May 2 - 15, 2011

The recent US-led globalization was preceded by the Victorian (or Imperial) globalization. Decades before the First World War of 1914, Britain dominated the world economic and financial scene, courtesy the imperialist expansionary policies that saw people like William Jardine and James Matheson came to power under the ruthless influence of British gunboats. The two-men company Jardine-Matheson that controlled opium trade (from India to China) wooed British parliament to take military action against China when the latter tried to block the illegal and socially-destructive trade. The British military assault on China culminated in the British occupation of Hong Kong.

Prior to the World War I, it was Britain not US and the Bank of England not the Federal Reserve that ruled the world finance. Till that time, the London bond market creators, N.M Rothschild and Sons used to dominate the world bond market holding in their portfolio bonds issued by the governments of Chile, Egypt, Germany, Hungary, Italy, Japan, Norway, Spain, Turkey, as well as securities issued by the railways of Argentina, Canada and China. Niall Ferguson writes in his book The Ascent Of Money: "At that time there were around forty foreign stock exchanges scattered throughout the world, of which seven were regularly covered in the British financial press. The London Stock Exchange listed bonds issued by fifty-seven sovereign and colonial governments. Following the money from London to the rest of the world reveals the full extent of this first financial globalization...Yet it is hard to believe there would have been so much overseas investment before 1914 had it not been for the rise of British imperial power."

The ingrained rivalries of European powers blew the war trumpets of 1914. And with that came down the structure of Victorian globalization. The rest is history - both military and financial. The Great Depressions separated the World Wars I and II. The three earth-trembling events led the world to force some kind of financial discipline in market operations. The new financial design created entities like IMF, IBRD and IDA - IBRD and IDA latter amalgamating into the World Bank - to bail out nations in deep financial crisis. The most important planks of the new global financial policy were the control over free flow of capital and prudent market regulations.

The issue of globalization, in the face of blocked global capital movement, remained dormant until the era of Ronald Reagan who, being influenced by the Chicago school of economists - especially by Milton Friedman - revived it. The 'freshwater economist' Friedman acted as Reagan's economic adviser. The idea of globalization - this time pioneered by the US - got to new heights with the help of unfettered movement of the stateless capital and galloping money and credit expansion. Alan Greenspan, the Fed chairman (1987-2006) and a devotee of Milton Friedman, added fuel to the globalization fire by allowing the US subprime mortgage to peak to a totally untenable position, and by looking to the other side while spurious financial derivatives kept ruling the US and world markets. The demise of subprime mortgage, by some quirk of fate, almost coincided with the demise of Milton Friedman. As if that was not enough, Alan Greenspan also left Fed the very same year when Friedman left the world. The upheaval caused by the frenzy of globalization and unregulated free market operations was colossal. The damage control measures were found lacking in efficacy by many analysts who believed that the damage assessment exercise was based on unscientific lines and na´ve assumptions.

The US-led globalization was essentially based on Friedman's 'monetarism' and the concept of a totally free market economy. These cornerstones of capitalistic philosophy were thought to be the effective answers to the communist world's highly centralized economy model. Unfortunately, both styles of economic management lacked control and balance, and, therefore, failed. Communist model failed because of high-powered government intervention, and US globalization model failed because of no government intervention at all. The globalization-II era was exemplified by the highly potent role of hedge/sovereign funds and the emergence of a new breed of Wall Street investment bankers. Being answerable almost to none, hedge funds wrecked havoc on the world of finance which, for a number of decades, had remained oblivious of the destructive power of unchained global capital. However, the hedge funds and Wall Street investment bankers were no exception when it came to the pay-back. Price paid for the global financial adultery was quite heavy.

No doubt, Pakistan was squarely hit by the global financial crisis, its economic prospects, however, have been more hurt by its talent-averse and corrupt feudal democrats than by the changed global conditions. The fast-drying foreign investment lines owe more to our inapt political system then to the footloose foreign capital. Our economy, when given a chance, has shown its outreach and potential. Other nations know more about the potential of our economy. They throng to make their presence felt in our markets whenever our political stability allows them to do so. Paradoxically, they find autocratic rules more stable than democratic ones which, they well know, are always short-lived. No surprise if the 8-year autocratic rule that preceded the ongoing democratic rule had a lot of attraction for the foreign as well as domestic investors. The stats show that the private sector investment, in the shape of gross fixed capital formation, recorded a growth of 183 percent during FY-03 and FY-08. Unfortunately, during the two subsequent financial years, the overall gross fixed capital formation has remained almost stagnant - showing a marginal increase of 2 percent.


FY 03-08
FY-09 FY-10 CHG B/W
FY 08-10
 (IN %)
A. Private sector 545 616 853 1198 1336 1540 183% 1621 1565 2
B. Public sector 104 104 129 162 173 205 97% 213 218 6
C. Gen. Govt. 87 125 153 206 306 350 302% 377 414 18
Public-Private (A+B) 649 720 982 1360 1509 1745 169% 1834 1783 2
Total (A+B+C) 736 845 1135 1566 1815 2095 185% 2211 2197 5

This is not because investors - both foreign and local - despise democracy. This is because of the inapt fiscal and monetary policies democrats have resorted to that both types of investors have shied away to some other avenues with better economic and business prospects. The factors contributing to the drying up of all types of investment are: political instability; law and order; corruption; chronic energy shortage; high inflation rate; unusually high interest rate; poor fiscal management; low tax revenue with a rampant tax avoidance culture; high government non-developmental spending; government borrowings from SBP and the banking system; banks' unprofessional stance - blocking credit to the private sector on one hand and encouraging government borrowing on the other. While shrinkage in foreign investment is understandable in view of the very nature of the roving global capital, the change in the focus of domestic investors, who have been compelled to take their investment away to foreign lands, is certainly an ominous sign.


A. Foreign Private Investment 6,960 5,454 3,210 2,739 1,388
B. Foreign Direct Investment 5,140 5,410 3,720 2,151 1,083
C. Foreign Public Investment 1,468 21 (545) (653) (70)
Total (A+C) 8,428 5,475 2,665 2,086 1,318