Tag Archive: Gross domestic product


Pakistan is on the path of international economic isolation. The serious analysts are in a state of shock with their fingers crossed. They are not ready to believe what is now unfolding before their eyes. A decision taken today in national interest is reversed the next day under pressure, again in the national interest. The ruling party of Pakistan has finally decided to sacrifice economy and the well being of the common man along with it, at the altar of power. The price for staying in power was huge but who cares as long as someone else (read: common man) is paying the price.

The government was relying on imposition of RGST for sailing through the economic problems but all the mainstream political parties have opposed it tooth and nail, for their own reasons which include safeguarding the interests of the elite and putting the government in a difficult situation. Ironically those who opposed this new levy had no alternative strategy except the vague rhetoric of minimizing the institutional corruption in the tax machinery. It seems that the government will work overtime to print notes during the remaining two years. Incidentally, governor of the central bank has already warned against the devastating implications of deficit financing.

Has the government decided to abandon the economic reforms? The instant reaction of US and IMF to reversion of increase in the petroleum prices confirms it.  The government has embarked on the path of economic isolation internationally simply to remain in power. These are short-cut methods and will badly affect the life of common man.

According to Financial Times, Pakistan’s Prime Minister, Yusuf Raza Gilani, announced the deferral of an IMF-backed tax reform on Friday. The reformed general sales tax, which Pakistan has been discussing with the IMF for more than a year, was supposed to be introduced in July last year to boost tax revenues.

“We will not go forward [with the RGST] until consensus is evolved,” said Mr Gilani during a visit to the southern port city of Karachi, where he visited the headquarters of the Muttahida Qaumi Movement.

Mr Gilani reversed a plan to increase oil prices on Thursday to win back the support of MQM, after the party withdrew from the ruling coalition in a move that denied the government parliamentary majority. MQM confirmed on Friday that it would rejoin the coalition.

Analysts warned that the decision to delay the RGST would further intensify concerns over the government’s ability to reform Pakistan’s troubled economy.

“This is a near fatal blow to the reform process,” warned Sakib Sherani, a former adviser to the finance ministry. “The RGST was meant to finally begin documenting the vast informal economy in a country with an alarmingly low tax to GDP ratio.”

Mr Gilani’s decision will only cause more problems with the IMF. Pakistan does not have much to show in the form of successful reforms being undertaken currently. The RGST is a key part of Pakistan’s agreement with the IMF and its postponement could put the $11bn loan package in jeopardy. The IMF said that raising the ratio of government revenue to national income was essential to returning Pakistan’s public finances towards sustainability and the sales tax was an indispensable component in this effort.

Advertisements

Pakistan’s President has announced that his government plans to tax the rich to help the poor i.e. flood-hit people. This sincere initiative is a happy development which should be appreciated but will the rich and mighty pay up or will they live up to their reputation of plundering but not paying back. Pakistan’s floods have placed the country at the head of a bumpy road ahead when the country is forced to make tough choices. To start with, Pakistan’s Central Bank has jacked up the interest rate which will have many implications for the flood-hit fragile economy, but the question is: did the new Governor who is an economist of international standing, have any other viable option? Businessweek in its current issue has reported that Pakistan’s deadliest floods ruined crops alone worth 281.6 billion rupees ($3.27 billion), destroying rice, cotton and sugar. And this is one of multiple official versions this time coming from the horse’s mouth, the Agriculture Minister himself. However, the floods have damaged about 10 million tons of crop, which Credit Suisse values at about $1.9 billion.

In this backdrop when Pakistan’s major contributor to the GDP has suffered so badly, the inflation was already out of control and the Bretton Woods sisters had no mercy on the devastated economy and battered populace, this was probably the only thing in his power that a Central Bank governor could do to arrest the inflationary trends. Wall Street Journal has reported that it’s a decision he had to make with incomplete information. Total assessments of the damage to Pakistan’s economy from floods that began in July are still pending….He chose right. The State Bank of Pakistan on Wednesday raised its policy rate by half a percentage point to 13.5%.

The paper says that holding off would have meant a risky delay of action against a worsening inflation problem. Consumer prices in Pakistan have been rising too fast for three years, with gains close to a 12% rate throughout 2010. The floods will amplify the problem, but floods aren’t the only source of a price shock in Pakistan. Islamabad is under pressure from the International Monetary Fund to increase electricity tariffs and raise general sales taxes and import duties—all of which would add fuel to the inflation problem. Not taking these steps could have the country miss out on a $3.2 billion IMF payment due by the end of this year. Pull it all together and economists at Standard Chartered expect inflation to average 15% in the fiscal year that began in July.

Then there’s the fragile state of Pakistan’s economy. Flood damage means Pakistan’s critical agriculture sector will contract 1.7% this fiscal year, the sector’s first decline in a decade, Credit Suisse predicted. It means economic growth could slow to 2.5%, much slower than last year’s 4.1%, and a crawl by Pakistan’s standards. Add to this the infrastructure damage—from power plants to highways—and industrial growth, too, will suffer. The International Labor Organization estimates 5.3 million people will lose their jobs because of the flood. Raising rates, and promising to keep doing so, in such an environment is certainly not going to win Mr. Kardar any friends in the business community. But inflation is the more frightening of Pakistan’s economic challenges. Price stability is far more critical to Pakistan’s long-term growth. Foreign aid and remittances from overseas Pakistanis will ensure money flows into the economy.

Is the love affair between Russia, China, India and Brazil over already? Are they looking for new affiliations, new love affairs and new life? It seems they are. But before we dwell on that, let’s look at the intensity of soon-to-be-forgotten love. Four countries namely, Brazil, Russia, India and China (BRIC) got together to become a force-to-reckon-with by 2050 keeping the following in view:

  • In 2001 and 2002, real GDP growth in large emerging market economies will exceed that of the G7.
  • At end-2000, GDP in US$ on a PPP basis in Brazil, Russia, India and China (BRIC) was about 23.3% of world GDP. On a current GDP basis, BRIC share of world GDP is 8%.
  • Using current GDP, China’s GDP is bigger than that of Italy.
  • Over the next 10 years, the weight of the BRICs and especially China in world GDP will grow, raising important issues about the global economic impact of fiscal and monetary policy in the BRICs.
  • In line with these prospects, world policymaking forums should be re-organized and in particular, the G7 should be adjusted to incorporate BRIC representatives.

It was estimated that if things went right in less than 40 years, the BRICs economies together could be larger than the G6 in US dollar terms. By 2025 they could account for over half the size of the G6. Of the current G6, only the US and Japan may be among the six largest economies in US dollar terms in 2050. The list of the world’s ten largest economies may look quite different in 2050. The largest economies in the world (by GDP) may no longer be the richest (by income per capita), making strategic choices for firms more complex.

Goldman Sachs was particularly upbeat on the prospects of formation of this economic power block. It wrote in December 2005:

  • Since we began writing on the BRICs, each country has grown more strongly than our initial projections. Our updated forecasts suggest the BRICs can realize the ‘dream’ more quickly than we thought in 2003.
  • The case for including the BRICs directly in global economic policymaking is now overwhelming.
  • We present the prospects for another set of developing countries, a group we call the N-11—the Next Eleven. Of them, only Mexico and perhaps Korea have the capacity to become as important globally as the BRICs.
  • We introduce a Growth Environment Score (GES), which aims to summarize the overall structural conditions and policy settings for countries globally. Improving long-term foundations is key to converting potential into reality.
  • Encouragingly, the BRICs themselves are all in the top half of the rankings for developing countries. While the BRICs are generally progressing, there is a need for considerable further policy improvement in each.

Thus the term BRICs, coined by Goldman Sachs’ chief economist Jim O’Neill in 2001 and referring to Brazil, Russia, India and China, has come to be widely used as a way of describing the transfer of economic power to the emerging markets and away from the developed world. But the realities are now shifting away from Brazil and Russia to Asia and (South) Africa and a new economic power block is coming into shape which only includes China and India from the original BRICs lineup, with Brazil deemed now to be relatively well developed, and the love affair with Russia is seen as over. The new buzzword among hedge fund managers in London, CIVITS–China, India, Vietnam, Indonesia, Turkey and South Africa–are tipped to be the hotspots to watch for growth through the current decade.

Wall Street Journal, in an article titled, Forget the BRICs-its all about the CIVITS, has reported that it’s a far cry from the start of the last decade, when Goldman Sachs argued that the combined economies of the BRICs could eclipse the combined economies of the wealthiest countries of the world–including the U.S. and the whole of Europe–by 2050.

China is well on its way, and its inclusion in the CIVITS is more than deserved. Its economy overtook Germany in 2007 and then surpassed Japan in July 2010, catapulting it into a league of its own because of its breakneck growth. The U.S. bank now says China will overtake the U.S. by 2027 to become the world’s largest economy, while PricewaterhouseCoopers pitches it even earlier, at 2020.

But, while timing is the only difference of opinion over China’s potential, India has drawn slightly more mixed views. The world’s second most populous nation suffers from poor infrastructure, volatile disputes with its neighbors and high levels of bureaucracy that hinder its ability to achieve its potential–not insurmountable challenges, but certainly ones to take into account. Goldman Sachs sees India, currently the world’s eleventh largest economy, outstripping the U.S. by 2050.But if opportunities in Brazil are on the wane given its relative self-sufficiency in the agricultural, mining, manufacturing and service sectors, the story in Russia is the opposite.

The world’s biggest country holds the largest reserves of mineral and energy resources globally, yet faces a shrinking population and an economy that is struggling to recover after falling off a cliff during the economic downturn. Earlier Thursday, the International Monetary Fund said the Russian economy faces a big challenge in withdrawing financial stimulus from its economy, with inflationary fears on the rise following the country’s worst drought in decades.

So if Brazil and Russia are old news, what’s behind the inclusion of new entrants to the top picks for emerging markets growth? On the face of it, South Africa’s entry is a little strange. But hedge funds say the country is a proxy for the continent as a whole, which has seen its collective GDP soar to equal roughly Brazil’s or Russia’s.Africa’s largely a commodities story, with rising demand for minerals and oil driving consumers to pay dearly for its natural riches. South Africa is already the largest energy producer and consumer on the continent, and a top producer of gold, platinum and palladium.

Indonesia meanwhile is already the largest economy in Southeast Asia and a member of the G20, and has emerged from the global downturn in better shape than its neighbors. Again, it’s a natural resources story, producing and exporting oil, natural gas, tin, copper and gold.

Vietnam meanwhile makes a lot of sense. It’s one of the world’s fastest growing economies attracting vast foreign investment and a significant agricultural exporter. PWC has said Vietnam could be the fastest growing of the emerging economies by 2025 with a potential annual growth rate of almost 10% pushing the size of the country’s economy to around 70% of the U.K.’s by 2050.

Like Vietnam, Turkey is also one of the fastest growing economies, boasting low inflation and soaring foreign investment following a series of key economic reforms. So wither the BRICs? Goldman Sachs isn’t giving up on them. In a recent update to its data, the bank said the BRICs would exceed the U.S. by 2018 and account for a third of the global economy in purchasing power parity terms, plus 49% of global GDP growth, by 2020. But it did admit that the stellar performance of BRICs’ stocks in the last decade might not be repeated this decade. The bank said:

“Now that the BRICs story is better known, expectations are higher and the valuation gap is much smaller, the same degree of out-performance seems much less likely, even if the BRICs deliver solid returns.”