ero interest ratesuntil the end of )A(* 3)A() for S2# loans4"

In addition to concessional loans lo!=income countries are also eligible for debts to be !rittenoff under t!o %e initiatives" The ;eavil Indebted Poor 2ountries 3;IP24 Initiative, introducedin (FF and enhanced in (FFF, !hereb creditors provide debt relief, in a coordinated manner,!ith a vie! to restoring debt sustainabilit and The ultilateral Debt -elief Initiative 3D-I4,under !hich the I#, the International Development /ssociation 3ID/4 of the 5orld 1an%, andthe /frican Development #und 3/fD#4 canceled (AA percent of their debt claims on certaincountries to help them advance to!ard the illennium Development Goals"

Non= concessional loans are provided mainl through Stand=1 /rrangements 3S1/4, the#lexible 2redit 7ine 3#274, the Precautionar and 7i9uidit 7ine 3P774, and the Extended #und#acilit 3!hich is useful primaril for medium= and longer=term needs4" /ll non=concessionalfacilities are sub$ect to the I#’s mar%et=related interest rate, %no!n as the Brate of charge,C anda surcharge for even larger loans"

Conditionality

5hen a countr borro!s from the I#, its government ma%es commitments on economic andfinancial policiesQa re9uirement %no!n as conditionalit" 2onditionalit is a !a for the I# tomonitor that its loan is being used effectivel in resolving the borro!er:s economic difficulties,so that the countr !ill be able to repa promptl"

Why is this necessary?

Gives confidence to borro!ing countr b clarifing the terms of on !hich the I# !illcontinue to ma%e its financial resources available" 6verall goal is to restore or maintain balanceof pament viabilit and macroeconomics stabilit in order to pave !a to sustained gro!th"



3o6 does the I>F "udge that the mem!er country is meeting conditionality?

Prior actions' easures that a countr agrees to ta%e before the #und:s Executive 1oard

approves a loan and before the initial disbursement ta%es place" Such measures ensurethat the program has the necessar foundation to succeed for example, ad$ustment of theexchange rate to a sustainable level"

Performance 2riteria 3P2s4' Specific conditions that have to be met for the agreed

amount of credit to be disbursed"

Muantitative Performance criteria' Tpicall refers to macroeconomic polic variables

such as international reserves, fiscal imbalances or external borro!ing"

Structural Performance 2riteria' Includes specific measures to restructure %e sectors

such as energ, reform social securit sstems, or improve financial sector operations"

Structural benchmar%s' 1enchmar%s ma help the I#’s Executive 1oard assess a

countr:s progress on structural reforms, but failure to achieve them !ould notnecessaril interrupt #und financing"

Program -evie! offers the broad based assessment b the Executive 1oard of progress

!ith the program"

I>F #acilities

Stand2,y Arrangements .S,A/% The bul% of non=concessional I# assistance is providedthrough S1/s" The S1/ is designed to help countries address short=term balance of paments problems" Program targets are designed to address these problems and disbursements are madeconditional on achieving these targets 3Rconditionalit’4" The length of a S1/ is tpicall ()O)+

months, and repament is due !ithin *W=. ears of disbursement" S1/s ma be provided on a precautionar basisQ!here countries choose not to dra! upon approved amounts but retain theoption to do so if conditions deteriorateQboth !ithin the normal access limits and in cases ofexceptional access" The S1/ provides for flexibilit !ith respect to phasing, !ith front=loadedaccess !here appropriate"

Fle'i!le Credit Line .FCL/% The #27 is for countries !ith ver strong fundamentals, policies,and trac% records of polic implementation and is particularl useful for crisis prevention purposes, although it can also be used for responding to a crisis" #27 arrangements are approved,at the member countr’s re9uest, for countries meeting pre=set 9ualification criteria" The lengthof the #27 is (=) ears 3!ith an interim revie! of continued 9ualification after ( ear4 and therepament period the same as for the S1/" /ccess is determined on a case=b=case basis, is notsub$ect to the normal access limits, and is available in a single up=front disbursement rather than phased" Disbursements under the #27 are not conditioned on implementation of specific policunderstandings as is the case under the S1/" There is flexibilit to either dra! on the credit lineat the time it is approved or treat it as precautionar" In case a member dra!s, the repamentterm is the same as that under the S1/"

&he E'tended Credit Facility .ECF/ succeeds the Povert -eduction and Gro!th #acilit3P-G#4 as the #und’s main tool for providing medium=term support to 7I2s !ith protracted



balance of paments problems" #inancing under the E2# currentl carries a 0ero interest rate,!ith a grace period of .X ears, and a final maturit of (A ears"

&he Stand!y Credit Facility .SCF/ provides financial assistance to 7I2s !ith short=term balance of paments needs" The S2# replaces the ;igh=/ccess 2omponent of the ExogenousShoc%s #acilit 3ES#4, and can be used in a !ide range of circumstances, including on a precautionar basis" #inancing under the S2# currentl carries a 0ero interest rate, !ith a grace period of + ears, and a final maturit of > ears"

&he -aid Credit Facility .-CF/ provides rapid financial assistance !ith limited conditionalitto 7I2s facing an urgent balance of paments need" The -2# streamlines the #und’s emergencassistance for 7I2s, and can be used flexibl in a !ide range of circumstances" #inancing underthe -2# currentl carries a 0ero interest rate, has a grace period of .X ears, and a final maturitof (A ears"

E'tended Fund Facility .EFF/' This facilit !as established in (F@+ to help countries addresslonger=term balance of paments problems reflecting extensive distortions that re9uire

fundamental economic reforms" /rrangements under the E## are thus longer than S1/sQ usuall * ears" -epament is due !ithin +XO(A ears from the date of disbursement"

-aid Financing Instrument .-FI/@ The -#I !as introduced to replace and broaden the scopeof the earlier emergenc assistance policies" The -#I provides rapid financial assistance !ithlimited conditionalit to all members facing an urgent balance of paments need" /ccess underthe -#I is sub$ect to an annual limit of .A percent of 9uota and a cumulative limit of (AA percentof 9uota" Emergenc loans are sub$ect to the same terms as the #27, P77 and S1/, !ithrepament !ithin *WO. ears"

7eneral ercetion o# the I>F

Same recipe for all appl one si0e fit all approach of stabili0ation policies

2losed door organi0ation of intellectuals belonging to iv leagues

1iased decision ma%ing procedure decision ma%ers holding positions In countr’s govt

leading to softer monetar policies

Political considerations in decision ma%ing as it is dependent on members’ financial

support

Inappropriate polic prescriptions !hich led to tight fiscal discipline !hile the actual

reason being faults !ith polic formation and implementation

Gro!ing disparities in developing countries ma$or ine9ualit issues !ithin the countr

I>F has #ailed its mission that is 6hy develoing countries are reluctant to !orro6

The first half of the (F>A’s sa! the fund providing credit to the developing countries !hich bthe second half the net transfer became negative, further more instead of resolving the I# %eptadding to it"



-easons for reluctance to borro! !ith reference to Globali0ation and Its Discontents, Stiglit0las out an argument for !h the I# has failed in its mission to ensure global economicstabilit'

I# operates largel on the untenable ideolog that mar%ets should be left to operate on

their o!n, and that no 3or ver little4 direction or intervention is needed" It is simpl badeconomics"

In times of crisis, the I# should foster expansionar economic policQfor instance,

encouraging or enabling increased expenditures, lo!er taxes, and lo!er interest ratesQinorder to stimulate the econom" No! the I# has adopted exactl the opposite approach' providing funds for countries onl if the institute contractionar policies such as cuttingdeficits, raising taxes, and raising interest rates"

The I# pressures countries that petition for I# loans to open their mar%ets to outside

investment capital" Investors ma invest huge sums in a countr onl to pull thoseinvestments at a moment’s notice, causing acute economic crises"

an of the ideas of the B5ashington 2onsensusC !ere based on the experience !ith

7atin /merica" It does ma%e sense to appl this polic blindl to other countries in verdifferent situations !here this %ind of polic might ma%e matters much !orse"

I# policies forcing trade liberali0ation on a developing countr !here industries are not

strong enough can actuall cause more harm" 7ocal industries could not compete, andrising interest rates made $ob creation virtuall impossible

The I# is funded b mone from taxpaers around the !orld, it is not held accountable

to the interests of this taxpaer" Governance is a ma$or problem

2ontrol of the I# is accomplished through a complicated set of voting arrangements based in large part on the economic influence of the member countries the L"S" haseffective veto po!er over I# decisions"

I# !as driven b the collective !ill of the G=@ 3the governments of the seven most

advanced industrial countries4" 6pen, democratic debate over I# policies and procedures !ould threaten the influence of these industrial giants, !hich !ould clearlnot be in their best interests"

Pakistan and I>F

Structural Ad"ustment Facility .SAF/ and Stand2!y arrangement .S,A/ 6as aroved !y

the I>F in (ecem!er $D%

To support the Pa%istan’s reforms program, the I# approved on December )>, (F>> a threeear arrangement under the structural /d$ustment #acilit 3S/#4 involving an amount of SD-*>) million, as !ell as (.=month stand b arrangement 3S1/4 involving an amount of SD- )@*million" In December (F>F, I# extended the time period for attaining fiscal and externalviabilit b one ear to (FF(&F)" 6n December )), (F>F the fund approved an extension of theS1/ through Kune *A, (FFA" Subse9uentl, the S1/ !as extended further to November *A, (FFA"



&he main o!"ectives o# the I>F lending rograms 6ere@

Sustain real gro!th at about .".?

Increase gross domestic savings from (A"*? of GDP to (+"+@? in (FF(&F)

-ise gross investment ratio from (@".? to (>"F? in (FF(&F)

-educe the rate of inflation from F")? to ")? in (FF(&F)

-educe the external current account deficit from +"@? of GNP to sustainable level of

)"? of GNP in (FF(&F)"

-educe the external debt service ratio from about *(? of current receipts in (F>>&>F to

less than )>? b (FFA&F(, and maintain it at about this level thereafter

Implementation of the ad$ustment and structural reform measures !ere broadl as

programmed

;o!ever, overall macro economic performance and the pace of structural reform !ere

some!hat !ea%er than expected

-euired Fiscal olicy measures

/ reduction in the overall fiscal deficit from @"*? of GDP to +">? in (FF(&F)

/n introduction of measures aimed at increasing the elasticit of the tax sstem and

expanding the tax base, and at reducing reliance of the tax sstem on international tradeover medium term"

Improvement in direct taxation

/n expansion in the base of sales tax on imports as !ell as domesticall produced goods

Introduction of general sales tax b $ul(, (FFA" /n increase in tax elasticit, reduction in

income and profit tax exemptions and expansion of !ithholding limits"

Structural Ad"ustment Facility .SAF/ and Comensatory and Contingency #inancing

Facility .CCFF/ aroved !y the I>F in $DD$

The board approved the programs under above S/# and 22## involving purchases of SD-(AF") million and SD- ())"+ million respectivel, in December (FF(" In November (FF), the

I# approved emergenc assistance for Pa%istan in the amount of SD- (>F".. million to assistthe countr in meeting immediate foreign exchange re9uirements in the !a%e of floods thatcaused !idespread destruction in the countr in September (FF)" 6verall the program targetedeconomic gro!th of ")?, reduction in inflation to >? and strengthening of gross internationalreserves position"

>acroeconomic o!"ectives@



Sustain real gro!th at about ")? I (FF(&F) and at an average of "*? of GDP in

(FF)YF*

Increase gross domestic savings from ()? of GDP in (FFA&F( to over (? b (FF*&F+,

mainl b raising government savings

-aise gross investment ratio from (>"*? of GDP in (FFA&F( to )A? (FF*&F+

-educe the rate of inflation from (A"@? to belo! ?

-educe the external account deficit from +"? of GNP in (FFA&F( to )".? of GNP in

(FF)&F*

-educe the external debt service ratio from ).? of current account receipts in (FFA&F( to

less than )*? b (FF*&F+ and

Increase gross official reserves to nearl six !ee%s of imports at end (FF*&F+

Fiscal olicy measures

-educe to overall budget deficit from >"? to +">? of GDP

Improve direct taxation, underta%e elimination of extensive exemptions, and extend the

scope of taxation in the agricultural sector,

Increase substantial excise tax receipts, raise the share of revenues from the GST and

federal excises A".? of GDP per ear"

Strengthen tax administration"

Pricing and other sectoral olicies

/nnual ad$ustment and further rationali0ation of po!er tariffs to achieve +A? self

financing of 5/PD/’s agreed investment program

Passing through to domestic consumers the full increases in the international price of

crude oil

/nnual ad$ustment of the price of natural gas supplies to domestic household consumers

!ith a vie! to reaching (AA? of the border price of fuel oil e9uivalent b (FF)&F*"

I>F Loan under Enhanced Structural Ad"ustment Facility .ESAF/ and E'tended Fund

Facility .EFF/ #or $DD+ND92$DD<ND=

6n ))nd #ebruar (FF+, the I# approved the use of SD- F>."@ million 3about LS (,*F billion4 SD- A" million 3about LS >+) million4 under the enhanced structural ad$ustmentfacilit 3ES/#4, and SD- *@F"( million 3about LS .) million4 under the extended fundfacilit 3E##4= over the next three ears in support of Pa%istan’s medium term economicad$ustment and reform program" /fter approving the use of its above financial resources to



Pa%istan, the I# on Pa%istan’s re9uest, cancelled the standb arrangement approved nSeptember (FF*"

>ain o!"ectives@

Sustaining an annual gro!th rate of ".?

-educing inflation to .? b the end of the program period

Strengthening the international reserves to cover (". !ee%s of imports"

/chieve current account convertibilit of the rupee" This !as accompanied b additionalimprovements in the structural aspects of the econom to strengthen its suppl responsiveness,reduce its vulnerabilit to adverse external shoc%s and improve social indicators"

Stand2,y credit aroved in (ecem!er $DD9

The I# approved on December (*, (FF. a (.=month stand=b credit for Pa%istan e9uivalent to

SD- +A(">. million 3about .F million4" 6b$ectives of the program included

-estoration of international reserves to the e9uivalent of F"+ !ee%s of imports

-eduction of inflation to F percent and

/cceleration of real GDP gro!th to .". percent"

;o!ever, achievement of these ob$ectives !as undermined b slippages in policimplementation in (FF.&F and the first four months of (FF&F@" In particular, excessive ban% borro!ing b the government to finance its fiscal deficit put pressure on balance of paments"

In support of the economic ad$ustment and reform program, Pa%istan re9uested the I# toextend the stand=b credit through end=September (FF@, and to augment the amount availableunder it b SD- (A"@+ million 3about LS)*( million4"

I>F5s :S 9D< >illion Stand2,y Credit #or Pakistan

The executive board of the International onetar #und 3I#4 approved on November )F,)AAA,a Stand=1 2redit for Pa%istan until end=September )AA(, in an amount e9uivalent to SD- +.illion 3about LS .F illion4 for the government’s economic ad$ustment and reform programto be supported also b financing from the /sian Development 1an%, the 5orld 1an%, 1ilateralofficial creditors, and the private sector"

The program aimed to'

ove Pa%istan on to a high and sustainable gro!th path b strengthening the 1alance of

paments position

-ebuilding official reserves and

-educing public sector indebtedness"



I>F $%* ,illion P-7F Credit to Pakistan

The I# approved on December @, )AA( a three=ear arrangement for Pa%istan under thePovert -eduction and Gro!th #acilit 3P-G#4, totaling SD- ("A*+ billion 3about LS ("*))

billion4" The decision enabled Pa%istan to dra! SD- >"( million 3about LS(AF" million4under the arrangement, the government’s ob$ective !as to raise gro!th and reduce povert, !hileconsolidating macroeconomic stabilit and external viabilit"

The central goal of Pa%istan’s P-G#=supported economic program !as to graduall raise gro!thcloser to a medium term ob$ective of at least percent annuall" Pa%istan targeted for the firstear of the premium 3#8 )AA(&A)4, a moderate increase in gro!th to *"@ percent from )"@ percentin the preceding ear" Inflation !as expected to be limited to . percent over the three=ear theI#=supported program"

I>F S,A 6ith Pakistan

Pa%istan submitted to the I# a -e9uest for Stand=1 /rrangement on )A November, )AA>amounting SD- ."(@ billion 3 @" billion4 e9ual to .AA? of Pa%istan:s 9uota in the #und" The-e9uest !as prepared $ointl b Pa%istani authorities and I# Staff and approved b the2abinet" The /rrangement !as for a period of )* months" It !as on interest rate of *".(=+".(?"

The amount !as disbursed in seven tranches = the first tranche of )"A@ billion !as received on)F November, )AA> and the balance amount had been disbursed in six 9uarterl installmentsduring )AAF=(A" The amount and interest !as to be repaid in five ears from )A(("

O!"ective and Economic Program .)D2)$/

The main ob$ectives of the /rrangement are to'

restore confidence of domestic and external investors b addressing macroeconomic

imbalances through a tightening of fiscal and monetar policies and

Protect the poor and preserve social stabilit through a !ell=targeted and ade9uatel

funded social safet net" #or this purpose the government of Pa%istan has initiatedan Economic Program covering )+ months"

The main elements of the Program are'

-educe fiscal deficit' @"+? of GDP in )AA> to +")? in )AAF and *"*? in )A(A

Tighten monetar polic 3increase interest rate, eliminate government borro!ing4 toreduce inflation to ? in )A(A

Increase expenditure on social safet net 3A"? of GDP to A"F? in )AAF4 =!or% !ith

5orld 1an% to prepare a comprehensive program of safet net

Conditionality o# S,A@



The program !as sub$ect to 9uarterl revie! and performance criteria"

The conditionalit covers actions prior to the approval of arrangement b the I# 1oard,

performance criteria, benchmar%s and 9uantitative targets"

The prior actions included increasing the State 1an%:s discount rate from (*? to (.? as

a measure to control inflation,

-ise in electricit tariff b an average of (>? effective from . September, )AA>, and

agreement on volume of 9uarterl issue of treasur bills for the remainder of second9uarter of )AA>&AF"

The performance criteria include submission of amendments in t!o legislations 3relating toenhancement of effectiveness of the State 1an% and harmoni0ation of income and GST la!s4 inthe Parliament b Kune )AAF"

Evaluation o# S,A )2$

The Economic Program under S1/ onl restored the confidence of international and

domestic investors !hile preserving social stabilit b protecting the poor"

It !as a financial stabili0ation plan heavil dependent on tight monetar and fiscal

policies" It ignored issues of revival of economic gro!th, social development"

The I# Staff has also estimated a medium=term macroeconomic frame!or% ending )A(*,depicting stead improvement in all ma$or indicators" The economic gro!th rate is pro$ected toclimb to @"A percent in )A(* supported b rise in national savings, capital formation and foreignexchange reserves, and decline in inflation, fiscal deficit, public debt and current account deficit"

I>F Assistance to Pakistan8ear )A(A = )A((

In march )A(A, The board of International onetar #und agreed to release ("(* billion

in aid for Pa%istan "

Sept )A(A = The I# announced it !ould provide around +.A million in ne! emergenc

financing to Pa%istan to help the countr cope !ith the economic impact of this summer’smassive floods"

Dec )A(A = In an effort to bail out Pa%istan’s sluggish econom, the International

onetar #und 3I#4 has approved an aid of (") billion dollars for the troubled countr" The International onetar #und expects Pa%istan’s )A((=() fiscal deficit to !iden to ".

per cent of gross domestic product, sas a report released on 5ednesda"

Pa%istan’s fiscal deficit !as ."F per cent in )A(A=(( and ("( per cent of GDP for three

months ending September *A"



The countr’s current account deficit is sho!n as ("@ per cent of GNP" Similarl, imports are

estimated at around + billion, !hile the exports trail behind at an estimated *A billion during

)A((=()"



ASIA8 FI8A8CIAL C-ISIS2$DD=

Introduction

The /sian financial crisis !as a period of financial crisis that gripped much of /sia beginning inKul (FF@, and raised fears of a !orld!ide economic meltdo!n due to financial contagion" Thecrisis started in Thailand !ith the financial collapse of the Thai baht after the Thai government!as forced to float the baht 3due to lac% of foreign currenc to support its fixed exchange rate4,cutting its peg to the L"S" dollar, after exhaustive efforts to support it in the face of a severefinancial overextension that !as in part real estate driven" /t the time, Thailand had ac9uired a burden of foreign debt that made the countr effectivel ban%rupt even before the collapse of itscurrenc" /s the crisis spread, most of Southeast /sia and Kapan sa! slumping currencies,devalued stoc% mar%ets and other asset prices, and a precipitous rise in private debt" Thoughthere has been general agreement on the existence of a crisis and its conse9uences, !hat is lessclear are the causes of the crisis, as !ell as its scope and resolution" Indonesia, South Jorea and

Thailand !ere the countr’s most affected b the crisis" ;ong Jong, alasia, 7aos and thePhilippines !ere also hurt b the slump" The People:s -epublic of 2hina, Pa%istan, India,Tai!an, Singapore, 1runei and Hietnam !ere less affected, although all suffered from a loss ofdemand and confidence throughout the region"

/s one of the !orld’s largest most successful developing region, East /sia !as able to attractseveral hundred billion dollars of international ban% loans in the first half of the (FFAs "/ huge proportion of these loans !ere short term maturit that is !ith a maturit of less than one ear";o!ever most /sian financial institutions and capitalists !ere not entirel capable of channelingthe increased inflo!s into profitable investments" Even traditional, hard !or%ing business people!ere snared b the lure of eas mone "one could easil borro! LS dollar at rates lo!er than

local currenc deposits" So traditional value builders ended up arbitraging= !ith disastrousresults !hen the local currencies collapsed"

Politicall connected individuals and institutions !ere !idel perceived to be bac%ed b implicitgovernment guarantees, but the !ere not sub$ect to effective b supervision" This !as aninvitation to ris% ta%ing and became especiall dangerous after (FFA as foreign capital began tospeculative real estate ventures, over ambitious corporate expansions and so on" 1 the mid(FFAs, the /sian financial mar%ets !ere inflated b a ma$or bubble that had to burst sooner orlater"

The impact of the /sian economics crisis !as substantial" 2urrencies plunged, enterprises failed,financial institutions closed their doors and rapid gro!th turned into recession" / number of

/sian countries had to deal !ith severe conse9uences of the crisis" Lnemploment, ban%ruptc,hunger and increased ethnic conflict !ere prominent leading in Indonesia’s case to PresidentSuharto having to step do!n in (FF> he !as not the onl victim"

The essentiall resulted from a financial sector malfunction !ithin the affected economies andfrom faults in financial architecture" 1ad investments left governments and businesses incapableof fulfilling their financial obligations" Short term capital left the countr, putting fixed exchangerates under pressure and ultimatel leading to the devaluation of /sian currencies"



The International onetar #und 3I#4 functioned as a buffer b bailing out outstanding loans"2ertain conditions, such the restriction of government expenditure, reform of the ban%ing sectorand cancellation of subsidies, have been applied to the East /sian economies"

&he ,eginning@ &hailand2 Eicenter O# A Crash

In 6ctober (FF /sia !ee% had alread labeled Thailand the region’s !orst performer= despiteover percent GDP gro!th in that ear" 1ut the health of Thailand’s financial sector had been acause of concern for some time" The 1ang%o% ban% of commerce had sun% in sea of scandal forsome time before (FF@" / real estate compan Somprasong land had defaulted on a Eurobondloan in #ebruar (FF@ and the countr’s largest finance compan #IN/N2E 6NE had beeneffectivel closed do!n on account of bad debts b the inistr of finance"

/t the same time, Thailand !as experiencing a !orring balance of pament deficit" During(FF, economic and export gro!th had fallen to their lo!est rates in a decade and domesticinterest rates !ere alread relativel high to protect the baht, !hich !as pegged to a dollardominant bas%et of ma$or currencies" /s a current account deficit exceeding > percent of GDP, a

number !hich had become smbolic in financial circles as a result of the exican crisis of (FF+,mar%ets became uneas and there !ere several speculative moves against the Thai currenc" 6necame in December (FF, another in arch (FF@, then on ( a the 1an% of Thailand spentnearl (A1 defending the baht’s peg" Nevertheless it is !orth nothing that Thailand hadexperienced a balance of paments deficit in excess of >? in (FFA !ithout precipitating a crisis"

Essentiall, appreciation of the baht against the en and !ea%nesses in the Thai financial sstemmade it difficult to maintain the established parit of the baht" Nonetheless the ban% of Thailand,for !hatever reasons, steadil s9uandered the countr’s reserves tring to maintain it" 5orse, ithid the actions from public vie! b failing full to disclose transactions" 1 Kune (F@@ these off= balance=sheet trades !ere almost e9ual to Thailand’s national reserves" 2onse9uentl the timehad arrived !hen another speculative challenge !ould force the Thai authorities to face realit"This occurred and on )( Kul (FF@ the 1an% of Thailand announced a managed float of the baht"The also sought assistance from the I#" The baht fell (.=)A? and triggered the East /siancrisis"

Some nine months after !ards at a media briefing in 5ashington on ( /pril (FF>,representatives of the I# spo%e publicall about these events"

B;edge funds triggered Thailand’s financial crisis building up large positions against the Thai baht and contributing to a devaluation that spar%ed /sia’s devastating financial turmoil" ;o!ever there is no evidence that the hedge funds had built up large positions against other Southeast/sian currenciesC" 31arr Eichengreen4

/sian crisis is more than an isolated event in a single countr" -ather it is a regional eventembracing man countries that turned out to have ma$or global repercussions" 5hat occurred inThailand !as $ust the start" The crisis 9uic%l spread to embrace almost all of Southeast /sia andSouth Jorea as !ell" 5ithin $ust a fe! months Thailand’s currenc crisis had become /sia’sfinancial crisis and later /sia’s economic meltdo!n" The rapid spread of crisis across the regionis a most note!orth and !orring feature of these events it !as essentiall a phenomenon offast and effective global financial mar%ets" #inancial mar%ets provided the conducting



mechanism b !hich the crisis in Thailand spread !ith such speed to other countries" Theefficienc of this mar%et mechanism reflected both modern communications technolog and thecharacteristics of modern fund management"

The /sian crisis !as financial panic on a grand scale" The leaps from countr to countr become%no!n as the contagion effect" Her soon there !as a region !ide crisis of confidence, !hichgiven lac% of understanding and institutional rigidities, 9uic%l spread from financial mar%ets tothe real economies of the region !ith disastrous economic and social effects"

&hailand

#rom (F>. to (FF, Thailand:s econom gre! at an average of over F? per ear, the highesteconomic gro!th rate of an countr at the time" Inflation !as %ept reasonabl lo! !ithin arange of *"+O."@?"The baht !as pegged at ). to the LS dollar" 6n (+ a and (. a (FF@, theThai baht !as hit b massive speculative attac%s" 6n *A Kune (FF@, Prime inister 2havalit8ongchaiudh said that he !ould not devalue the baht" This !as the spar% that ignited the /sianfinancial crisis as the Thai government failed to defend the baht, !hich !as pegged to the bas%et

of currencies in !hich the L"S" dollar !as the main component, against international speculators"

Thailand:s booming econom came to a halt amid massive laoffs in finance, real estate, andconstruction that resulted in huge numbers of !or%ers returning to their villages in thecountrside and AA,AAA foreign !or%ers being sent bac% to their home countries" The bahtdevalued s!iftl and lost more than half of its value" The baht reached its lo!est point of .units to the LS dollar in Kanuar (FF>" The Thai stoc% mar%et dropped @.?" #inance 6ne, thelargest Thai finance compan until then, collapsed" The Thai government !as eventuall forcedto float the 1aht, on ) Kul (FF@" 6n (( /ugust (FF@, the I# unveiled a rescue pac%age forThailand !ith more than (@ billion, sub$ect to conditions such as passing la!s relating to ban%ruptc 3reorgani0ing and restructuring4 procedures and establishing strong regulationframe!or%s for ban%s and other financial institutions" The I# approved on )A /ugust (FF@,another bailout pac%age of *"F billion" 1 )AA(, Thailand:s econom had recovered" Theincreasing tax revenues allo!ed the countr to balance its budget and repa its debts to the I#in )AA*, four ears ahead of schedule" The Thai baht continued to appreciate to )F 1aht to theDollar in 6ctober )A(A"

Indonesia

In Kune (FF@, Indonesia seemed far from crisis" Lnli%e Thailand, Indonesia had lo! inflation, atrade surplus of more than FAA million, huge foreign exchange reserves of more than )A billion, and a good ban%ing sector" 1ut a large number of Indonesian corporations had been borro!ing in L"S" dollars" During the preceding ears, as the rupiah had strengthened respective

to the dollar, this practice had !or%ed !ell for these corporations their effective levels of debtand financing costs had decreased as the local currenc:s value rose" In Kul (FF@, !hen Thailandfloated the baht, Indonesia:s monetar authorities !idened the rupiah trading band from >? to()?" The rupiah suddenl came under severe attac% in /ugust" 6n (+ /ugust (FF@, the managedfloating exchange regime !as replaced b a free=floating exchange rate arrangement" The rupiahdropped further" The I# came for!ard !ith a rescue pac%age of )* billion, but the rupiah !assin%ing further amid fears over corporate debts, massive selling of rupiah, and strong demand for



dollars" The rupiah and the Ka%arta Stoc% Exchange touched a historic lo! in September"ood:s eventuall do!ngraded Indonesia:s long=term debt to :$un% bond:"

/lthough the rupiah crisis began in Kul and /ugust (FF@, it intensified in November !hen theeffects of that summer devaluation sho!ed up on corporate balance sheets" 2ompanies that had borro!ed in dollars had to face the higher costs imposed upon them b the rupiah:s decline, andman reacted b buing dollars through selling rupiah, undermining the value of the latterfurther" In #ebruar (FF>, President Suharto sac%ed 1an% Indonesia Governor K" Soedrad$adD$i!andono, but this proved insufficient" Suharto resigned under public pressure in a (FF>and Hice President 1" K" ;abibie !as elevated in his place" 1efore the crisis, the exchange rate bet!een the rupiah and the dollar !as roughl ),AA rupiah to ( LSD" The rate plunged to over((,AAA rupiah to ( LSD on F Kanuar (FF>, !ith spot rates over (+,AAA during Kanuar )*O)and trading again over (+,AAA for about six !ee%s during KuneOKul (FF>" 6n *( December(FF>, the rate !as almost exactl >,AAA to ( LSD" Indonesia lost (*".? of its GDP that ear"

South orea

The ban%ing sector !as burdened !ith non=performing loans as its large corporations !erefunding aggressive expansions" During that time, there !as a haste to build great conglomeratesto compete on the !orld stage" an businesses ultimatel failed to ensure returns and profitabilit" The South Jorean conglomerates, more or less completel controlled b thegovernment, simpl absorbed more and more capital investment" Eventuall, excess debt led toma$or failures and ta%eovers" #or example, in Kul (FF@, South Jorea:s third=largest car ma%er,Jia otors, as%ed for emergenc loans" In the !a%e of the /sian mar%et do!nturn, ood:slo!ered the credit rating of South Jorea from /( to /*, on )> November (FF@, and do!ngradedagain to 1) on (( December" That contributed to a further decline in South Jorean shares sincestoc% mar%ets !ere alread bearish in November" The Seoul stoc% exchange fell b +? on @ November (FF@" 6n > November, it plunged b @?, its biggest one=da drop to that date" /nd on

)+ November, stoc%s fell a further @")? on fears that the I# !ould demand tough reforms" In(FF>, ;undai otors too% over Jia otors" Samsung otors: . billion venture !as dissolveddue to the crisis, and eventuall Dae!oo otors !as sold to the /merican compan Generalotors 3G4"

The South Jorean !on, mean!hile, !ea%ened to more than (,@AA per L"S" dollar from around>AA" Despite an initial sharp economic slo!do!n and numerous corporate ban%ruptcies, SouthJorea has managed to triple its per capita GDP in dollar terms since (FF@" Indeed, it resumed itsrole as the !orld:s fastest=gro!ing econom since (FA per capita GDP has gro!n from >A innominal terms to more than )(,AAA as of )AA@" ;o!ever, li%e the chaebol, South Jorea:sgovernment did not escape unscathed" Its national debt=to=GDP ratio more than doubled3approximatel (*? to *A?4 as a result of the crisis"

Philiine

The Philippine central ban% raised interest rates b ("@. percentage points in a (FF@ andagain b ) points on (F Kune" Thailand triggered the crisis on ) Kul and on * Kul the Philippine2entral 1an% intervened to defend the peso, raising the overnight rate from (.? to *)? at theonset of the /sian crisis in mid=Kul (FF@" The peso dropped from ) pesos per dollar at the startof the crisis to *> pesos in mid=(FFF to .+ pesos as in earl /ugust, )AA(" The Philippine GDP



contracted b A"? during the !orst part of the crisis, but gre! b *? b )AA(, despite scandalsof the administration of Koseph Estrada in )AA(, most notabl the $ueteng scandal, causing thePSE 2omposite Index, the main index of the Philippine Stoc% Exchange, to fall to (AAA pointsfrom a high of *AAA points in (FF@" The peso:s value declined to about .. pesos to the LS dollar"7ater that ear, Estrada !as on the verge of impeachment but his allies in the senate voted

against continuing the proceedings"

>alaysia

1efore the crisis, alasia had a large current account deficit of .? of its GDP" /t the time,alasia !as a popular investment destination, and this !as reflected in J7SE activit !hich!as regularl the most active stoc% exchange in the !orld 3!ith turnover exceeding evenmar%ets !ith far higher capitali0ation li%e the Ne! 8or% Stoc% Exchange4" Expectations at thetime !ere that the gro!th rate !ould continue, propelling alasia to developed status b )A)A,a government polic articulated in 5a!asan )A)A" /t the start of (FF@, the J7SE 2ompositeindex !as above (,)AA, the ringgit !as trading above )".A to the dollar, and the overnight rate!as belo! @?" In Kul (FF@, !ithin das of the Thai baht devaluation, the alasian ringgit !as

attac%ed b speculators" The overnight rate $umped from under >? to over +A?" This led torating do!ngrades and a general sell off on the stoc% and currenc mar%ets" 1 end of (FF@,ratings had fallen man notches from investment grade to $un%, the J7SE had lost more than.A? from above (,)AA to under AA, and the ringgit had lost .A? of its value, falling from above)".A to under +".@ on 3Kan )*, (FF>4 to the dollar" The then premier, ahathir ohammadimposed strict capital controls and introduced a *">A peg against the LS dollar"

alasian moves involved fixing the local currenc to the LS dollar, stopping the overseas tradein ringgit currenc and other ringgit assets therefore ma%ing offshore use of the ringgit invalid,restricting the amount of currenc and investments that residents can ta%e abroad, and imposedfor foreign portfolio funds, a minimum one=ear sta period !hich since has been converted to

an exit tax" The decision to ma%e ringgit held abroad invalid has also dried up sources of ringgitheld abroad that speculators borro! from to manipulate the ringgit, for example b sellingshort" Those !ho do, have to purchase bac% the limited ringgit at higher prices, ma%ing itunattractive to them" In (FF>, the output of the real econom declined plunging the countr intoits first recession for man ears" The construction sector contracted )*".?, manufacturingshrun% F? and the agriculture sector ."F?" 6verall, the countr:s gross domestic product plunged ")? in (FF>" During that ear, the ringgit plunged belo! +"@ and the J7SE fell belo!)@A points" In September that ear, various defensive measures !ere announced to overcome thecrisis" The principal measures ta%en !ere to move the ringgit from a free float to a fixedexchange rate regime" 1an% Negara fixed the ringgit at *"> to the dollar" 2apital controls !ereimposed !hile aid offered from the I# !as refused" Harious tas% force agencies !ere formed"

The 2orporate Debt -estructuring 2ommittee dealt !ith corporate loans" Danaharta discountedand bought bad loans from ban%s to facilitate orderl asset reali0ation" Danamodal recapitali0ed ban%s" Gro!th then settled at a slo!er but more sustainable pace" The massive current accountdeficit became a fairl substantial surplus" 1an%s !ere better capitali0ed and NP7s !ere reali0edin an orderl !a" Small ban%s !ere bought out b strong ones" / large number of P72s !ereunable to regulate their financial affairs and !ere delisted"



Singaore

/s the financial crisis spread the econom of Singapore dipped into a short recession" The shortduration and milder effect on its econom !as credited to the active management b thegovernment" #or example, the onetar /uthorit of Singapore allo!ed for a gradual )A?depreciation of the Singapore dollar to cushion and guide the econom to a soft landing" Thetiming of government programs such as the Interim Lpgrading Program and other constructionrelated pro$ects !ere brought for!ard" Instead of allo!ing the labor mar%ets to !or%, the National 5age 2ouncil preemptivel agreed to 2entral Provident #und cuts to lo!er labor costs,!ith limited impact on disposable income and local demand" Lnli%e in ;ong Jong, no attempt!as made to directl intervene in the capital mar%ets and the Straits Times Index !as allo!ed todrop A?" In less than a ear, the Singaporean econom full recovered and continued on itsgro!th tra$ector"

China

The 2hinese currenc, the renminbi 3-14, had been pegged to the LS dollar at a ratio of >"*

-1 to the dollar, in (FF+" ;aving largel %ept itself above the fra throughout (FF@O(FF>there !as heav speculation in the 5estern press that 2hina !ould soon be forced to devalue itscurrenc to protect the competitiveness of its exports vis=a=vis those of the /SE/N nations,!hose exports became cheaper relative to 2hina:s" ;o!ever, the -1:s non=convertibilit protected its value from currenc speculators, and the decision !as made to maintain the peg ofthe currenc, thereb improving the countr:s standing !ithin /sia" The currenc peg !as partlscrapped in Kul )AA. rising )"*? against the dollar, reflecting pressure from the Lnited States"

Lnli%e investments of man of the Southeast /sian nations, almost all of 2hina:s foreigninvestment too% the form of factories on the ground rather than securities, !hich insulated thecountr from rapid capital flight" 5hile 2hina !as unaffected b the crisis compared toSoutheast /sia and South Jorea, GDP gro!th slo!ed sharpl in (FF> and (FFF, calling attentionto structural problems !ithin its econom" In particular, the /sian financial crisis convinced the2hinese government of the need to resolve the issues of its enormous financial !ea%nesses, suchas having too man non=performing loans !ithin its ban%ing sstem, and reling heavil on trade!ith the Lnited States"

&he -ole o# International >onetary Fund

The I# found itself confronting problems it never had to face before" The /sian crisis !as acomplex crisis, !ith a currenc component and credit component" The credit component, in turn,had an international aspect and a domestic aspect, and all the various components !ereinteractive" 5hat made the /sian crisis different from an previous one !as that it originated in

the private sector the public sector !as in the relativel good shape"

The I# prescribed the traditional medicine !hen the public sector is in trouble raise interestrates and reduces government spending in order to stabili0e the currenc and restore theconfidence of international investors" It did recogni0e the structural defects in the individualcountries and also imposed tailor =made conditions, such as the closing of unsound financialinstitutions" 1ut the I# program did not restore the confidence of international investors because the addressed onl some aspects of the crisis, not all" Since those aspects !ere



interrelated, none could be cured separatel" Specificall currencies could not be stabili0ed untilthe debt problems !ere tac%led, because debtors rushing to cover their exposure depressed thecurrenc, and currenc !ea%ness in turn increased the debtors’ exposure in vicious circle"

I# had not developed a methodolog for dealing !ith imbalances in the private sector I#officials had an inade9uate understanding of ho! financial mar%ets operate" In Indonesia !herethe I# insisted on closing some ban%s !ithout ma%ing provisions for the protection ofdepositors, provo%ing a classic run on practicall all ban%s"

In Indonesia, the financial !ea%ened the President Suharto’s resolve to abide b the conditions of I# rescue program, !hich he alread found distasteful because it encroached upon the privileges of his famil and friends" The s9uabble bet!een the Suharto and I# pushed theIndonesian rupiah at around four thousand to dollars, thin%ing that the currenc had alreadovershot !hen it had fallen from ),+*A as of Kul (FF@ to fall to more than (,AAA in short order"

The I# has been critici0ed for setting too man conditions and interfering too much in theinternational affairs of the countries that turned to it for assistance" 5hat business is it of the

I#, it is as%ed, if a regime is corrupt on the ban%ing and industrial structure over its obligations"The $ob of I# is to help contain li9uidit crises the structural problems are best left to thecountr concern"

7i9uidit crises are inextricabl interconnected !ith structural imbalances" 5hen ban%s andcorporations are over indebted, their condition cannot be corrected $ust b lending them moremoneQan infusion of e9uit is re9uired" The trouble is that during a crisis neither ne! e9uitnor further credit is readil available"

The onl effective solution !ould have been to impose a moratorium on debt repamentsfollo!ed b a debt=to=e9uit conversions scheme, but that !as far beond the po!er andcompetence of I#" It !ould have relieved the pressure on the exchange rates and obviated the

need for imposing punitive interest rates it !ould have achieved the necessar structuralad$ustments !ithout plunging the countries into depression" 1ut it could not have beenaccomplished !ithout mustering the necessar political !ill both locall and internationall"

6bviousl there is a sstematic problem here, and the I# is part f the problem rather than thesolution" The I# is no! in a crisis of its o!n" ar%et confidence has been essential ingredientin its past successes, and its credibilit has been impaired" The international financial institutionsalso find themselves under political pressure from the L"S 2ongress" ost important, the I#has itself lost confidence in the doctrine that guided its actions in the past, and it is flailing abouttring to find a !a to Bbail inC the private sector"

Persectives on the :n#olding O# the Crisis in the 7lo!al Economy

There are t!o perspectives on /sian crisis

(" The perspectives of international financial and development organi0ations !hichemphasis deficiencies in the practices of firms and of financial and governmentalinstitutions in /sia

)" Soros and strange !ho perceive it as part of a broader crisis of the global financialsstem



5hile the crisis has the significant financial and economic aspects, it is much more pervasiveand sstematic" It is a production as !ell as a financial crisis" It is a crisis of the export oriented,industriali0ation 3E6I4 development model" It is a crisis of free=mar%et 3unregulated4 capitalism"It particular it is a crisis of orthodox 3fundamentalist4 free=mar%et economics"

&he Persectives o# International Financial and (eveloment Organiations

I# staff 3(FF>4 identified the follo!ing causes of the /sian crisis'

• 6verheated economics stemming from large external stemming from large external

deficits and inflated propert and stoc% mar%et values"

• Prolonged maintenance of pegged exchange rates to the LS dollar at unsustainable levels,

coupled !ith !ide s!ings in the dollar=8en exchange rate that undermined internationalcompetitiveness"

• Excessive external 3especiall short term4 borro!ing, leading to excessive exposure to

foreign exchange ris% in both the financial and corporate sectors

• 7ac% of enforcement of prudential rules and inade9uate supervision of financial sstems,

coupled !ith government=directed lending practices that led to a sharp deterioration inthe 9ualit of ban%s loan portfolios

• The limited availabilit of data and a lac% of transparenc hindered mar%et participants

from ta%ing a realistic vie! of economic fundamentals"

• International investors underestimated the ris%s as the searched for higher ields at a

time !hen investment opportunities appeared less profitable in Europe and Kapan, o!ingto their sluggish economic gro!th and lo! interest rates"

• Governance problems and political uncertainties !orsened the crisis of confidence,

fuelled the reluctance of foreign creditors to roll over short=term loans, and createddo!nload pressure on currencies and stoc% mar%ets"

•

Excessive government intervention in the econom, !idespread political patronage,nepotism and lax accounting practices"

5orld 1and pointed to narro! speciali0ation in the electronics industr, competition from 2hinaand other lo! cost exporters and the domino effect transmitted through Intra= /sian trade ascontributor causes of the crisis"

I>F Proosal

• #irm monetar polic to restore investors and mar%et confidence"

• -estructure and recapitali0e !ea% but viable financial institutions and close insolvent

ones or merge them !ith stronger institutions"

• Improve public sector and corporate sector governance and strengthen transparenc andaccountabilit"

• /dopt fiscal policies that reduce reliance on external savings and promote the

restructuring and recapitali0ation of domestic ban%s"

• -eallocate resources from unproductive public expenditures minimi0e the social cost of

the crisis and strengthen social safet nets"



&he Persectives o# Soros and Strange

Soros and strange lin%ed the crisis to a more fundamental sstemic disorder in the globalfinancial sstem" /ccording to Soros the /sian crisis !as precipitated b a rise in the LS dollar, but Soros also placed responsibilit on the I# for the crisis claiming that there an asmmetr bet!een its treatment of lenders and borro!ers" It imposed conditions for assisting borro!ers tomanage financial crises but not on the lenders that contributed to the crisis" In this !a RI# programs have severed to bail out the lenders and thereb encouraged them to act irresponsiblthis !as the ma$or source of instabilit in the international financial sstem"

Soros sa! the problem as a manifestation of the crisis of free mar%et 3unregulated4 capitalism";e claims that Rthe capitalist sstem b itself sho!ed no tendenc to!ard e9uilibrium" Theo!ners of capital see% to maximi0e their profits" 7eft to their o!n devices, the !ould continueto accumulate capital until the situation became unbalanced" In the process, investors andspeculators !ould drive the sstem from Rnear e9uilibrium’ to Rfar=from=e9uilibrium’ situations"In this regard, Strange had dra!n attention to %enes belief that the situation !ould progress sofar from e9uilibrium as to be unmanageable"

Soros lin%s the origins of the crisis to a fundamental mista%e in conventional belief in ho!financial mar%ets operate'

The global capitalist sstem is based on the belief that financial mar%ets, left to their o!n devicestend to e9uilibrium" The are supposed to move li%e a pendulum the ma be dislocated bexternal forces, so called exogenous shoc%s, but the !ill see% to return to the e9uilibrium point"This belief is false" #inancial mar%ets are given to excesses and if a boom&bust se9uence progresses beond a certain point it !ill never revert to !here it came from" Instead of actingli%e a pendulum financial mar%ets have recentl acted more li%e a !rec%ing ball, %noc%ing overone econom after another"

#rom this perspective the crisis in the global financial sstem also represents a crisis of orthodox3fundamentalist4 free=mar%et economics" Soros argues that'

The global capitalist sstem is supposed b an ideolog rooted in the theor of perfectcompletion" /ccording to this theor, mar%ets tend to!ard e9uilibrium and the e9uilibrium position represents the most efficient allocation of resources" /n constraints on free competitioninterfere !ith the efficienc of the mar%et mechanism therefore the should be resisted"

Causes o# Crisis

The /sian financial crisis is best understood as a financial crisis !ith self=fulfilling featuresafflicting countries !hose governments lac%ed the economic and political !here!ithal to defend

their currencies" /nd the !ea%ness of governments, in turn, reflected three sources ofvulnerabilit"

>acroeconomic Im!alances

acroeconomic factors contributed to this vulnerabilit, even though this might seem strange for countries !here economic gro!th !as proceeding at . to > percent a ear" The region’s rapidgro!th !as sustained in part b capital inflo!s !hich caused increasingl overvalued real



exchange rates, accompanied in some cases b ballooning current account deficits" Theappreciation of real exchange rates !as not large b the standards of, sa, /rgentina and 1ra0il,and the current account deficit reached trul alarming levels onl in Thailand and alasia, but both higher exchange rates and the current account deficit !ere sources of vulnerabilit" Thecould be transformed into serious problems if foreigners suddenl stopped investing because

the decided one morning that the deficit !ould no longer be financed" Eliminating a largecurrent account deficit re9uires the large=scale redeploment of resources from production fordomestic consumption to production for export, something that can occur smoothl, !ithout arecession, onl if it is allo!ed to ta%e place graduall over time" Eliminating that deficit 9uic%l,in contrast, re9uires radicall reducing demand, disrupting production, and almost certainlinducing a recession" If capital suddenl stops flo!ing in, bridge financing is re9uired to avoidthis outcome, and if the nation’s foreign reserves are not sufficient to provide it, attracting itre9uires high interest rates"

Financial2Sector Weaknesses

The second source of /sia’s vulnerabilit !as the !ea%ness of the financial sstems in the crisis

countries" ;igh interest rates onl served to compound their problems" In particular, the no!higher interest rates 3!hich !ere needed to attract foreign capital and stabili0e the balance of paments4 threatened to destabili0e the ban%ing sstem" 1an%s are in the business of borro!ingmone from some people to lend it to others, and higher interest rates raised their funding costs"/nd passing on those higher funding costs to their customers precipitated loan defaults !hichfurther damaged their balance sheets" Put another !a, sustaining capital inflo!s re9uired higherinterest rates, !hich reduced the eas availabilit of credit in domestic financial mar%ets, but this process !ould threaten havoc b %noc%ing out the props from under the ban%ing sstem"International investors !ere understandabl s%eptical that governments !ere prepared to sta thecourse" -udiger Dornbusch put the point colorfull, as usual' BTo %eep the mone coming in tofinance the Pon0i game and hold the exchange rate, interest rates had to go up to re!ard foreign

lenders for the ris%, but that made real estate and ban%s even !orse" To %eep ban%s alive, interestrates had to go do!n" The government could not have it both !as" The cut rates, made it freeto speculate against the currenc and that is !hat happened"C /fter Samprasong 7and missed a pament on its foreign debt in #ebruar (FF@, the 1an% of Thailand lent more than > billion todistressed financial institutions through its #inancial Institutions Development #und, despitealread mounting pressure on the baht, !hich it supported b intervening in the foreign exchangemar%et" Speculators dre! the obvious conclusion"

Short >aturity o# (e!t

This leads to the third element of the stor, the short=term nature of the foreign funding of /sian ban%s and corporations" 1et!een (FFA and (FF roughl .A percent of net private portfoliocapital inflo!s into Thailand too% the form of short=term borro!ing"(( ) percent of net capitalinflo!s in Jorea consisted of short=term borro!ing in the three ears (FF+=(FF, compared !ith*@ percent in (FFA=(FF*"() Net interban% lending rose from (+ billion in the five ears endingin (FF+ to more than +* billion in the next t!o ears" +A percent !as denominated in en, therest in dollars" ore than t!o=thirds of these loans matured in less than a ear" ;ence, the /sianeconomies had not $ust a flo! problem a continued need to attract ongoing capital inflo!s tofinance their current account deficits but a stoc% problem as !ell" The had accumulated largestoc%s of short=term debt, denominated in foreign currencies, that needed to be regularl rolled



over 3i"e", refinanced4" If confidence !as disturbed, it !ould be necessar to pa higher interestrates to induce foreign investors to rene! their maturing loans" /nd given the threat this !ould be to alread !ea% domestic ban%s, there !ere obvious 9uestions about the !illingness andabilit of governments to do so" To the contrar, government authorities might feel compelled toguarantee the foreign liabilities of the ban%s, creating additional claims against their thinl=

stretched foreign exchange reserves and ensuring that the ban%ing crisis also provo%ed acurrenc crisis"

These three elements modest macroeconomic imbalances, serious ban%ing=sector problems, andmismanagement of the maturit structure of the debt placed governments in an untenable position" Painful policies !ere re9uired to sustain confidence if it !as disturbed, but financialsstems could not bear the pain" There !as nothing inevitable about the crisis, except in Thailand perhaps better luc% 3and better policies4 might have enabled countries to gro! out of theircurrent account deficits, lengthen the maturit structure of their debts, and strengthen their ban%ing sstems before a shoc% to confidence occurred" /s things happened, ho!ever,Thailand’s devaluation disturbed investor confidence before its neighbors succeeded in escapingthe 0one of vulnerabilit, and the rest, as the sa, is histor"

:nderlying Causes o# the Asian Crisis

This section see%s to identif some of the underling factors that made South East /siasusceptible to financial crisis" / number of Rstructural’ !ea%nesses in these economies have beensuggested' South East /sia’s current account deficit, over=inflated asset prices, excess lending,corruption and macroeconomic polic mista%es"

$% :nsustaina!le Current Account (e#icits

ost of the South East /sian economies in crisis had large current account deficits, in somecases exceeding .? of their GDP" These deficits !ere financed b attracting inflo!s of capital

from abroad, often short=term capital" Inflo!s from overseas on such a large scale !ere a ne! phenomenon" an governments, especiall in developing countries, had previousl resisted fullcapital mobilit, as one academic has noted'

The apprehension regarding the opening of the capital account = or at least its rapid 6pening =goes beond traditional nationalistic vie!s, and is based on both macroeconomic andmicroeconomic arguments""It is often argued that under capital mobilit the national authoritieslose 3some4 control over monetar polic, and that the econom !ill become more vulnerable toexternal shoc%s" oreover, sometimes it has been argued that full capital mobilit !ill result inRover borro!ing’ and, eventuall, in a ma$or debt crisis as in 7atin /merica in (F>)" 6therconcerns regarding the liberali0ation of capital movements relate to increased real exchange rate

instabilit, and loss of international competitiveness" Still other analsts pointed out that the premature opening of the capital account could lead to massive capital flight from the countr in9uestion"

During the (FFAs, follo!ing financial deregulation and capital liberali0ation in the 5est,international institutions began to encourage developing countries to move to!ards free capitalmar%ets as !ell" It !as particularl !elcome in South East /sia, because the foreign capital !asostensibl for investment' 5ith fiscal positions health in most cases, the si0eable external



current account deficits being run up persistentl in some cases = most notabl in alasia andThailand = reflected not public sector dissaving but shortfalls of private saving relative to privateinvestment and such deficits, it could be argued, !ere not a matter for polic concern ifmonetar polic !as set appropriatel and private sector decisions !ere not sub$ect to significantdistortions" The idea that a countr’s current account deficit is of no concern provided it is the

result of the private sector and not the public sector 3and is used for investment notconsumption4, has been referred to as the R7a!son Doctrine’" It !as proposed b the then2hancellor, Nigel 7a!son, in a speech to the I# and 5orld 1an% in September (F>>" The problem is not that the free movement of capital is a danger for developing economies per se,rather than a countr could become excessivel dependent on foreign short=term capital flo!s"

)% Over2(eendence On Short2&erm Foreign Funds

The problem in the South East /sian countries !as not merel allo!ing deleterious currentaccount positions to build up, but of the form that the too%" Driving a large part of their capitalinflo!s !ere lending booms, !hich led domestic ban%s in a number of these economies toactivel see% foreign funds from the 5est to finance the lending" The ban%s !ere motivated b

the prospect of large profits, especiall as the could ta%e advantage of fixed exchange rates inorder to reduce the cost of this borro!ing" ;o!ever, as the I# has noted, the borro!ing fromforeign sources became excessive' In Jorea, in particular, substantial difficulties accumulated inthe financial sector as a result of a combination of !ea%nesses both in that sector and, moregenerall, in the financial structure of the Jorean econom" 7arge corporate conglomerates3chaebol4 became heavil dependent on debt as opposed to e9uit finance, !ith much of thecorporate debt supplied directl b, or guaranteed b, Jorean financial institutions"""F

The same motives led blue chip companies to borro! excessivel from overseas, rather than pahigher domestic interest rates" Even /sian borro!ers !ith sound businesses !ould raise capitalabroad to finance industrial development" Excessive leverage in financial mar%ets is most often

the cause of extreme booms and crashes'(A in South East /sia, the excessive leverage !as inforeign liabilities" #or example, foreign liabilities amounted to )+? of all ban% liabilities in (FFin Thailand $ust before the crisis erupted 3this compares !ith onl a ? proportion in (FF)4" /scan be seen in table + belo!, lending to South East /sia b !estern ban%s !as considerable, !ithKapanese ban%s the largest lenders

*% Poor -egulation O# &he Economy

/ third contributor factor to the /sian 2risis has been the absence of an ade9uate regulatorframe!or% for businesses, especiall the ban%s, in South East /sia" This omission allo!edunsound and possibl corrupt relationships to develop" In Jorea, for example, it !as not unusualthat one division of a chaebol !ould be a ban%, lending to other divisions of the same chaebol

+% Over2In#lated Asset Prices

/nother !ea%ness of the South East /sian economies that made them vulnerable to a sharpdo!nturn, if not crisis, !as the unrealisticall high asset values in most of the South East /siancountries" The cause !as that the mone suppl !as gro!ing too 9uic%l for the real econom toabsorb" Excess credit !as used to fuel speculative booms in real estate, factories and the stoc%mar%et"



9% >acroeconomic Policy@ Fi'ed E'change -ates

5hereas the factors outlined above have been recogni0ed as probabl contributing in one !a or another to the crisis, there is less agreement amongst economists over the 9uestion of !hether thegovernments of the /sian Tiger economies made basic errors of polic in running theireconomies" The polic most intensel discussed is the decision to unofficiall fix the value oftheir currencies to the dollar" The previous fifteen ears had seen the global debate overexchange rates move in favor of some tpe of pegged or fixed exchange rate"

E##ects o# the Crisis on Economies in the -egion

This section loo%s at the effects that the crisis !ould be expected to have on the economies of theregion and some of the conse9uences that have actuall emerged" #alls in e9uit mar%ets, foreignexchange mar%ets and rises in interest rates are the most notable financial effects" These changesthen have an impact on the real sector of the South East /sian economies" Table belo! gives anindication of the extent of these changes"

A% Euity >arkets

Stoc% mar%ets serve as a barometer of opinion on the health of an econom" The concerns aboutthe South East /sian economies !ere reflected in sharp falls in the stoc% mar%ets in the eightcountries affected" The greater the degree of concern over a particular countr’s plight, thegreater !as the conse9uent correction of its stoc% mar%et" The level of an stoc% mar%et isultimatel dependent upon the prospects for continued earnings&profits of the companies listedon the mar%et" In periods !hen economic problems are ta%ing place, or even anticipated, stoc%mar%ets !ould tend to fall to reflect the lo!er expected profits" ;o!ever, !hen investors loseconfidence in the economic health of an entire econom or a government to meet its foreigndebts, the !ill see% to move funds abroad into more secure assets" #inancial companies !hichinvest in large portfolios !ill s!itch from holding stoc%s to holding hard currenc or bondsissued b the governments of the industriali0ed economies, particularl the Lnited States" During periods of financial turmoil, such government bonds are vie!ed as Rsafe havens’" This Rflight to9ualit’ tends to exacerbate the anticipated problems"



,% Cometitive Currency (evaluations

6ne of the most notable effects of the /sian 2risis has been the rapid fall in the value against thedollar of man of the region’s currencies" /s noted earlier, devaluations can be ver contagiousas Rmatching’ devaluations are made, moving from countr to countr" In the earl (F*As,Professor 2harles Jindleberger first described the phenomenon of countries, led b #rance andthe LS, pursuing Rbeggar=th=neighbour’ policies of competitive currenc devaluation, !hich!as labeled the RJindleberger Spiral’" In South East /sia in (FF@, there also seemed to be anelement of Rbeggar=th=neighbor’ Devaluation"

C% Interest -ates

The third smptom of the financial crisis !as that interest rates increased significantl" Themar%et reaction to a decrease in the mone suppl 3in this case because of capital flight overseas4is an increase in mar%et interest rates and the prospect of a so=called Rcredit crunch’, in !hichfunds for borro!ing diminish throughout the econom" In addition to this mar%et response, themonetar authorities ma raise rates further in an effort to prevent further, continuous

depreciation of the currenc" #or example, Indonesia raised overnight interest rates to *AA? in/ugust (FF@, but this failed to stop the exchange rate from collapsing" 6n the other hand, inThailand during the initial pressure on the baht, the central ban% resisted tightening monetar polic" /s a result overnight interest rates pea%ed at )A?, before falling bac% to (A? in /ugust(FF@" /lthough the ma be necessar to prevent stric%en currencies going into free=fall, one

Effect of higher interest rates is to reinforce the deflationar pressures s9uee0ing the domesticeconom

(% &he -eal Economy

These factors in combination have initiated a severe contraction in real economic activit in

South East /sia, characteri0ed b increased corporate ban%ruptcies and rising levels ofunemploment" The best up=to=date statistics available 3from the I#4 indicate that nominalGDP contracted in the first half of (FF> b ()? in Indonesia, b >? in Thailand and b .? inalasia and the Philippines".(Economic theor predicts that a currenc devaluation shouldlead to an overall expansion of output, as production for export increases" ;o!ever, in the !orstcrises, if devaluation is slo! in triggering an expansion of exports, a contraction in economicactivit and deflation ensues" It is no! clear that in the earl aftermath of the /sian 2risis"

Outside Asia

/fter the /sian crisis, international investors !ere reluctant to lend to developing countries,leading to economic slo!do!ns in developing countries in man parts of the !orld" The

po!erful negative shoc% also sharpl reduced the price of oil, !hich reached a lo! of about (( per barrel to!ards the end of (FF>, causing a financial pinch in 6PE2 nations and other oilexporters" In response to a severe fall in oil prices, the super ma$ors that emerged in the late=(FFAs undertoo% some ma$or mergers and ac9uisitions bet!een (FF> and )AA) = often in aneffort to improve economies of scale, hedge against oil price volatilit, and reduce large cashreserves through reinvestment" The reduction in oil revenue also contributed to the (FF> -ussianfinancial crisis, !hich in turn caused 7ong=Term 2apital anagement in the Lnited States tocollapse after losing +" billion in + months" / !ider collapse in the financial mar%ets !as



avoided !hen /lan Greenspan and the #ederal -eserve 1an% of Ne! 8or% organi0ed a *"). billion bail=out" a$or emerging economies 1ra0il and /rgentina also fell into crisis in the late(FFAs" The crisis in general !as part of a global bac%lash against the 5ashington 2onsensus andinstitutions such as the I# and 5orld 1an%, !hich simultaneousl became unpopular indeveloped countries follo!ing the rise of the anti=globali0ation movement in (FFF" #our ma$or

rounds of !orld trade tal%s since the crisis, in Seattle, Doha, 2ancUn, and ;ong Jong, havefailed to produce a significant agreement as developing countries have become more assertive,and nations are increasingl turning to!ard regional or bilateral free trade agreements 3#T/s4 asan alternative to global institutions"

an nations learned from this, and 9uic%l built up foreign exchange reserves as a hedgeagainst attac%s, including Kapan, 2hina, and South Jorea" Pan /sian currenc s!aps !ereintroduced in the event of another crisis" ;o!ever, interestingl enough, such nations as 1ra0il,-ussia, and India as !ell as most of East /sia began coping the Kapanese model of !ea%eningtheir currencies, restructuring their economies so as to create a current account surplus to buildlarge foreign currenc reserves" This has led to an ever increasing funding for LS treasur bonds,allo!ing or aiding housing 3in )AA(O)AA.4 and stoc% asset bubbles 3in (FFO)AAA4 to develop in

the Lnited States"

Crises Prevention

2rises are to the financial sstem !hat heart attac%s are to the cardiovascular sstem" The organscentral to its operation begin functioning erraticall the extreme cases the stop functioningentirel" Their convulsions interrupt the circulation to the rest of the bod 3of blood or credit asthe case ma be4, placing other organ sstem at ris%" If the attach is minor and the patient isother!ise in good health, he ma stage a full recover" The attac% ma then severe mainl as a!a%e up all for changes in lifestles li%e a more sensible diet, more exercise and more regularvisits to the doctor 3in economic terms, better balanced monetar and fiscal policies, more

vigorous prudential supervision and regulation, and more fre9uent consultations !ith theinternational financial institutions4" 1ut a more damaging attac% that cases doubt on the sub$ect’srecuperative po!ers ma re9uire him to be chec%ed into the hospital for angioplast or bpasssurger 3for currenc devaluation and debt restructuring in financial case4"

5e should thus resist the temptation to act li%e means giving less pla to I# press releasesannouncing emergenc rescue pac%ages and plaing more attention to the institutions -eports onthe 6bservance of Standards and 2odes 3-6S2s4 and #inancial Sector /ssessment program3#/SP4, to the core principles and prudential standards of the 1asel committee of 1an%ingSupervisors, and to the special studies of the #inancial Stabilit #orum"

/t the same time, the changes in macroeconomic and financial policies advanced in the name of

strengthening the international financial architecture are imperfect substitutes for !hat isultimatel needed' stronger economic, financial and political institutions" Strongermacroeconomic and financial policies in emerging mar%ets ma reduce the fre9uenc andseverit of crises, but the !ill not eliminate the problem" Indeed the !ill not even moderate itto the levels to !hich the advanced=industrial economies are accustomed" To speed economicand financial development, !hich is ultimatel the onl effective !a of minimi0ing theincidence and severit of crises" / durable solution involves building mar%ets and institutions!ith the capacit to regulate them=selves"



&ransarency

ar%et discipline is the first line of defense against financial excesses and imbalances" If mar%et participants bear the conse9uences of their actions, the !ill have an incentive not to lend togovernments !ith unsustainable macroeconomic and financial policies instead the !ill ta%e positions against their currenc pegs and sovereign debts, ratcheting up the pressure for policad$ustments" The !ill have no reason to lend to ban%s and corporation attempting to financespeculative pro$ects" 6nl borro!ers !ith their !illingness and abilit to service their debts evenin the face of bad ne!s !ill have reason to expect access to external funding" In turn thisavoidance of speculative investments should render the financial sstem more robust"

1ut lenders !ill have an incentive to act in this !a onl if the ade9uatel informed about theactivities and intentions of those to !hom the lend" ar%et discipline cannot operate in other!ords, !ithout information on mar%et participants" Investors cannot smoothl curtail the provision of credit to emerging=mar%et borro!ers !hose debts threaten to gro! too heav if thelac% information on those borro!ers"

oreover, in so far as information is asmmetric 3the borro!er %no!s more about his currentsituation and future prospects than the lender4, more ha0ard and adverse selection !ill arise,undermining the operation of the mar%et" In a !orld of full information, a rise in LS interestrates !ill simpl be passed through to interest rates in other countries" Pro$ects !ith returns toolo! and ris%s too high to be attractive at the no! increased cost of borro!ing !ill be rationed outof the mar%et and capital flo!s !ill decline at the margin" 5ith asmmetric information incontrast, it is firms and governments !ith lo!=ris% pro$ects that !ill drop out of the mar%et, sincethe !ill face even higher borro!ing costs, the lender being unable to distinguish them fromtheir ris%ier counterparts" 6nl the ris% borro!ers !ill remain" 1orro!ers !ith a choice of pro$ects !ill s!itch to ris%ier alternatives in order to increase the odds that the !ill be able tomeet their no! higher debt servicing costs" If the lenders %no! this 3but not the tpe of the

individual borro!er or pro$ect4, an increase in the opportunit cost of funds ma then cause anabrupt collapse in lending to emerging mar%ets rather than smooth ad$ustment on the margin" Ne!s that one borro!er is in serious trouble ma cause the mar%et to abruptl curtail its provision of credit to other borro!ers !ith superficiall similar characteristics"

The international organi0ation of securities commissions have developed and endorsed a set of principles of securities regulation and disclosure standards for cross=border offerings andmultinational issuers" Some of these initiatives predated the /sian crisis" 1ut that event clearlgave this transparenc agenda an additional push"

That agenda can be critici0ed on several grounds" #irst it is naZve to thin% that enhancedtransparenc and disclosure !ill ever solve the crisis problem" No regulator initiative, ho!ever

ambitious can change the fact that the %no! more about their intentions than their lenders" IfSE2 regulations bac%ed b the full force of LS securities la!, could not prevent the Enrondebacle, then should !e reall believe that the I#’s Special Data Dissemination standard, bac%ed onl b the promise of members’ government to compl, !ill protect investors in thesovereign debts of developing counties[ oreover the %eenest political observer cannotconfidentl predict the composition, much less the action of future governments" Even under the best of circumstances the information available to the mar%ets is incomplete, rendering somedegree of moral ha0ard, adverse selection and herding unavoidable"



Second, there are plausible circumstances under !hich additional information can hurt more thanit helps" Greater transparenc can aggravate problems of financial instabilit rather than solvingthem" This idea is a straightfor!ard application of the theor of the second best' starting from asituation !here imperfections are pervasive adding a bit of information ma be more a!a fromthe first best rather than a move to!ard it"

/ccording to Stephen orris and ;un Song Shin3)AA(4 !hen the information environment is poor=there is little public information and agents rel on private information= additional publicinformation ma be destabili0ing"

In an environment of highl imperfect information, more data dissemination ma onl hasten thespread of instabilit" ore information about a problem of nonperforming loans in a countr!here ban%s are state o!ned and operated ma onl cause investors to scramble out of othercountries !here ban%s are state o!ned and operated" ore information about problems of BcroncapitalismC in one countr ma onl prompt investors to scramble out of other countries !hereeconomic and financial affairs are also organi0ed on the basis of famil ties and politicalconnections"

I# to problems of cron capitalism actuall !or%ed to aggravate the /sian crisis" /notherexample in 1ra0il in (FFF, !hich released information on foreign exchange reserve outflo!s ona dail basis" /s the crisis mounted these data began to generate their o!n dnamic in theabsence of more complete information on the authorities’ policies mar%et participants too% themas a crude summar statistics of future prospects" In the end, the 1ra0ilian authorities stopped publishing these data on a dail basis, !hich ironicall helped to contain the crisis" This is aconcrete illustration of the pint that there ma be circumstances in !hich running out the lightma help !hen there is a ris% of people rushing for the door"

ore advanced emerging mar%ets have probabl reached the point !here additional informationdisclosure is stabili0ing rather than destabili0ing"

Prudential Suervision

Strengthening the supervision and regulation of financial sstem is a %e initiative in the area ofcrisis prevention" The tendenc for currenc ad$ustments to be destabili0ing !hen ban%ingsstems are !ea% goes a long !a to!ard explaining the disruptive fallout from the devaluationof the exican peso, the Thai baht, and a long list of other currencies" 1an%s, it is clear, are the!ea% lin%s in the financial chain because the operate in the information=impacted segment ofthe econom" That is the provide li9uidit and credit to small firms and start=ups, among others,about !hich public information is least" /s a result, ban%s themselves find it hard to raiseli9uidit in times of distress, o!ing to similarl limited information about the strength of their

balance sheets" /nd ban%s dominate financial intermediation in developing countries, since fe!such economies can meet the relativel demanding preconditions for the development of deepand li9uid securities mar%ets" 2onse9uentl, !hen things go !rong in ban%ing sstems, themacroeconomics conse9uences can be severe"

6fficials have paid considerable attention to ban%ing sstem !ea%nesses in emerging mar%etssince the problem !as bought to their attention b the exican crisis" /t their Kune (FF. summitin ;alifax, G=@ governments called for initiatives to strengthen the supervision and regulation of



financial institution and mar%ets" /t their 7on summit in (FF, the rene!ed this call andflagged the problem of prudential standards in emerging mar%ets" These efforts ac9uired anoperational focus in (FF@ as a result of orris Goldstein’s plan for an international ban%ingstandard defining minimall= acceptable practices for the ban%ing sstems of emerging mar%etsand advanced= industrial countries"

Three initiatives follo!ed'

• 1asel committee issued its core principles for effective ban%ing supervision, and I#

published its frame !or% for financial stabilit, specifing measures that countries shouldta%e to strengthen the supervision and regulation of their financial institution andmar%ets"

• 1asel committee sought to strengthen and update its standards for capital ade9uac for

internationall active ban%s

• I# and 5orld ban% established their $oint financial sector assessment program to

identif financial vulnerabilities in their member countries"

Standards

The international polic communit has promulgated scores of codes and standards to guideefforts to strengthen transparenc prudential supervision, and monetar, fiscal, and exchange=rate policies" #or developing countries the offer guideposts for the implementation ofmacroeconomics and structural reforms and the development of polic ma%ing and supervisorcapacities" #or the multilaterals the offer an ob$ective basis for polic advice and a metricagainst !hich the progress of countries can be gauged and vulnerabilities detected" #or themar%ets the provide summar information on progress in implementing appropriate reforms anddeveloping the relevant capacities" In principle, that information can be used as an input into ris%assessment and in particular into the internal ratings that can provide the basis for the capital

re9uirements under the proposed revision of the 1asel 2apital /ccord"

Lp!ard of @A standards and codes have been promulgated b various international bodies andembraced b the multilaterals the ver proliferation of standards undermines the credibilit andeffectiveness ac%no!ledging this problem, the financial stabilit forum has designated ()standards as deserving priorit"

Then there is the 9uestion of !hether these standards are suited to the varied circumstances ofdeveloping countries" Their limited representation on the relevant standard=setting bodies raisesdoubts about !hether this is the case" Private sector standard setting bodies li%e the International/ccounting Standards 2ommittee have subcommittees concerned !ith the problems of emergingmar%ets, but their deliberations are still dominated b G=@ countries, regulators and mar%et

participants" These groups ma overestimate the capacit of poor countries to implementcomplex regulations rendering much of their advice superfluous" To the extent that the lac%familiarit !ith alternative modes of economic organi0ation=!ith the /sian model of ban%=centered finance, industrial polic insulated from rent see%ing and reciprocal control forexample= the ma underestimate their viabilit and attempt to s9uee0e all countries regardlessof their histories and circumstances into the same regulator strait$ac%et"



Standards re9uiring arms=length dealing bet!een ban%s and corporations, !estern stle prudential regulation and supervisions and resource allocation guided b asset prices ma becorrosive of a ban% and government led development model !ith trac% record of success" It maremove some components of the /sian model but not others and thereb reduce the effectivenessof the remaining elements" It ma undermine one model of economic organi0ation !ithout

putting anthing else in its place"

6ne reading of personal experience is that financial integration re9uires a considerable degree ofinstitutional harmoni0ation" Governments cannot allo! corporations to sell securities tointernational investors !ithout re9uiring issuers to emplo international standards for auditing,accounting and financial reporting other!ise a rumor about the condition of the issuer, though illfounded can provo%e panic" The cannot allo! ban%s to fund themselves offshore !ithoutremoving implicit guarantees and appling internationall=recogni0ed regulator standards"6ther!ise foreign lenders !ill have no reason to discipline borro!ers !ho !ill respond blevering up their bets" Government cannot borro! abroad unless the are prepared to provideinformation or else revelations about the public finances ma lead panic%ed investors to herd outof their mar%ets"

The choice, then, is !hether to participate in international financial mar%ets, in !hich caseinternational standards along the lines of those developed b mar%et=led economies li%e LJ andLS are the onl game in the to!n or to limit such participation in !hich case variet ofalternative s is possible" /ccording to 1arr Eichengreen /sian polic ma%ers see theireconomics as exiting the phase of government=led extensive development in !hich financialmar%ets integration !ill pla a prominent role, creating pressure for institutional convergencearound international standards of the sort being promulgated" /t the same time, cases li%e 2hinaand alasia suggest there are exceptions remains to be seen"

Ln9uestionabl, these adaptations !ill pose problems for existing development strategies,

creating disruptions in the short run" /ppling international financial standards to Jorean cachedto obtain customar levels of debt finance, forcing them to restructure but also compounding thedifficulties of the Jorean econom in the meantime" This !ill be uncomfortable in the short run, but there is no alternative if Jorean polic=ma%ers are committed to opening to internationalfinancial flo!s"

/t the same time, if the international polic communit’s financial standards are pitched at asufficientl general level, the can leave room for countries to tailor their arrangements to localneed" #or example, /sian standards could have fe!er and looser restrictions on portfolioconcentrations" an /sian countries 3not onl Jorea4 have adopted a development model in!hich industrial conglomerates and groups are relied on to solve coordination problems, andthose conglomerates and groups re9uire large amounts of external financing dra!n from a smallnumber of allied ban%s" Portfolio concentrations that are large b international standards thusma be a necessar corollar of economic development" 1ut allo!ing claims on individual borro!ers to comprise a larger share of individual ban% portfolios in turn implies greaterfinancial ris% and the need for higher capital re9uirements than those re9uired b the 1asel2ommittee"

This example illustrates that a distinctive regional approach to prudential supervision andregulation need not to be laxer than that mandated b global financial standards" 7ooser



restrictions in one area, portfolio concentrations, can be offset b tighter restrictions in another,capital re9uirements" / regional approach to coordinating prudential supervision and regulationserves no purpose if it simpl amounts to setting looser standards than those promulgatedgloball" The argument for a distinctive regional approach is not that /sia or some other regioncan afford !orse financial regulation than the rest of the !orld, but that it ma !ish to attain the

same standards of prudential regulation in different !as"

In practice, a different set of /sian standards is needed onl if global standards fail to addresssuch needs" In fact, the revision of the 1asel /ccord currentl under consideration includes a provision along these lines" 1an%s !ith large concentrations of ris% to a single borro!er or sector !ill be sub$ect to an additional capital re9uirement or R’granularit ad$ustment"’’ Perhaps the1asel 2ommittee’s formulation of this tradeoff does not go far enough to satisf /sian countries"1ut its existence points up the 9uestion of !hether separate regional financial standards are infact needed"

The preceding advice is appropriate for middle=income emerging mar%ets that alread have thenecessar institutional infrastructure in place" It is more problematic for lo!=income developing

countries !here much of that infrastructure is absent" Pastor 3)AAA4 ma%es this point for legalcodes and standards" The la!, as she describes it, is a sstem of interdependent components,legal rules and concepts cannot be understood and applied !ithout reference to other legal rulesand concepts" / rule !ill not deliver efficient and e9uitable outcome in the absence of a bod of precedent reflecting accumulated %no!ledge of its functioning in the context of a living legalsstem" ;ence, international legal standards are unli%el to be effective !here complementar bod of domestic la! and precedent does not exist"

The International 6rgani0ation of Securities 2ommissions 3I6S264 standards for securitiesregulations !ill not have their desired effect in the absence of an ade9uate bod of commercialla! 3governing, inter alia, the duties of compan directors and officers, ta%eover bids and other

transactions intended to change control, and private rights of contract and propert4" /ninternational standard for the e9uitable and efficient determination and resolution of insolvenc!ill not be !or%able in a countr that lac%s an independent $udiciar"

These ob$ections are reall of t!o tpes" 6ne is that standards !ill not !or% !hen supportiveinstitutions are absent" 2apital standards !ill not !or% in the absence of effective auditing andaccounting rules" 7egal standards !ill have little effect !ithout a $udiciar capable of applingthe rule of la!" #inancial standards !ill not !or% in the absence of sanctions against corruptionand malfeasance the !ill not influence behavior !hen those !ho provide blatantl false andmisleading balance=sheet information do not suffer legal conse9uences" 2odes for good practicein fiscal polic !ill not !or% in the absence of an effective and ade9uatel compensated civilservice"

5here reliable $udicial enforcement of contracts is absent, agents develop other !as ofguaranteeing their transactions" The invo%e the support of politicians" The provide R’greasemone"’’ Standards that prohibit connected lending !ill then undermine the onl viable basis fortransactions" The imposition of international standards ma force the pace of institution building b eliminating alternatives, but it also ma precipitate a crisis that disrupts economics activit"The vigor !ith !hich international standards should be applied presumabl varies case b case"This is a caution not $ust against appling industrial=countr standards to developing countries



chec% li%e to gauge a countr’s compliance" ;ence, verification !ill be difficult" /ll this suggeststhat not too much should be expected of mar%et discipline"

Jenen 3)AA(4 suggests that governments could sign a R’contract’’ !ith the I# specifingexactl ho! the propose to compl, thereb easing the tas% of monitoring their progress" This isan intriguing idea, although, it remains to be seen !hether an international bureaucrac intent onspecifing standards and codes can appl them !ith the re9uisite combination of rigor andflexibilit" /nd it raises the 9uestion of !hether the relevant counterpart in some cases is not theI# but a private sector bod li%e International /ccounting Standards 2ommittee"

The application of these standards and codes to lo!=income developing countries is especiall problematic" 5here the relevant mar%et=supporting institutions are underdeveloped, attempts toappl standards and codes !ill have limited benefits" 5orse, their rigid application maundermine the onl existing basis for economic transactions !ithout putting a viable alternativein its place" 6nce again the dilemma is ho! to get from here to there" The application ofstandards and codes !ill be !elfare improving onl if the institutional environment has alreaddeveloped to a certain point, but the Institutional environment can develop to that point onl if

steps are ta%en to encourage adoption of the appropriate standards and codes"



7LO,ALIJA&IO8@ CASE FO- A8( A7AI8S&

Globali0ation is the closer integration of the countries and people of the !orld !hich has been brought about b the enormous reduction of costs of transportation and communication, via

flo!s of goods, services, capital, %no!ledge, and people across borders"

3istory o# 7lo!aliation

/ccording to most scholars and researchers, it is the modern age !hich led to the origin ofglobali0ation" In this age, !ide spread development too% place in the field of infrastructure andconnectivit" This led to more interaction bet!een the nations and sharing of ideas, culture andtradition too% place" /ll these put a direct impact on the process of globali0ation" In the economicscenario, more trade lin%s started ta%ing place bet!een countries on a global scale !hichinfluenced global as !ell as domestic economies to a great extent"

;o!ever, there are some scholars !ho point out that the origins of the histor of globali0ation

can be traced bac% to the ancient civili0ations" Scholars !ho advocate this theor sa that theexample of the earliest forms of globali0ation is the trade lin%s bet!een the Sumerian civili0ationand the Indus Halle 2ivili0ation in third millennium 1"2" In fact, after this age, there arenumerous instances !here trade lin%s !ere established bet!een various countries li%e India,Egpt, Greece, and -oman Empire and so on" There !ere regular business lin%s bet!een theParthian Empire, -oman Empire and ;an Dnast" The popularit of the trade relations led tothe development of various trade routes li%e Sil% -oad and so on"

7lo!aliation in the >edieval Age

The Islamic period in the medieval era is an important epoch in the histor of globali0ation" This

!as !hen the Ke!ish and the uslim traders started going to various parts of the !orld to sellvarious items" This led to a blend of ideas, traditions and customs"

In 2hina, the first postal service !as introduced and paper !as invented" This led to better%no!ledge sharing" /s more and more people started traveling to various countries across the!orld, it led to more communication bet!een people and intermingling of languages" Explorersli%e 2olumbus and Hasco Da Gama sailed through the oceans in search of ne! countries andestablish trade lin%s !ith them or to ma%e other countries their colonies" /ll these factors !ere ama$or cause for the development of the pre=globali0ation era"

The medieval period !as the age of discover" It !as in this period that /frica and Eurasiaengaged in cultural and economic exchange bet!een them" Graduall, this led to the gro!th of

colonies in various parts of /frica, /sia and 7atin /merica" /s a result, there !as constant blendof the ideas, languages, rituals and customs bet!een the natives and the foreign inhabitants" Infact, this sstem of coloni0ation put a deep impact on agriculture, trade, ecolog and culture on aglobal scale"

7lo!aliation !et6een the Pre >odern Periods to >odern Period



The industrial revolution in the (Fth centur !as one of the ma$or periods in the histor ofglobali0ation" Due to the industrial revolution, there !as a significant increase in the 9uantit and9ualit of the products" This led to higher exports and better trade and business relations" Due to better products and coloni0ation, lots of countries across the !orld became the consumers of theEuropean mar%et"

The phase of pre globali0ation perhaps came to an end after the #irst 5orld 5ar !as fought" The!ar put a significant adverse effect on the economic scenario and it led to the Great Depressionand gold standard crisis in the later part of the (F)As and earl (F*As"

7lo!aliation in the >odern Era

Globali0ation, in the modern sense of the term, came into existence after the Second 5orld 5ar"6ne of the main factors for this !as the plan b the !orld leaders to brea% do!n the borders forfostering trade relations bet!een nations" It !as also in this period that ma$or countries li%eIndia, Sri 7an%a, Indonesia and some countries in South /merica gained independence" /s aresult, these countries too started having their o!n economic sstems and made established trade

relations !ith the rest of the !orld" The establishment of the Lnited Nations 6rgani0ation 3LN64!as also a ma$or step in this regard"

Graduall, the economic scenario of the !orld strengthened and it led to better trade relationsand communication" Some other factors !hich have put a positive impact on globali0ation are'

• Promotion of free commerce and trade

• /bolition of various double taxes, tariffs, and capital controls

• -eduction of transport cost and development of infrastructure

• 2reation of global corporations

• 1lend of culture and tradition across the countries

/nother milestone in the histor of globali0ation is the creation of the 5orld Trade 6rgani0ation!hich led to the gro!th of a uniform platform to settle trade and commercial disputes" /ccordingto economic surves, the !orld exports improved significantl from >".? to around (")? dueto globali0ation"

&yes o# 7lo!aliation

Economic glo!aliation pertains to deeper integration and more rapid interaction of economiesthrough production, trade, and 3unregulated4 financial transactions b ban%s and multinationalcorporations, !ith an increased role for the 5orld 1an% and the International onetar #und, as!ell as the more recent 5orld Trade 6rgani0ation"

Political glo!aliation refers to an increasing trend to!ard multilateralism 3in !hich the Lnited Nations plas a %e role4, to!ard an emerging transnational state apparatus45 and to!ard theemergence of national and international nongovernmental organi0ations that act as !atchdogsover governments and have increased their activities and influence"

Cultural glo!aliation is the rapid traversing of ideas, attitudes and values across national borders" This sharing of ideas generall leads to an interconnectedness and interaction bet!een peoples of diverse cultures and !as of life" The term Bglobali0ationC came to be !idel used in



the (F>As, but as earl as the (FAs, arshall c7uhan populari0ed the term Bglobal villageC todescribe the effect that the abilit to connect and exchange ideas instantaneousl !ould bring tothe !orld"

&he social dimension of globali0ation refers to the impact of globali0ation on the life and !or%of people, on their families and their societies" 2oncerns and issues are often raised about theimpact of globali0ation on emploment, !or%ing conditions, income and social protection"1eond the !orld of !or%, the social dimension encompasses securit, culture and identit,inclusion or exclusion and the cohesiveness of families and communities"

Imact o# 7lo!aliation on the World

Integration o# Economies

• The increasing reliance of economies on each other

• The opportunities to be able to bu and sell in an countr in the !orld

• The opportunities for labor and capital to locate an!here in the !orld

• The gro!th of global mar%ets in finance

>ade ossi!le !y@

• Technolog

• 2ommunication net!or%s

• Internet access

• Gro!th of economic cooperation O trading blocs 3EL, N/#T/, etc"4

• 2ollapse of Rcommunism’

• ovement to free trade

7lo!aliation ; International &rade

Globali0ationC refers to the gro!ing interdependence of countries resulting from the increasingintegration of trade, finance, people, and ideas in one global mar%etplace" International trade andcross=border investment flo!s are the main elements of this integration"

Globali0ation started after 5orld 5ar II but has accelerated considerabl since the mid=(F>As,driven b t!o main factors" 6ne involves technological advances that have lo!ered the costs oftransportation, communication, and computation to the extent that it is often economicallfeasible for a firm to locate different phases of production in different countries" The other factorhas to do !ith the increasing liberali0ation of trade and capital mar%ets' more and moregovernments are refusing to protect their economies from foreign competition or influence

through import tariffs and nontariff barriers such as import 9uotas, export restraints, and legal prohibitions" / number of international institutions established in the !a%e of 5orld 5ar IIQ including the 5orld 1an%, International onetar #und 3I#4, and General /greement onTariffs and Trade 3G/TT4, succeeded in (FF. b the 5orld Trade 6rgani0ation 35T64Qhave plaed an important role in promoting free trade in place of protectionism"

,ene#its o# &rade@



• Increase in household purchasing po!er

• Greater potential for gro!th

• Increase international economies of scale

• Greater emploment opportunities

• Disadvantages of trade'

• Increase in gap bet!een the rich and the poor

• Dominance of global trade b the rich, northern hemisphere countries

• 7ac% of opportunities for the poor to be able to have access to mar%ets

• Exploitation of !or%ers and gro!ers

• 2orporate Expansion

ulti=national or trans=national corporations 3N2s or TN2s4 O businesses !ith a head9uartersin one countr but !ith business operations in a number of others has became possible throughthe process of globali0ation"

Characteristics@

• Expanding revenue

• 7o!ering costs

• Sourcing ra! materials

• 2ontrolling %e supplies

• 2ontrol of processing

• Global economies of scale

&he Conseuences o# 7lo!aliation

ainl, the general vie!s about globali0ation can be categori0ed into four main perspectives that

are economic, technological, development, and societal respectivel"

&he Economic Persective@ of globali0ation is the gro!th of !orld trade as a proportion ofoutput 3the ratio of !orld imports to gross !orld product, G5P, has gro!n from some @? in(F*> to about (A? in (F@A to over (>? in (FF4" It is reflected in the explosion of foreign directinvestment 3#DI4' #DI in developing countries has increased from )") billion in (F@A to (.+ billion in (FF@" It has resulted also in national capital mar%ets becoming increasingl integrated,to the point !here some ("* trillion per da crosses the foreign exchange mar%ets of the !orld,of !hich less than )? is directl attributable to trade transactions"

&he &echnological Persective@ involves Information 2ommunication Technolog 3I2T4 !hat

explains this globali0ation[ It certainl lies in the development of technolog" The costs oftransport, of travel, and above all the costs of communicating information have fallendramaticall in the post!ar period, almost entirel because of the progress of technolog

&he (eveloment Persective@ is the most controversial and important of all" It touches theheart of dichotom !hich toda globali0ation phenomenon faces" It tries to find the clues of theincreasing divide bet!een the rich and the poor, the existing cleavage bet!een the I2T haves andhave=nots, under the umbrella of one !orld concept of integrated mar%ets and capital flo!s"/bove all it challenges the greatest protagonists of globali0ation, the global institutions of 5orld



1an%, I#, and even 5T6 one hand" 6ne the other it has created a massive !ave of antagoniststhreatening the industrial nations through anti=globali0ation relas, protests, and stri%es"

&he Societal Persective@ focuses on some %e factors !hich have become pivotal to ensurethe longevit of success of developed nations and that are their sensitivit to the communit,cultural norms, and environmental care" This includes the condition of human rights, !omenempo!erment, gender sensiti0ation, civic education, status of !omen in the societ, politicalstatus becoming more democratic, freedom of speech, rule of la!, e9ual access to resources andlevel of education"

Globali0ation is also a %e to future environmental changes" Decisions made b the privatesector, in its search for comparative advantages, are increasingl affecting !here and ho! peoplelive and !or%" Globali0ation is having a ma$or impact on population migration, populationdistribution, particularl through accelerating urbani0ation trends, and gro!th of mega=cities"These population changes are in turn impacting on securit, governance, povert, health andenvironmental factors

Pakistan and 7lo!aliation

/ccording to the 5orld 1an%’s Global Economic Prospects )A() released in Kanuar )A(), the!orld econom has entered a ver difficult phase characteri0ed b significant do!nside ris%s andfragilit" The financial turmoil generated b the intensification of the fiscal crisis in Europe hasspread to both developing and high=income countries and is generating significant head!inds"2apital flo!s to developing countries have declined b almost half as compared !ith last ear,Europe appears to have entered recession and gro!th in several ma$or developing countries31ra0il, India, and to a lesser extent -ussia, South /frica and Tur%e4 has slo!ed partl inreaction to domestic polic tightening" /s a result, despite relativel strong activit in the LnitedStates and Kapan, global gro!th and !orld trade have slo!ed sharpl"The global econom is no!expected to expand b )".? and *"( ? in )A() and )A(* 3*"+? and +"A ? !hen calculated using purchasing po!er parit !eights4 versus *" ? pro$ected in Kune for both ears" -eflecting thegro!th lo!do!n, !orld trade, !hich expanded b an estimated " ? in )A((, !ill gro! onl+"@? in )A() before strengthening to ">? in )A(*" Economic activit in Pa%istan, South /sia’ssecond largest econom 3representing about (.? of regional GDP4, continues to mar%edl lagoutcomes else!here in the region" Nevertheless, it firmed in the second half of )A((" Pa%istan’s!ea% gro!th outturns are also tied to !orsening securit conditions accompanied b greater political uncertaint and a brea%do!n in polic implementation" Infrastructure bottlenec%sincluding disruptions in po!er deliver remain !idespread" /ccording to the report, Pa%istan is pro$ected to post a rebound to *"F? gro!th rate of GDP 3calculated using constant )AA. dollarsGDP !eights4 in )A((&(), and to firm further to +")? in )A()&(*" -egional inflationar pressures are pro$ected to come do!n over the forecast hori0on, assuming continued expansionof crop production 3India, Pa%istan and Sri 7an%a4 and a decline in international fuel prices3reflecting !ea%er global activit in )A()4" 2ountries heavil reliant on foreign assistance suchas /fghanistan, Nepal and Pa%istan could be hit hard if fiscal consolidation in high=incomecountries !ere to result in cuts to overseas development assistance"

/ccording to the State 1an% of Pa%istan, the countr had to pa a heav price of loss of *"* billion in fiscal ear )A((=() due to fluctuations in the price of LS dollar against ma$orcurrencies" The importance of currenc composition of external debt has significantl increased



in recent ears as foreign currenc mar%ets remained volatile follo!ing the financial crisis of)AA>" The currenc composition reveals that F+"F? of Pa%istan’s external debt and liabilities3ED7s4 are denominated in four ma$or currencies, i"e", LS dollar, Kapanese 8en, Euro, and SD-"Exchange rate movements 3appreciation or depreciation4 of the LS dollar against other ma$orcurrencies 38en, Euro and SD-4 have a significant effect on the stoc% of ED7s as it is used as a

base currenc" /ccording to the composition, LS dollar constitutes ).") ?, SD- )" ?, 8en*A"* ?, Euro ()"> ? and others ."( ? in the ED7s of Pa%istan"

The State 1an% of Pa%istan has established 2entre for Surve -esearch !ith the cooperation ofthe Institute of 1usiness /dministration to help stud inflation expectations and economicconfidence of households !hich !ill facilitate the process of designing a for!ard=loo%ingmonetar polic"

/ 5orld 1an% funded pro$ect costing )A million has been launched for economic revitali0ationof Jhber Pa%htun%h!a and #ederall /dministered Tribal /reas 3#/T/4" Lnder the pro$ect,o!ners of small and medium enterprises hit b militanc !ill get cash grants, technicalassistance and training for reviving their businesses" The grants could be utili0ed for pursuing

technological innovation, adopting ne! pac%aging and labeling, establishing common facilitcenters and product development" The eligible businesses !ould be able to use the grants as!or%ing capital for reconstructing their infrastructure and ac9uiring and repairingmachiner&e9uipment"

/ll the nine government=o!ned po!er distribution companies 3Discos4 entered into agreements!ith the LS government to collaborate on improving energ suppl to consumers" Lnder theagreements, the Lnited States !ill help Discos generate more revenue to pa for energ production, reduce losses in po!er distribution from the producer to the consumer and ma%e the po!er suppl more reliable"

2ars’ sale !ent up b )A".? in the first half of current fiscal ear amid negative developments of government’s decision to impose a ban on 2NG %its and clinders, suspension in production of;onda 2ivic and 2it and increase in prices of all vehicles" Due to the government’s decision ofimposing a ban on 2NG %its and clinders, Pa% Su0u%i otor 2ompan 7imited 3PS274,!hich holds over .A? mar%et share, ma suffer more as it used to roll out >A? 2NG=fittedvehicles out of its total production" /ccording to the assemblers, the six months’ sales rose due to previous orders and the impact of government’s decision !ould be reali0ed in the comingmonths" Toota 2orolla, !hich also launched 2NG=fitted vehicles a fe! months ago, ma also be affected b this decision"

2hina has emerged as Pa%istan’s largest trading partner replacing the LS and is being closelfollo!ed b the L/E" The LS has slipped to *rd position on the list of Pa%istan’s top ten trading

partners" German and the LJ occup >th and (Ath slots respectivel and Kapan is no longer onthe list of top ten" The latest ran%ings based on the #8(( statistics indicate that Pa%istan is doingmuch more trade !ithin /sia and its reliance on /merican and European mar%ets is on thedecline" India and 2hina are t!o of the six countries on the list of the top ten trading partners!ith !hich Pa%istan runs trade deficit" The other four are the L/E, Saudi /rabia, Ju!ait andalasia" Pa%istan imports large amounts of costl fuel oil from the L/E, Saudi /rabia andJu!ait and runs trade deficit !ith alasia primaril due to huge import bill of palm oil" The



four countries on the list !ith !hich Pa%istan runs trade surplus are the LS, /fghanistan,German and the LJ"

The /sian Development 1an% and the Government of Pa%istan has signed t!o loan agreements!orth .(* million for improving irrigation and po!er transmission sstems" Lnder theagreements, /D1 !ill invest )@A million for construction of ne! Jhan%i 1arrage and )+*million for improving the countr’s po!er transmission sstems" The ne! barrage !ill connectthe 7o!er 2henab 2anal !ith a ne! head regulator through a lead channel ensuring a reliableflo! of !ater to the canal and increasing the flood=bearing capacit of the structure" The po!erenhancement programme !ill be completed b the end of )A(. to enhance the efficienc of theoverall po!er transmission sstem and provide ade9uate and reliable po!er suppl to a greaternumber of commercial, industrial and residential consumers" The loan !ill be utili0ed forconstruction of a ne! AA Jm and AA JH transmission line from Kamshoro to oro, Dadu and-ahim 8ar Jhan, construction of a ne! .AA JH grid station at oro and expansion of threeexisting .AA JH grid stations at Kamshoro, Dadu and -ahim 8ar Jhan" / ne! (). Jm and))AJH transmission line from Lch=II po!er plant to the ))A JH grid station at Sibi, and aconnection bet!een Lch=I and Lch=II po!er plants !ill also be constructed" #urther, the loan

!ill finance construction of a ne! )AAJH grid station at ansehra"

-eal Sector

2otton production has been estimated at ()".F million bales this ear b the 2otton 2rop/ssessment 2ommittee against the /nnual Plan )A((=() targets of ()"> million bales" Thisestimated figure is >".? higher than the last ear’s production figure of ((" million bales"

-ice production !as estimated at F"@ million tonnes 3". million tonnes in milled terms4 this ear b the #ood and /griculture 6rgani0ation 3#/64 against the /nnual Plan target of "(* milliontonnes" The revised estimate is *.? higher than the last ear’s production of +">)* milliontonnes"

5heat production is estimated at ). million tonnes this ear as per /nnual Plan )A((=()" Its areaunder cultivation has decreased b a small margin of almost * ? as compared to the last ear’sfigure of >"F million hectares" This reduction in cultivated area despite increase in support price!as due to lesser !ater availabilit and delaed rains in barani areas"

During December )A((, total production of all fertili0ers !as about .+* thousand tonnes" Thefertili0ers produced !ere' urea 3*F thousand tonnes4 D/P 3.+ thousand tonnes4, Nitrophos 3+Athousand tonnes4, 2/N 3.. thousand tonnes4, SSP 3)A thousand tonnes4 and NPJ 3. thousandtonnes4" Imported supplies during the month !ere ** thousand tonnes !hich included **(thousand tonnes of urea, one thousand tonnes each of D/P and NP, ("+ thousand tonnes of S6P

and * thousand tonnes of 6P"

Total urea availabilit during December )A(( !as about >*F thousand tonnes comprising of (*Fthousand tonnes of opening balance, *F thousand tonnes of domestic production and **(thousand tonnes of imported supplies" Lrea offta%e during the month !as @A+ thousand tonnesleaving a balance of (). thousand tonnes for the next month" Total availabilit of D/P duringthe month !as ))@ thousand tonnes comprising of (@) thousand tonnes of previous month’s



leftover and .+ thousand tonnes of domestic production" D/P offta%e !as ((+ thousand tonnesand its closing balance came to ((* thousand tonnes"

The Muantum Index of 7arge Scale anufacturing Industries 3MI4 for Kul=November )A((gre! b (".)? over Kul=November )A(A" 6n month=on=month basis, the index for November)A(( sho!ed a decrease of *"@(? over 6ctober )A((" The index for November )A(( alsodecreased b A".+? on ear=on=ear basis, i"e", over November )A(A" The items sho!ing positive gro!th in their production during Kul=November )A(( over the corresponding period of )A(A !ere textile, food and beverages, petroleum products, pharmaceuticals, leather products,rubber products and non=metallic mineral products !hereas the production of chemicals,automobiles, iron and steel products, fertili0ers, electronics, paper and board, engineering products and !ood products !itnessed negative gro!th"

In#lation

During Kul December )A((, inflation as measured b 2onsumer Price Index 32PI4 !as recordedas (A"F?" #ood and non=food inflations !ere ((">? and (A")? respectivel during this period"

5holesale Price Index 35PI4 and Sensitive Price Index 3SPI4 for Kul=December )A(( increased b (."(? and @"+? respectivel"

onthl 2PI, 5PI and SPI for December )A(( decreased b A"@? ("*? and ("+? respectivelover November )A(("

6n ear=on=ear basis, 2PI, 5PI and SPI for December )A(( increased b F"@?, >"*? and ."(?respectivel over December )A(A" #ood and non=food inflations !ere F".? and F"F?respectivel during December )A(( over December )A(A" This inflation !as mainl contributed b furnishing and household e9uipment maintenance 3(F"+?4, clothing and foot!ear 3(+"F?4and transport 3(*"?4"

The factors contributing to increasing inflationar trend are spurt in prices of crude and palm oilin international mar%et, rupee depreciation against LS dollar and higher government borro!ingfor budgetar support"

>onetary (eveloments

During (st Kul )A(( to *Ath December )A((, broad mone 3)4 sho!ed an expansion of -s"+."F billion 3"F?4 in stoc% at the end of Kune )A(( against an expansion of -s" (>"+ billion3>"F@?4 in stoc% at the end of Kune )A(A during the corresponding period last ear"

Net #oreign /ssets of the ban%ing sstem contracted b -s" (*A"* billion 3=("@?4 during (stKul )A(( to *Ath December )A(( as compared to an expansion of -s" ()"> billion 3)*").?4

during the corresponding period last ear" This contraction in Net #oreign /ssets is due tocurrent account deficit"

Net Domestic /ssets of the ban%ing sstem expanded b -s" .F") billion during the periodunder revie! sho!ing a gro!th of (A"A>? in stoc% at the end of Kune )A(( against an expansionof -s"*F("@ billion during the same period last ear that sho!ed a gro!th of @".? in stoc% at theend of Kune )A(A" The expansion of Net Domestic /ssets is due to an increase of -s" @@."> billion in net government sector borro!ing" Government borro!ing for budgetar support from



S1P expanded b -s" (+*") billion during the period under revie! as compared to -s" F)"+ billion during the corresponding period last ear" Government borro!ing for budgetar supportfrom scheduled ban%s also increased b -s"F"@ billion during the period under revie! ascompared to an expansion of -s")("( billion during the corresponding period last ear"

Fiscal Position

#1-’s tax collections during Kul to December )A(( stood at -s" >+A"@ billion against -s"("@ billion during the corresponding period last ear sho!ing an increase of )@?"

Total revenue during the first 9uarter of current financial ear stood at -s" .**" billion 3taxrevenue' -s" +A>"F. billion, non=tax revenue' ()+"@ billion4" Total expenditure recorded !as -s"@FA"F billion and budget deficit came to ).@") billion as against the annual target of -s" >.( billion"

,alance o# Payments

During December )A((, current account surplus stood at LS (A million as compared to thedeficit of LS >> million during November )A(( sho!ing an increase of LS >+> million3()*"*?4 in current account balance" During December )A((, export bill stood at LS)A.@million as compared to LS(F(> million during November )A(( sho!ing an increase of @").?"Import bill deceased b )"*>?, from LS*(.@ million in November )A(( to LS*A>) million inDecember )A(( and trade deficit decreased b (@"*?, from LS ()*F million in November )A((to LS (A). million in December )A((" 5or%ers’ remittances increased b (@"*?, from LSF).million in November )A(( to LS(A>. million in December )A(("

During Kul=December )A((, current account deficit !as recorded as LS )(.+ million as

compared to the surplus of LS > million during the same period last ear sho!ing a decrease ofLS)() million in current account balance"

During Kul=December )A((, exports stood at LS ()()+ million as compared to LS (((()million during the same period last ear sho!ing an increase of F"(?" Imports !ere recorded asLS (F@+* million during Kul=December )A(( as compared to LS (>>) million during thesame period last ear sho!ing an increase of ("F.?" Trade deficit !idened b )+").?, fromLS .@@A million during Kul=December last ear to LS @(F million during the same periodthis ear" 5or%ers’ remittances during the period under revie! stood at LS *). million !hichare (F".+? higher than the remittances of LS .)F( million during the corresponding period lastear"

During Kul=December )A((, net inflo! of foreign investment stood at LS *>" million3#oreign Direct Investment' LS .*(") million, Portfolio Investment' LS =(++" million4 ascompared to LS(A("( million 3#DI' LS >*F" million, PI' LS ))(". million4 during thecorresponding period last ear sho!ing a decrease of *"? 3#DI' =*"@?, PI' =(."*?4"

(is!ursement o# Foreign Economic Assistance



During Kul=December )A((, total disbursements of foreign economic assistance stood at+(+"(A million that is >A"+? of total commitments of .(."*+ million for the period" 6ut ofthese disbursements, grants !ere +*"@A million and loans !ere *@A"+A million" Thesedisbursements are *F? lo!er than the disbursements of @F".) million during the same periodlast ear !hich included grants and loans amounting to )*+")+ million and ++.")> million

respectivel"

1ilateral aid disbursed during the period under revie! !as )A."A million against commitmentsof @@"A> million" These bilateral aid disbursements included grants of *@")F million and loansof (>"*) million and their donor=!ise brea%up as measured in million !as' /ustralia'A"A3grant4, 2hina' @@"A+ 3loan4, German' @"() including grant of ". and loan of A".@, Kapan'+@"( including grant of F"+( and loan of *@"F, Saudi /rabia' +>"+F including grant of ("A@ andloan of +@"+), LJ' ("@F 3grant4 and LS' (>"+ 3grant4"

ultilateral aid disbursements during the period !ere recorded as )A>". million againstcommitments of +*>") million" These multilateral aid disbursements included grants of "+(million and loans of )A)"AF million and their donor=!ise brea%up as measured in million !as'

/D1' F"F( including grant of +"*> and loan of F)".*, I1-D' (*"@@ 3loan4, ID/' )"> includinggrant of ("(A and loan of (".>, ID1' *A"@(3loan4, I#/D' *".A 3loan4 and LN;2-' A"F+3grant4

Positive E##ect o# 7lo!aliation on Pakistan

a$or benefit' increasing economic !elfare&!ell=being

a$or cost' integration&sublimation of cultures and social values

( Provide a higher income for people in third=!orld nations"

) -aise the standard of living of most of these people from extreme povert to moderate

povert, so that the can eat more nutritious foods and have cleaner potable !ater"* 5ith higher income also comes better education == %no!ledge is being shared"

+ 5ith better %no!ledge, better understanding about health care, superstition, poor habits, andhuman rights"

. ;opefull a better chance at !orld peace and less racial and religious hatred"

7lo!aliation and Its (iscontents

/bout Koseph E" Stiglit0

• 6ne of the most celebrated dissenters of globali0ation"• 2hief Economist of the 5orld 1an% till Kan )AAA"

• Nobel Pri0e in Economics in )AA("

• 2hairman of 2linton’s 2ouncil of Economic /dvisors"

• 2urrentl teaching at the 2olumbia Lniversit"

Stiglit says@

The average European co! gets a subsid of \(")A a da, more than !hat is earned b half the



people in the developing !orld" #or much of that !orld, globali0ation seems li%e a pact !ith thedevil"

Stiglit5s transition

I believe that globali0ation the removal of barriers to free trade and the closer integration of

national economies can be a force for good and that it has the potential to enrich everone in the!orld, particularl the poor" 1ut I also believe that if this is to be the case, the !a globali0ationhas been managed, including the international trade agreements that have plaed such a largerole in removing those barriers and the policies that have been imposed on developing countriesin the process of globali0ation, need to be radicall rethought"

What is the henomenon o# 7lo!aliation?

2loser integration of countries peoples of the !orld that has been brought about b theenormous reduction of costs of transportation and communication, and the brea%ing do!n ofartificial barriers to the flo! of goods, services, %no!ledge and people across borders"

Three main institutions govern globali0ation' I#, 5orld 1an% and 5T6"

Globali0ation has helped'

• 2ountries gro! faster b opening up to international trade

• -educe the sense of isolation

• illions b bringing them foreign aid benefits

Boseh stiglit in the #avor o# 7lo!aliation

Pro=globali0ation policies have the potential of doing a lot of good, if underta%en properl and ifthe incorporate the characteristics of each individual countr"

2ountries should embrace globali0ation on their o!n terms, ta%ing into account their o!nhistor, culture, and traditions"

;o!ever if poorl designed or if a coo%ie=cutter approach is follo!ed pro=globali0ation policiesare li%el to be costl"

The !ill increase instabilit, ma%e countries more vulnerable to external shoc%s, reduce gro!th,and increased povert"

The international financial institutions have pushed a particular ideolog mar%et fundamentalismthat is both bad economics and bad politics"

The I# has pushed these economics policies !ithout a broader vision of societ or the role ofeconomics !ithin societ" /nd it has pushed these policies in !as that have underminedemerging democracies" ore generall, globali0ation itself has been governed in !as that areundemocratic and have been disadvantageous to developing countries, especiall the poor !ithinthose countries"



;e critici0e I# for being responsible for economic damage b its prescribed rules for countriesthat the must follo! in order to 9ualit for loans from I# or from other ban%s and privatesector lenders that loo% to!ards I# to state !hether the borro!er is credit!orth or not"

In (e#ence o# 7lo!aliation

/n internationall reno!ned economist, Kagdish 1hag!ati ta%es conventional !isdomQthatglobali0ation is the cause of several social illsQand turns it on its head" Properl regulated,globali0ation, he sas, is the most po!erful force for social good in the !orld"

Dra!ing on his unparalleled %no!ledge of international economics, 1hag!ati dismantles theantiglobali0ation case" ;e persuasivel argues that globali0ation often leads to greater general

prosperit in an underdeveloped nation' it can reduce child labor, increase literac, and enhancethe economic and social standing of !omen" /nd to counter charges that globali0ation leads tocultural hegemon, to a bland c5orld, 1hag!ati points to several examples, from literatureto movies, in !hich globali0ation has led to a spic hbrid of cultures"

6ften controversial and al!as compelling, 1hag!ati cuts through the noise on this mostcontentious issue, sho!ing that globali0ation is part of the solution, not part of the problem"/none !ho !ants to understand !hat:s at sta%e in the globali0ation !ars !ill !ant to read In

(e#ense o# 7lo!aliation

The first edition of In *efense of +lobaliation addressed the criti9ues that concerned the social

implications of economic globali0ation" Thus, it addressed 9uestions such as the impact on!omen:s rights and e9ualit, child labor, povert in the poor countries, democrac, mainstreamand indigenous culture, and the environment" Professor 1hag!ati concluded that globali0ation!as, on balance, a force for advancing these agendas as !ell" Thus, !hereas the critics assumedthat globali0ation lac%ed a human face, it actuall had a human face" ;e also examined in depththe !as in !hich polic and institutional design could further advance these social agendas,adding more glo! to the human face" This boo% therefore !as uni9ue in treating !ith seriousscholarship and a smpathetic attitude the true concerns that animated and agitated the mancritics of globali0ation"

1 no!, ho!ever, the social concerns that Professor 1hag!ati addressed have been augmented

in the rich countries such as the L"S", #rance, and German, b gro!ing concerns over theeconomic implications of globali0ation, i"e", b concerns over the !ages of the !or%ing and themiddle classes" Thus, !hereas the social concerns !ere prompted b altruism and empath, theeconomic concerns have been the result of fear and self=interest" In his /fter!ord for the ne!edition, Professor 1hag!ati addresses these concerns, sho!ing that these are not cogent either"

1hag!ati believes that, !hile governments should open their borders to free trade in goods andservices in order to benefit from !hat the rest of the !orld has to offer, the should



L"S" textiles and European farm lobb, as !ell as the /ustralian and L"S" trade unionmovements"

What Went Wrong?

• To understand !hat !ent !rong, it is important to loo% at three most important global

institutions that govern globali0ation' I#, 5orld 1an% and 5T6"• 6ver the ears I# has changed mar%edl" #ounded on the belief that there’s a need for

international pressure on countries to have more expansionar economic polic= such asincreasing expenditure, reducing taxes or lo!ering interest rates to stimulate econom"Toda the I# tpicall provides funds onl if countries engage in policies li%e cuttingdeficits, raising taxes or raising interest rates that lead to a contraction of the econom"

• In the (F>As, the 51 !ent !ell beond $ust lending pro$ects 3li%e roads and dams4 to

providing broad based support in form of structural ad$ustment loans, but it did this onl!hen I# gave its approval = !ith approval came I# imposed conditions on thecountr"

• I# !as supposed to focus on crisis but developing countries !ere al!as in need of

help, so it became a permanent part of life in most of the developing !orld"

• an of the policies that I# pushed, in particular, premature mar%et liberali0ation, have

contributed to global instabilit"

• 5T6’s beggar=th=neighbor trade policies, in !hich countries raised tariffs to maintain

their o!n economies but at the expense of their neighbors !ere largel blamed for spreadof economic depression"

• I# has made mista%es in all the areas it has been involved in' development, crisis

management, and in countries ma%ing the transition from communism to capitalism"

• ar%ets !ere opened up for competition so rapidl, before strong financial institutions

are established, and $obs are destroed faster than ne! $obs are created"

• #iscal /usterit, privati0ation and mar%et liberali0ation !ere the three pillars of5ashington 2onsensus advice throughout (F>As and (FFAs" These policies became endsin themselves rather than means to more e9uitable and sustainable gro!th"

&he 6ay ahead26hat is needed?

• /cceptance of the dangers of capital mar%et liberali0ation"

• 1an%ruptc reforms and standstills"

• Improved ban%ing regulations"

• Improved ris% management"

• Improved safet nets"

• Improved response to crisis"

I# should disclose the expected BpovertC and unemploment impact of its programs"

-eforming the 5orld 1an% and development assistance



/ssistance' 2onditionalit should be replaced b selectivit, giving aid to countries !& a proventrac% record, allo!ing them to choose their o!n development strategies, ending micromanagement that has been a feature of the past"

Debt #orgiveness' !ithout debt forgiveness, man of the developing countries simpl cannotgro!"

Arguments2 Against 7lo!aliation

The primar targets of the anti=globali0ation movement have been the Lnited States, the 5orldTrade 6rgani0ation 35T64, the International onetar #und 3I#4 and the 5orld 1an%" Theseorgani0ations are seen as the enforcers of the globali0ation and the rights of multinationals to thedetriment of ordinar people"

• Koseph E" Stiglit0, in Globali0ation and Its Discontents, offers his vie!s both of !hat has

gone !rong and of !hat to do differentl" 1ut the main focus of his boo% is !ho to blame" /ccording to Stiglit0, the stor of failed development does have a villain, and the

villain is trul detestable' the villain is the I#' fla!ed economic theories, lac% oftransparenc and accountabilit to the public, and the pursuit of special corporateinterests"

• Stiglit0 notes that the original mission of the I# !as that of ensuring global economic

stabilit" ;e argues repeatedl that it has essentiall abandoned this mission, and is no!driven instead as though its mission !ere to advance the interests of financial capital"

• Stiglit0 complains that the I# has done great damage through the economic policies it

has prescribed that countries must follo! in order to 9ualif for I# loans, or for loansfrom ban%s and other private=sector lenders that loo% to the I# to indicate !hether a borro!er is credit!orth" The organi0ation and its officials, he argues, have ignored theimplications of incomplete information, inade9uate mar%ets, and un!or%able institutions

Qall of !hich are especiall characteristic of ne!l developing countries"• Stiglit0 repeatedl claims that the I#:s policies stem not from economic analsis and

observation but from ideolog specificall, an ideological commitment to free mar%etsand a concomitant antipath to government" /gain and again he accuses I# officials ofdeliberatel ignoring the facts on the ground in the countries to !hich the !ereoffering recommendations" In part his complaint is that the did not understand, or atleast did not ta%e into account, his and other economists: theoretical !or% sho!ing thatunfettered mar%ets do not necessaril deliver positive results !hen information or mar%etstructures or institutional infrastructure are incomplete"

• ore specificall, he argues that the I# ignores the need for proper se9uencing"

7iberali0ing a countr:s trade ma%es sense !hen its industries have matured sufficientl

to reach a competitive level, but not before" Privati0ing government=o!ned firms ma%essense !hen ade9uate regulator sstems and corporate governance la!s are in place, butnot before" The I#, he argues, deliberatel ignores such factors, instead adopting acoo%ie cutter approach in !hich one set of policies is right for all countries regardlessof their individual circumstances" 1ut importantl, in his ees, the underling motivationis ideological' a belief in the superiorit of free mar%ets that he sees as, in effect, a formof religion, impervious to either counterarguments or counterevidence"



• / further implication of this belief in the efficac of free mar%ets, according to Stiglit0, is

that the I# has abandoned its original Jenesian mission of helping countries tomaintain full emploment !hile the ma%e the ad$ustments the need in their balances of paments instead the I# recommends policies that result in steeper do!nturns andmore !idespread $oblessness" ;e does not argue, of course, that the I# prefers serious

recessions or unemploment per se" -ather it simpl acts on the beliefQseriouslmista%en in his vie!Qthat allo!ing free mar%ets to do their !or% !ill automaticall ta%ecare of such problems" 1 extension, he argues, the I# also does not act to promoteeconomic gro!th 3!hich helps to produce full emploment4" /gain the claim is not thatthe I# disli%es gro!th per se, but that it believes free mar%ets are all that is needed toma%e gro!th happen"

• /s a further conse9uence of the misguided policies that follo! from this curious blend

of ideolog and bad economics, Stiglit0 argues, the I# itself is responsible for!orseningQin some cases, for actuall creatingQthe problems it claims to be fighting"1 ma%ing countries maintain overvalued exchange rates that everone %no!s !ill haveto fall sooner or later, the I# gives currenc traders a one=!a bet and therefore

encourages mar%et speculation" 1 forcing countries that are in trouble to slash theirimports, the I# encourages the contagion of an economic do!nturn from one countr toits neighbors" 1 ma%ing countries adopt high interest rates that stifle investment and ban%rupt companies, the I# encourages lo! confidence on the part of foreign lenders"/t the same time, b repeatedl coming to these lenders: rescue, the I# encourages laxcredit standards"

• ore dar%l, the I#, in Stiglit0:s vie!, sstematicall acts in the interest of creditors and

of rich elites more generall, in preference to that of !or%ers, peasants, and other poor people" ;e sees it as no accident that the I# regularl provides mone that goes to paoff loans made b ban%s and bondholders !ho are eager to accept the high interest ratesthat go along !ith assuming ris%Q!hile preaching the virtues of free mar%ets as the do

soalthough the are e9uall eager to be rescued b governments and the I# !hen ris%turns into realit"

• Stiglit0:s attac% on the I# raises not $ust factual 3and counterfactual4 9uestions but

substantive issues as !ell, particularl his argument that the I# acts on behalf of ban%sand bondholders, and rich countries more generall and therefore against the interests ofthe poor" To !hat extent is the I# supposed to act as lending institutions ordinaril act[Stiglit0 complains at length, and !ith man specific cases to cite, that the I# violatescountries: economic sovereignt !hen it re9uires them to carr out its policrecommendations as a condition for its granting credit" 1ut don:t responsible lendersnormall impose such conditions on borro!ers[ Stiglit0 never ac%no!ledges that todathe I# faces serious criticism from man economists and politicians in the 5est on the

ground that it ma%es loans !ith too fe! conditions, so that the borro!ing countries oftensimpl end up !asting the mone"

• / tpe of problem stemming from globali0ation is that the control of national economies

is seen b some as possibl shifting from sovereign governments to other entities,including the most po!erful nation states, multinational or global firms, and internationalorgani0ations" The result is that some perceive national sovereignt as being undermined b the forces of globali0ation" Thus globali0ation could lead to a belief among nationalleaders that the are helplessl in the grip of global forces and an attitude of disaffection



among the electorate" The result could be extreme nationalism, along !ith calls for protectionism and the gro!th of extremist political movements, ultimatel leading to potential conflicts"

• Stiglit0 has presented, as effectivel as it is possible to imagine anone ma%ing it, his side

of the argument, including the substantive case for the %ind of economic development

policies he favors as !ell as his more specific indictment of !hat the I# has done and!h" ;is boo% stands as a challenge" It is no! important that someone else if possible,someone !ho thin%s and !rites as clearl as Stiglit0 does, and !ho understands theunderling economic theor as !ell as he does, and !ho has a firsthand command of thefacts of recent experience comparable to his ta%e up this challenge b !riting the best possible boo% laing out the other sides of the argument" 5hat is needed is not $ust anattempt to ans!er Stiglit0:s specific criticisms of the I# but a boo% setting out thesubstantive case both for the specific policies and also for the general polic approachthat the I# has advocated"

Criticism against I>F and World ,ank MStructural Ad"ustment Program

6ne of the criticisms that has been directed against the I# and the 5orld 1an% sponsoredstructural ad$ustment programs is that these programs are usuall too uniform in nature and areimplemented universall and globall, across countries" 5ithout ta%ing due cogni0ance of particular histories, institutions, structures these programs lac% an semblance of conceptualit"/ ver general economic restructuring program designed for an or all countries in need ofrestructuring has, at best, a fe! minor specificities, !hich are spelt out in the details of the program for each countr" Lsuall, a fe! specific targets or a set of numbers to be achieved atthe end of the program period, differentiate one countr’s program from that of another"

;ence, here there are t!o aspects of globali0ation !ith respect to the International #inancialInstitutions" #irstl, is the 9uestion of supreme po!er !here these t!o organi0ations, along !ith

the 5orld Trade 6rgani0ation 35T64 and other less prominent entities, determine, manage andeven run numerous economies and governments !orld!ide, primaril in underdevelopedcountries[ Secondl, all economies are treated ali%e, the concept of universalit' !hat is good for 1ra0il is e9uall good for 1angladesh" Economic globali0ation !ith regard to I#Is is une9ual interms of po!er and uniform in terms of its policies, advice and programs"

Structural ad$ustment programs are meant for economies in Rdistress’, often on the Rbrin% ofdisaster’ having usuall, though not exclusivel, balance of pament problems" The aim of thestructural ad$ustment program is to reduce the current account deficit, to lo!er inflation, increasethe gro!th rate in the Structural ad$ustment programs are meant for economies in Rdistress’,often on the Rbrin% of disaster’, having usuall, though not exclusivel, balance of pament problems" The aim of the structural ad$ustment program is to reduce the current account deficit,to lo!er inflation, increase the gro!th rate in the econom, and to cut the fiscal deficit"

The mechanism to achieve these goals is, b no!, fairl !ell %no!n and standard" 2ountries reexpected to remove non=tariff barriers, replacing them !ith tariffs, tariffs !hich are supposed to be lo!ered substantiall across the ad$ustment period, so that cross=border Rdistortions’ areremoved b Rgetting prices right’" 6n the trade front, in addition to large reductions in tariffs,countries are expected to devalue their currencies so that domestic currencies better reflect thetrue price of foreign currencies, !here their demand and suppl, rather than government



intervention, determine the price" Greater liberali0ation and openness, !ith more focus onexports, rather than on import substitution, form the %e ingredients of !hat goes for trade sector Rreform’ under the structural ad$ustment program"

6ften the fiscal deficit is considered to be the mother of all evils, and the most significant andreal cause of the distortions and problems that exist in the econom" In fact, all the problems!hich determine the need for a structural ad$ustment program, such as, high inflation, lo!gro!th, a high current account deficit, lo!er private sector investment, cro!ding out, and sundr problems are 3incorrectl4 attributed to a high, Runsustainable’ fiscal deficit" ;ence, a cut in thefiscal deficit is probabl the most important component of the structural ad$ustment program"

The 5orld 1an% and the I# advice countries undergoing ad$ustment to rationali0e their taxstructure, to impose consumption oriented general sales or value added tax, to impose taxes onsectors of the econom in order to encourage certain industries or sectors" 6n the expenditureside, a cut in government expenditure is critical in order to reduce the fiscal deficit, !here privati0ation is promoted so that loss=ma%ing government departments and institutions can behanded over to the private sector"

5hile the emphasis in cutting government expenditure is usuall on consumption expenditure,fre9uentl countries are as%ed to cut overall spending, !hich includes capital and developmentexpenditure" 1 hoping to raise revenue b imposing more taxes, and b cutting :!asteful:government expenditure, countries are expected to reduce their fiscal deficit to more :sustainable:levels" The removal of subsidies, !hich, in most underdeveloped countries are on food items,essential inputs li%e fertili0er, or on utilities, is also an important plan% of the polic directed toreduce the fiscal deficit"

-egardless of the causes for inflation, monetar :discipline:, in the form of limiting monetarexpansion to some preconceived 9uantum, is supposed to be part of the ad$ustment program" Theinterest rate, at the same time, is supposed to be determined b the suppl and demand for creditand mone, i"e", b the mar%et" Government intervention to determine the interest rate or to provide directed credit to %e sectors and industries at subsidi0ed rates is activel discouraged"2ountries follo!ing agreements over the ad$ustment program expect financial liberali0ation,!ith less government control over the ban%ing sector, !ith far more competition" /lso, the preferential financial treatment to state o!ned enterprises is to be eliminated, so that theseenterprises become more responsive to mar%et signals"

In essence then, the structural ad$ustment program is supposed to be more mar%et friendl, it isexpected to promote private sector initiatives and interests, remove distortions in the econom bgetting domestic and cross=border prices right, and to open up the econom to foreign goods andcompetition from abroad as the process of globali0ation proceeds" In addition, privati0ation

should form an important component of the program, and the role and involvement of thegovernment in the econom and other sectors, should be minimi0ed" The government:s roleshould become one of an :enabler:, rather than an implementer, so sas this philosoph"

(isadvantages o# 7lo!aliation

$% International Economic scenario



If imports increase more rapidl than exports, as the have in this economic expansion, the neteffect of trade !ill be to reduce gro!th and emploment" ;igh economic gro!th does notautomaticall result in povert reduction" 2omplementar domestic policies, good governanceand institutions delivering public services do ma%e a big difference"

<% (o6n6ard Pressure on Wages

Globali0ation does not evenl distribute this ne! !ealth and it creates economic losers" Evidencesho!s that globali0ation has created do!n!ard pressure on !ages for Buns%illed laborC in theLnited States" Do!n!ard pressure on !ages and the attendant erosion of purchasing po!er !illencourage politicians to protect the !ages" Some of these policies ma run counter to tradeagreements, !hile other policies ma !or% imperfectl and might induce industr to move production facilities to lo!er !age countries"

=% Lack o# Environmental Considerations

#ree trade and investment agreements protect corporate interests at the expense of environmentalconsiderations" Globali0ation is occurring so rapidl that developing countries are being loc%edinto polluting technologies and environmentall damaging development paths"

% Other 8egative Imacts o# 7lo!aliation

• Increased li%elihood of economic disruptions in one nation effecting all nations

• Threat that control of !orld media b a handful of corporations !ill limit cultural

expression

• Greater chance of reactions for globali0ation being violent in an attempt to preservecultural heritage

• Greater ris% of diseases being transported unintentionall bet!een nations

• Spread of a materialistic lifestle and attitude that sees consumption as the path to

prosperit

• Intensifing problem of food securit

• #ast expansion of consumerism and individualism and displacing collectivism

• #ast eroding $oint famil sstem

• Export of pollution from the developed countries

• ;eav intervention in cultural and indigenous life

• Establishing private o!nership in natural resources• Institutionali0ation and naturali0ation of corruption

• Privati0ing not onl public enterprises and state o!ned enterprises but also government

responsibilities and services

• 2urtailed expenditure on social securit and social !elfare

• ;eav class transition of people creating bigger and bigger gap bet!een rich and poor"



• There are potential non=economic impacts of globali0ation involving great ris%s and

potential costs, even the possibilit for catastrophe"

• 6ne is that of securit, !here the negative effects of globali0ation could lead to conflicts,

as suggested above, or the ver process of globali0ation leading to integration of mar%etscould ma%e conflicts escalate beond a particular region or raise the sta%es of conflict, for

example, from conventional !eapons to !eapons of mass destruction"• / second non=economic area in !hich globali0ation could lead to catastrophic outcomes

is that of political crises, that could escalate from local to large=scale challenges and, ifunresolved, to a catastrophic outcome"

• / third such area is that of the environment and health, !here the greater

interconnectedness stemming from globali0ation could lead again to catastrophicoutcomes, such as those stemming from global environmental impacts, such as global!arming"

D% 8egative Imacts on the Working Class

The impact of the capitalist globali0ation is !idespread covering almost all segments of societand sectors of emploment and !or%" Since ma$orit members of the societ fall under the broadcategor of !or%ing class, vulnerable and immediate point of adverse effect is the !or%ers bothin the formal and informal sectors" /s labor cost is easier to curtail in comparison to other costson other inputs, cost minimi0ation and hence maintaining of profit margin is possible onlthrough pressure on labor costs in the present context of severe competition, emploers do nottr to curtail other costs" It is also because of the fact that labor can be replaced b other factorsof production through technological innovation" Thus entrepreneurs have easil established andare reling on the inverse relation bet!een huge profits and labor costs" Therefore, the impact ofglobali0ation on !or%ing class should be vie!ed in a broad spectrum"

•

Increasing attac% on labor and human rights• 2hanges in pattern of emploment and fast declining labor intensit of production and

services

• Negative use of labor flexibilit particularl for eas hire and fire

• Increasing ine9ualit and povert

• Increasing efforts to chase out unions from labor mar%et

• Decline in real !ages and incomes as compared to removal of subsidies and price=

controls

• Increasing unemploment and underemploment

• Promoting !or%ers to migrate for $obs to!ards extremel exploitative conditions 3*=D

$obs O dangerous, difficult and dirt4

• Increasing child labor"

• Detraction of oung !or%ers and ne! labor mar%et entrants from trade union movement



po!er needs !hile protecting environment and technolog holds extraordinar promise for thefuture of education"

Example' Solar po!er, metal detectors"

&rans#er o# &echnology

Technolog transfer refers to an process b !hich one part gains access to a second part’sinformation&technolog and successfull learns and absorbs it into the production function"2learl, much technolog transfer occurs bet!een !illing partners in voluntar transactions"Thus, there are demanders and suppliers of technolog and information is traded in technologmar%ets"

It is the movement of technological and technolog related organi0ational %no!=ho! among partners 3individuals, institutions, and enterprises4 in order to enhance at least one partner’s%no!ledge and expertise and strengthen each partner’s competitive position"

Examples' Son=Ericsson

-enfro 2rescent

Technolog transfer occurs at all stages of the technolog innovation process, from initial idea tofinal product" These processes integrate multiple functions, including organi0ed research anddevelopment, design, production engineering, manufacturing, mar%eting, etc"

&yes o# &echnology &rans#er

Kertical trans#er@

Is generall internal to the enterprise and ta%es place b the incorporation of ne! %no!ledge

from the idea stage to its final development"

3oriontal trans#er@

Involves the transfer of proven or tested technolog from one industr or countr to be adopted,modified or applied in another industr or countr"

-anking O# the World &o ) Comanies !y &heir &otal -;( Investment .>illion/



&rans#er o# &echnology to (eveloing Countries



6ne of the benefits of technolog transfer is globali0ation of industries" Technolog transfer brings the !orld together as one large mar%et place" 5hen technolog is transferred around the!orld from a developed nation to less developed nation, economic vibranc !ill be seen andnation !ill dra! closer to one another ma%ing the !orld loo% li%e a large global mar%et place"

Economic Gro!th of a developing nation helps in alleviating povert and creating $obopportunities"

Internationali0ation of domestic mar%et is also a benefit to technolog transfer" Product produced b domestic mar%et could compete !ith large international industr if proper technolog istransferred to the domestic mar%et" This !ill increase production and also economic gro!th ofthat nation"

Example' /pparel Industr 3Gul /hmed4

>odes o# &rans#er o# &echnology

(" #oreign Direct Investment 3#DI4

)" Technical licensing agreements

*" Promoting public=private partnership

+" /c9uisition of 2apital Goods

." Koint venture

" anagement contracts

@" Turn%e pac%ages

Foreign (irect Investment .Fdi/

#oreign direct investment 3#DI4 is defined as investment made to ac9uire lasting interest inenterprises operating outside of the econom of the investor"

The #DI relationship consists of a parent enterprise and a foreign affiliate !hich together form aultinational corporation 3N24"

The Lnited Nation defines control in this case as o!ning (A? or more of the ordinar shares orvoting po!er of an incorporated firm or its e9uivalent for an unincorporated firm lo!er

o!nership shares are %no!n as portfolio investment"

Pakistan (irect Foreign Investment2At 3ome

This entr gives the cumulative LS dollar value of all investments in the home countr madedirectl b residents = primaril companies = of other countries as of the end of the time periodindicated" Direct investment excludes investment through purchase of shares"

In the global ran%ing



Pa%istan !as ran%ed *rd !ith #DI=/t ;ome of *(,*A,AAA,AAA LS as of (st Kanuar, )A()"

Pakistan (irect Foreign Investment2At 3ome

This entr gives the cumulative LS dollar value of all investments in foreign countries madedirectl b residents = primaril companies = of the home countr, as of the end of the time period indicated" Direct investment excludes investment through purchase of shares"



In #DI=/broad Pa%istan !as ran%ed @*rd as of (st Kanuar, )A()"

Licensing

7icensing covers the broad spectrum of permissions that are granted for the use of patents,technolog, and trademar%s" 6f the various methods of transferring technolog internationall,

licensing is the most versatile" It offers flexibilit in technolog choice and an opportunit for thesource and the receiving institution to negotiate"

Technolog license agreements also enable a foreign licensor to reap profits from the transfer oftechnolog !ithout ris%ing capital in a sometimes volatile foreign mar%et"

&urn2ey Pro"ect

/ turn=%e pro$ect is a pro$ect in !hich separate entities are responsible for setting up a plant ore9uipment 3e"g" trains&infrastructure4 and for putting it into operation" It can include contractualactions at least through the sstem, subsstem, or e9uipment installation phase and ma includefollo!=on contractual actions, such as testing, training, logistical, and operational support" It is

often given to the best bidder in a procurement process"

Example' 2hina agrees to set up a mass=transit sstem in Jarachi]

Pu!lic2Private Partnershi

Public=private partnership 3PPP4 describes a government service or private business venture!hich is funded and operated through a partnership of government and one or more privatesector companies"

Example' P/-2 and ENG-6 3Kul ’AF4

PPP involves a contract bet!een a public sector authorit and a private part, in !hich the private part provides a public service or pro$ect and assumes substantial financial, technical andoperational ris% in the pro$ect"

In some tpes of PPP, the cost of using the service is borne exclusivel b the users of the serviceand not b the taxpaer"

8on2Commercial &echnology &rans#er

a) Initiatives ta%en b international organi0ations, b the governments of developedcountries and b non=governmental organi0ations 3NG6s4"

b4 The vertical transfer of technologies from international research centers 3such as those

belonging to the 2onsultative Group on International /gricultural -esearch4 to researchcenters, farmers and firms in developing countries"

c4 6fficial development assistance provided b the development agencies of advancedcountries through helping to finance training, e9uipment purchase, and licensing"



&rans#er o# &echnology to Pakistan

In order to prosper technolog and foreign investment in Pa%istan, government has signedagreements !ith .) countries on avoidance of double taxation including almost all developed

countries of the !orld"

7ist of countries'

Agreements during recent government5s tenure on the 8ational Front

• #rance offered civilian nuclear technolog to Pa%istan 3a RAF4

• LS/ !as to transfer cheap electricit technolog to Pa%istan that could help the countr

to generate cheaper electricit through use of hdel, coal and !indmill methods insteadof going for producing expensive electricit through nuclear technolog but hasn’tmateriali0ed et 3Kan RAF4

• Pa%istan benefitted from 2hinese hbrid rice technolog 3arch RAF4

• Progress !as made on Lnmanned /erial Hehicle technolog transfer to Pa%istan b LS

3Kul ,AF4

• r" Vardari reiterates demand for transfer of LS drone technolog to pa%istan 3Kan, )A(A4

• Partial transfer of drone technolog to Pa%istan O -ehman ali% 3#eb )A(A4

• Pa%istan see%s LS civilian nuclear technolog 3ar )A(A4



• Pa%istan and 2hina in%ed three agreements in )A(( on ban%ing, economical and technical

cooperation and extraction of gold and copper pro$ect up to ear )A(@, from Sainda%mines"

seminar notes 1

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