A ROAD TO DEVELOPMENT OR DEAD-END

MULAZIM ALI KHOKHAR
June 1 - 7, 2009

The financial systems of the world have collapsed so badly that they have dragged the economies into recession. Many believe that this is the end of the liberal government system or the capitalistic economic system.

Once the hub of capitalism, the America, is now rushing towards saving the indigenous financial sector and that is going against the capitalistic theory. What are the reasons behind the collapse? The main reason is consumer financing.

How? Well this is a like a knitted trap of the shrewd bankers for the end consumers and other financial institutions, in which they themselves could not survive along with other parties. It's like earning money for money having no real value in nature.

Bankers lend their money to the buyers of goods and services and in return they charge heavy interest rates. The impacts of interest rates are so large that at the end of the payment duration of the loans bankers actually would earn twice the loaned amount.

Obviously when a buyer gets a thing thrice its actual value, he would certainly sale it against the inflated value. This phenomenon triggers inflationary pressures in the market that starts picking up prices as a result. Finally, it turns the real goods into investment goods and their values go up like fired rocket.

At initial levels it is good experience for investors and end consumers both. As the investors earn decent profits while the consumers enjoy the things which they actually could not. A person having monthly gross income of Rs. 40,000 could now afford a car and a two bed flat and on the back of credit card he could buy a good living.

On the other hand, Bankers earn interest payments at regular installments which they further mortgage as derivative debt instruments on the regular incoming installments. Their pool of debts is further sold out for money which they further invest for the same and other ventures.

All this shapes in real crazy business when bankers with hell lot of money loan out without making proper risk assessment of the customers. The default rates pick up and the inflated values of the goods climb to the north. Everyone starts possessing the loaned properties which now are actually very costly than actually priced goods in the market. This has multiplied the default rates.

Now, large investors and financial institutions have called on their money. Bankers could not reimburse because of defaults of their customers. Have you noticed the cycle? Now everyone is becoming insolvent and hence the situation proclaims end of the boom, which has resulted in the economic meltdown.

This phenomenon has already affected Pakistan but fortunately considering the precedents in the world and especially in America Pakistan quickly has changed consumer financing policies.

There are no buyers in the market and the actual buyers or the investors are extinct. The phenomenon has jeopardized stock markets that though once were trading average 16000 levels in early 2008 are now trading around 7000 levels.

The phenomenon has stimulated economic meltdown and hence the Government came to rescue the sagging industries.

The Government intervention with a large extent is reflective of capital system downfall. The phenomenon of slow or no growth would continue for some period until new influx of money is put on to work out a stimulus for new growth.

Actually, today's world crises are very severe and they have been marching forward for the last two years. The world economies and especially the American economy are slowly and gradually sliding down to recession and most of the economists and investors are predicting severe recession in the American economy this time.

Also, it has been the world's history that whenever the big economy gets short of resources it goes for war to fish out resources to maintain status quo. The same is happening in recent time and now America is looking for another war to shore up its economy with more money and resources.

The current financial crises have reinforced the belief that religion has rightly restricted extravaganza and lavish living. Today's spendthrifts may turn into tomorrow's grief.

As member of tolerant and literate society we should restrict ourselves to our actual resources and should not pursue a debt financed lavish living. We should learn from mistakes and especially from others' mistakes to avoid the grave consequences. Today the need is to work out the interest free economic system and real economic system. Based on non-speculation values of goods and services restrict individuals and investors to available resources by default.

MACROECONOMIC INDICATORS
(annual percent changes) 2008 2009 2010
GDP per capita 4.8 4.0 5.8
Private Consumption 5.7 4.7 5.7
Inflation 11.7 9.8 5.5
Current Account Balance / GDP -3.5 -2.0 -1.9
Exchange Rates
- India -19.7 -1.2 .
- Bangladesh -0.9 0 .
- Pakistan -21.7 -1.9 .
Remittances 26.7 (-7.3; -4.2) (0.5; 3.4)
Unemployment 0.1 (0; 0.8) n/a