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Jan 28 - Feb 03, 2008

Till date, most of the foreign direct investment (FDI) coming into Pakistan has been of a short term nature. Major part of this investment is portfolio investment in the stock exchange, free to make a quick exit. Serious FDI has been targeting the purchase of our existing assets, either on a bilateral basis or through competitive bidding. This means that as long as the country keeps selling existing strategic assets, no new capital formation will take place. Capital formation is also a function of country's infrastructure. Pakistan has very poor industrial level infrastructure. While a lot of planning is underway to develop new infrastructure, it will take quite some time before it is ready.

The cost of doing business in Pakistan is very high. Energy shortages mean high cost of electricity and gas inputs resulting in a high cost of end product. Moreover, a low literacy rate creates shortage of appropriately trained manpower making the unavailability of skilled labor a serious hurdle in the way of industrialization.

Our economic managers have tried the Japan's model of economy without sufficient knowledge and ground work. In the wake of surplus budgets, and a soaring yen, Japan decided to divert its surpluses to the real estate business. Interest rates were lowered and banks' excess liquidity was diverted to the real estate sector in the shape of cheap housing credit. Japan was successful because it is a developed economy; it has a strong and stable currency; its financial sector is closely monitored by the government; it has a strong infrastructure base and its corruption rate is very low. We don't have any of these things and therefore, are bound to fail.

We have seen a huge inflow of foreign investment and foreign remittances but in the absence of any sound industrial policy, this inflow has been channeled into non-productive sectors namely stock trading and real estate business. The outcome has been a low industrial and agricultural growth coupled with a high service sector growth leading to structural imbalance. The banking and finance sector has grown out of proportion and has thrived on common man's money due mainly to State Bank's failure to properly monitor the sector. Owing to the lack of balanced growth, we have experienced one of the worst food inflations. SBP's recent monetary policies based on increase in discount rate with a view to control inflation are viewed with skepticism.

We have seen a boom in the telecommunication sector but most of the investment goes to the marketing efforts needed by the sector. Any transfer of technology or broadening of industrial base has not taken place. In our economy consumer expenditure is very high and we are fast changing in to a nation that produces little and spends more. Those who can not enjoy the luxury of foreign remittances have resorted to expensive consumer credit which is presently easily and readily available. On the other hand, the over all credit growth in 2007 has been very low as compared to last four years which gives rise to the fears of recession. .



We had tried to follow the early 1980s Japanese economic model zaiteku or "speculative financial engineering" whose basic components are:

A very low discount rate
Availability of easy and cheap bank credit
Existence of excessive liquidity owing to trading surpluses
Systematic channeling of excessive liquidity to real estate and stock exchange

We conveniently forgot that Japan is a developed and stable economy which we are not. Moreover, Japan had trade surpluses while our annualized trade deficit stands at US $ 14 Billion. Also, Japan's currency was very strong and still is. To top it all, Japan's financial system was found on a very sound basis and was professionally managed by the government itself.

In consequence, we find our economy entrenched in the quagmire of speculative investment and high consumer spending. Major portion of the foreign investment and foreign remittance lies hidden (not invested!) in the highly inflated prices of some stocks and real estate assets. It may get wiped off any moment with the crash of these two markets.

Stock market, instead of being a place for sale and purchase of maturing productive investment, has become an arena for speculative forces where fortunes can be lost within the minimum possible time. Most of the "favorite" stocks are trading at high price / earning multiples and are likely to suffer the most in the event of any downturn.

The sectoral imbalance of the economy has assumed disturbing proportions as three sectors namely Energy, Banks and Communication are carrying 75 percent "load" of the total market capitalization.

Privatization process, apart from being murky, has added little to the capital formation base.

Communication sector, no doubt, has shown growth and has created job opportunities, but the nature of investment is mostly non-industrial and any worthwhile transfer of technology or broadening of industrial base has not taken place. Most of the foreign invested either gets invested in marketing efforts or finds exit to cell phone manufacturing countries.

Consumer spending is on a rise thanks to the continuous inflow of foreign remittances and rising prices of goods and services. Those having no access to the luxury of foreign remittance have resorted to consumer credit which is abundantly available in the shape of auto financing and credit cards.


The government should completely revamp its policy design. Like the National Security Council, an elite panel of economists should be formed. The panel members must not have any political affiliations. The panel should be answerable only jointly to the country's chief executive, the chief justice and the chief of the army staff.

While deciding on policy design, the emphasis should be on long term steady growth rather than on any ad-hoc measures based on short term vision. The panel should do economic planning for at least coming 30 years divided into a number of smaller plans, like 5-year plans of the yester years. Special emphasis should be placed on the development of a strong infrastructure. Education, energy and health sectors should be given top priority by the planners.

Strict rules should be framed by the controlling bodies prohibiting speculative trades of real estate.

The foreign investment, being a double edged sword, should be made subject to such highly thought out rules which neither restrict its inflow nor allow a free outflow at the cost of country's economy.

Besides the trading indices, an index should be introduced at the stock exchange to measure the level of capital formation at any time. Any incongruent disparity between the trading and capital formation indices should be seriously viewed and swift corrective actions be taken.