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Inflation and Crony Capitalism in Pakistan

Source :Ahmed Nadeem Gehla Blog

Almost one third of the population of Pakistan lives under poverty line. Same number of children have never gone to school. If an educated youth willing to work is unemployed or a child cannot get to school, the state is responsible. The just distribution of resources is responsibility of state. Poverty, hunger, unemployment, illiteracy and terrorism – all these ills in our society are related. It’s an apt time to ask ourselves, what is the cause?
After earth, labour is the only source which creates value. Since ancient times labour has created more than enough value for human survival from earth. The technology has further helped to improve the out-put of labour and to preserve that produce. With tremendous increase in labour power, technology, natural resources and produce, half of the world population is still food deficient as distribution of the produce remains unfair. This unfair distribution of resources is justified with one magical word: ‘ownership’. Because the owners are permitted to contribute very little, and take quite a lot, leaving rest to starvation. That is ‘Capitalism’ – and we have to live with it!
Most of the third world states have inherited or adopted a crude form of ‘Capitalist System’ from imperial powers. Implementation of this cloned ‘capitalism’, which is already a self destructive phenomenon, without developing the necessary regulatory infrastructure has proved to be disastrous. The term ‘Crony Capitalism’ refers to the situation where state institutions succumb to manipulation of cronies of capitalists and fail to perform their function of regulating the highly controversial capitalist system. The society is then left on mercy of those holding capital and their greed for profits. This ‘crony capitalism’ give birth to an unregulated exploitation and wide spread deprivation which turns in civil unrest.
Economic situation in Pakistan can be a unique example of practicing an economic system, which has to be strictly regulated to prevent collapse, without having a functional regulatory infrastructure in place. As a result of the lack of corporate governance structure and even violating already unfair ‘capitalist market’ principles, the system becomes rather cruel for those who earn through labour. Unregulated stock and property markets and rouge banking and investment sector is pushing economic inequality to the extent of a chaos and civil war.
Trading in stock markets has nothing to do with the real business of a corporation. Companies get stockholders’ money only when they sell new common stock, which is very rare. As observed by Professor Ralph Estes observes in ‘Tyranny of the Bottom Line’, the stock market works like a used car market. When you buy a 1999 Ford, the money goes does not to Ford but to the previous owner of the car. Ford gets the buyer’s money only when it sells a new car.
The idea of ‘trading on stock market’ is to create some liquidity so that shareholder can conveniently convert stocks in to cash. This activity which produces no real value is to be strictly regulated as the prices in stock markets are driven by principal of ‘demand and supply’ and prone to manipulation. Those holding capital can create artificial demand to push prices up and vice versa in order to create money without producing anything or providing an services.
When capital creates capital, the real production remains missing while cash is available to be spent. When more money is available to spend than Gross National Produce of a state, it pushes the demand and prices higher. Higher demand and more cash shrinks the value of capital and adds in to inflation- the little money available to poor becomes insufficient even to afford them a decent meal. The market becomes a casino and cash, the king, this dilutes the value of money earned through labour.
The biggest beneficiaries of this scam are Banks, Brokers, Hedge Funds and the so called ‘foreign investors’ who sit on huge amounts of cash. The size of market capitalization in Pakistan has seen a peek of around 50-60 Billion US$. An average Hedge Fund in USA possesses several times cash than the entire market capitalization in Pakistan. What can be more seducing than a non-functional regulatory system to create an artificial demand or supply and make few quick billion?
The ‘Chief Architect’ of quick money scam was Shaukat Aziz, an imported banker who became Finance Minister and helped Privatization of State owned Banks. As soon as Banks went in to private sector they started pumping funds in to Stock Market’s through ‘investment companies’ owned by them registering an increase of 14.1% and 19.9% in market capitalization in 2002 and 2003 respectively. In 2004 when he became Prime Minister and got complete control over economic affairs the growth in market capitalization reached 29.9% followed by 42%, 35% and 49.2% 2005, 2006 and 2007 respectively. Perhaps an unprecedented world record of two fold increase in overall index value. With so huge money created without any real ‘produce’, the inflation also touched the peak.
With such massive increase in profits of stock traders and money ‘created’ without actual economic activity, banks started a massive campaign of consumer finance; thus giving a false impression of ‘economic progress’. Although some consumer goods sectors benefited from this fake rally but soon it came to a collapse. When so called ‘foreign investor’ and their ‘local cronies’ packed their bags after earning hefty profits, it resulted in to collapse of foreign exchange reserves and 30% devolution in rupees value. We ended up at door steps of IMF for financial assistance and ‘Friends of Pakistan for ‘charity’.
Assuming that addition of each 1,000 points in market capitalization adds 4/5 billion US$ in market capitalization and traders profits. That would mean that 11,000 points increase had added over US$ 40-50 Billion in to stock traders profits. That is almost equal to total exports of four years of ‘exceptional growth ‘engineered’ by a crony banker. Just imagine of the impact, such huge profits created from capital would have had on dilution of money earned through labour. The inflation rose to 30%, number of those went under poverty line doubled and value of rupee faced a massive decline.
The most cruel aspect of this manipulation is that these traders make profits through short selling even when market is falling. This lead to notorious 2006 crash in stock market, of which former Prime Minister is thought to be a master mind. That resulted in over US$50 Billion going in to pockets of super rich bankers and brokers. The ‘independent judiciary’ which was restored through a popular movement on promise to investigate this scam, is sleeping over it while actively chasing the ghost of imaginary $60 Million assets of Asif Ali Zardari. The Securities and Exchange Commission has so far, not even been able to come up with some shady explanation, as is a practice in ‘land or pure’.
This biggest scam in economic history, which added millions in to vicious cycle of poverty was not the last in history of Pakistan. The practice still continues. Some groups of overseas Pakistani’s, hedge funds and local investment companies, brokers and Banks continue creating money from thing air. A part of gains from market is later remitted overseas in form of foreign exchange. This results in to devolution of rupee and puts pressure on foreign exchange reserves. The rest of the ‘artificial’ money goes in to profits of greedy bankers and accounts of brokers – thus fueling the inflation and making life more difficult for poor.
Capitalist world which has for more efficient regulatory institutions, effective financial crime laws and non-partisan judiciary, is forced to introduce stricter regulations after current financial crisis. We, who adopted the ‘half cooked’ system and have non-functional regulatory institutions are still living in past. In United States and Europe, the gains from capital markets are heavily taxed. The wisdom behind this taxation is to minimize the manipulation and direct a part of ‘artificially created’ money to public sector development. This mechanism works as a ‘shock absorber’ for a potential reaction against economic in-equality.
Present government in Islamabad has shown a remarkable commitment to focus on targeted assistance for underprivileged hardcore poor and labrourers by introducing Benazir Income Support Program and Benazir Stock Option Scheme. But, if manipulation in ‘Capital Markets’ to create the ‘artificial capital’ continue, the benefits of these programs would be diluted by massive inflation and capital outflow. There is some hope in newly introduced ‘withholding tax’ on ‘gains’ from capital markets. But mere 10% tax might not help as in USA and Europe, it ranges from 30-40% and regulatory process is much transparent. Any government control inflation and fight poverty while such massive and untaxed amounts are being pumped in to economy without any real productivity.
Unfortunately the levy of ‘with holding tax on capital markets profits has been challenged in Supreme Court by none else than the top opposition family in the country; Sharif Brothers. The government in waiting – with promises of delivering good governance while its head paying meager 5,000 as tax.Cynics are already speculation about the outcome from court – as Sharifs has been ‘lucky’ to secure unprecedented ‘justice’ in these times. It will be unfortunate if court blocks the government move which targets on getting a share of massive stock markets gains for public exchequer.
Even court does so, it is not an end of the world. If sincere, government can introduce the new legislations and reform regulatory institution – the Securities and Exchange Commission. Although those who accumulated wealth in past would get away but it would be promising step for future. Keeping in view an average of per annum increase of 2,000 points addition in market capitalization means a US$ 10 Billion taxable income for future. A 30% rate of tax as in USA on profits from stocks trading could result in to an increase of around Rs. 250 Billion. Much bigger than entire government spendings or health and education funds or even much criticized increase in defense spendings.
There is also a need to reorganize the Securities and Exchange Commission in to an efficient watch dog of securities markets. The SEC rules must be re-drawn and it’s regulatory powers needs to be independent and effective. There is also a need to redesign the monotony role of State Bank and investment/finance policies of banking and investment sectors in funding for ‘stock trade’. That money should be directed for SME’s and value addition in agriculture which is being invested in ‘gambling ‘ on market floor and resulting to inflation and poverty.
In capitalist world – we have to live by rules of those who ‘own the capital’, but violating the rules of ‘capitalism’ itself does not yield anything except anarchy and chaos in society. We had enough of it and before a complete collapse occurs, we need to focus on ‘controlled exploitation’ which is basis of capitalism. In case of uncontrolled explication against the rules set by genius who creates ‘capital from capital’ and dilutes the value of labour – we are inviting a disaster which will push underprivileged to choose survival or death from starvation. Let us practice ‘capitalism’ and help rich become super-rich. But this should not be a ‘crony-capitalism’ on cost of a meal of poor, while rich create artificial wealth.

Almost one third of the population of Pakistan lives under poverty line. Same number of children have never gone to school. If an educated youth willing to work is unemployed or a child cannot get to school, the state is responsible. The just distribution of resources is responsibility of state. Poverty, hunger, unemployment, illiteracy and terrorism – all these ills in our society are related. It’s an apt time to ask ourselves, what is the cause?
After earth, labour is the only source which creates value. Since ancient times labour has created more than enough value for human survival from earth. The technology has further helped to improve the out-put of labour and to preserve that produce. With tremendous increase in labour power, technology, natural resources and produce, half of the world population is still food deficient as distribution of the produce remains unfair. This unfair distribution of resources is justified with one magical word: ‘ownership’. Because the owners are permitted to contribute very little, and take quite a lot, leaving rest to starvation. That is ‘Capitalism’ – and we have to live with it!

Most of the third world states have inherited or adopted a crude form of ‘Capitalist System’ from imperial powers. Implementation of this cloned ‘capitalism’, which is already a self destructive phenomenon, without developing the necessary regulatory infrastructure has proved to be disastrous. The term ‘Crony Capitalism’ refers to the situation where state institutions succumb to manipulation of cronies of capitalists and fail to perform their function of regulating the highly controversial capitalist system. The society is then left on mercy of those holding capital and their greed for profits. This ‘crony capitalism’ give birth to an unregulated exploitation and wide spread deprivation which turns in civil unrest.

Economic situation in Pakistan can be a unique example of practicing an economic system, which has to be strictly regulated to prevent collapse, without having a functional regulatory infrastructure in place. As a result of the lack of corporate governance structure and even violating already unfair ‘capitalist market’ principles, the system becomes rather cruel for those who earn through labour. Unregulated stock and property markets and rouge banking and investment sector is pushing economic inequality to the extent of a chaos and civil war.

Trading in stock markets has nothing to do with the real business of a corporation. Companies get stockholders’ money only when they sell new common stock, which is very rare. As observed by Professor Ralph Estes observes in ‘Tyranny of the Bottom Line’, the stock market works like a used car market. When you buy a 1999 Ford, the money goes does not to Ford but to the previous owner of the car. Ford gets the buyer’s money only when it sells a new car.

The idea of ‘trading on stock market’ is to create some liquidity so that shareholder can conveniently convert stocks in to cash. This activity which produces no real value is to be strictly regulated as the prices in stock markets are driven by principal of ‘demand and supply’ and prone to manipulation. Those holding capital can create artificial demand to push prices up and vice versa in order to create money without producing anything or providing an services.

When capital creates capital, the real production remains missing while cash is available to be spent. When more money is available to spend than Gross National Produce of a state, it pushes the demand and prices higher. Higher demand and more cash shrinks the value of capital and adds in to inflation- the little money available to poor becomes insufficient even to afford them a decent meal. The market becomes a casino and cash, the king, this dilutes the value of money earned through labour.

The biggest beneficiaries of this scam are Banks, Brokers, Hedge Funds and the so called ‘foreign investors’ who sit on huge amounts of cash. The size of market capitalization in Pakistan has seen a peek of around 50-60 Billion US$. An average Hedge Fund in USA possesses several times cash than the entire market capitalization in Pakistan. What can be more seducing than a non-functional regulatory system to create an artificial demand or supply and make few quick billion?

The ‘Chief Architect’ of quick money scam was Shaukat Aziz, an imported banker who became Finance Minister and helped Privatization of State owned Banks. As soon as Banks went in to private sector they started pumping funds in to Stock Market’s through ‘investment companies’ owned by them registering an increase of 14.1% and 19.9% in market capitalization in 2002 and 2003 respectively. In 2004 when he became Prime Minister and got complete control over economic affairs the growth in market capitalization reached 29.9% followed by 42%, 35% and 49.2% 2005, 2006 and 2007 respectively. Perhaps an unprecedented world record of two fold increase in overall index value. With so huge money created without any real ‘produce’, the inflation also touched the peak.

With such massive increase in profits of stock traders and money ‘created’ without actual economic activity, banks started a massive campaign of consumer finance; thus giving a false impression of ‘economic progress’. Although some consumer goods sectors benefited from this fake rally but soon it came to a collapse. When so called ‘foreign investor’ and their ‘local cronies’ packed their bags after earning hefty profits, it resulted in to collapse of foreign exchange reserves and 30% devolution in rupees value. We ended up at door steps of IMF for financial assistance and ‘Friends of Pakistan for ‘charity’.

Assuming that addition of each 1,000 points in market capitalization adds 4/5 billion US$ in market capitalization and traders profits. That would mean that 11,000 points increase had added over US$ 40-50 Billion in to stock traders profits. That is almost equal to total exports of four years of ‘exceptional growth ‘engineered’ by a crony banker. Just imagine of the impact, such huge profits created from capital would have had on dilution of money earned through labour. The inflation rose to 30%, number of those went under poverty line doubled and value of rupee faced a massive decline.
The most cruel aspect of this manipulation is that these traders make profits through short selling even when market is falling. This lead to notorious 2006 crash in stock market, of which former Prime Minister is thought to be a master mind. That resulted in over US$50 Billion going in to pockets of super rich bankers and brokers. The ‘independent judiciary’ which was restored through a popular movement on promise to investigate this scam, is sleeping over it while actively chasing the ghost of imaginary $60 Million assets of Asif Ali Zardari. The Securities and Exchange Commission has so far, not even been able to come up with some shady explanation, as is a practice in ‘land or pure’.

This biggest scam in economic history, which added millions in to vicious cycle of poverty was not the last in history of Pakistan. The practice still continues. Some groups of overseas Pakistani’s, hedge funds and local investment companies, brokers and Banks continue creating money from thing air. A part of gains from market is later remitted overseas in form of foreign exchange. This results in to devolution of rupee and puts pressure on foreign exchange reserves. The rest of the ‘artificial’ money goes in to profits of greedy bankers and accounts of brokers – thus fueling the inflation and making life more difficult for poor.

Capitalist world which has for more efficient regulatory institutions, effective financial crime laws and non-partisan judiciary, is forced to introduce stricter regulations after current financial crisis. We, who adopted the ‘half cooked’ system and have non-functional regulatory institutions are still living in past. In United States and Europe, the gains from capital markets are heavily taxed. The wisdom behind this taxation is to minimize the manipulation and direct a part of ‘artificially created’ money to public sector development. This mechanism works as a ‘shock absorber’ for a potential reaction against economic in-equality.

Present government in Islamabad has shown a remarkable commitment to focus on targeted assistance for underprivileged hardcore poor and labrourers by introducing Benazir Income Support Program and Benazir Stock Option Scheme. But, if manipulation in ‘Capital Markets’ to create the ‘artificial capital’ continue, the benefits of these programs would be diluted by massive inflation and capital outflow. There is some hope in newly introduced ‘withholding tax’ on ‘gains’ from capital markets. But mere 10% tax might not help as in USA and Europe, it ranges from 30-40% and regulatory process is much transparent. Any government control inflation and fight poverty while such massive and untaxed amounts are being pumped in to economy without any real productivity.

Unfortunately the levy of ‘with holding tax on capital markets profits has been challenged in Supreme Court by none else than the top opposition family in the country; Sharif Brothers. The government in waiting – with promises of delivering good governance while its head paying meager 5,000 as tax.Cynics are already speculation about the outcome from court – as Sharifs has been ‘lucky’ to secure unprecedented ‘justice’ in these times. It will be unfortunate if court blocks the government move which targets on getting a share of massive stock markets gains for public exchequer.

Even court does so, it is not an end of the world. If sincere, government can introduce the new legislations and reform regulatory institution – the Securities and Exchange Commission. Although those who accumulated wealth in past would get away but it would be promising step for future. Keeping in view an average of per annum increase of 2,000 points addition in market capitalization means a US$ 10 Billion taxable income for future. A 30% rate of tax as in USA on profits from stocks trading could result in to an increase of around Rs. 250 Billion. Much bigger than entire government spendings or health and education funds or even much criticized increase in defense spendings.

There is also a need to reorganize the Securities and Exchange Commission in to an efficient watch dog of securities markets. The SEC rules must be re-drawn and it’s regulatory powers needs to be independent and effective. There is also a need to redesign the monotony role of State Bank and investment/finance policies of banking and investment sectors in funding for ‘stock trade’. That money should be directed for SME’s and value addition in agriculture which is being invested in ‘gambling ‘ on market floor and resulting to inflation and poverty.

In capitalist world – we have to live by rules of those who ‘own the capital’, but violating the rules of ‘capitalism’ itself does not yield anything except anarchy and chaos in society. We had enough of it and before a complete collapse occurs, we need to focus on ‘controlled exploitation’ which is basis of capitalism. In case of uncontrolled explication against the rules set by genius who creates ‘capital from capital’ and dilutes the value of labour – we are inviting a disaster which will push underprivileged to choose survival or death from starvation. Let us practice ‘capitalism’ and help rich become super-rich. But this should not be a ‘crony-capitalism’ on cost of a meal of poor, while rich create artificial wealth.

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Humza Ikram

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