A Question of Real Growth

The article Was Published in the Magazine "South Asia"

Since a military government is not bound by political exigencies, it can easily formulate and implement policies which may not seem people-friendly – at least in the short term.

In today’s world, military rule is considered the worst form of government as opposed to democratic regimes. It is, however, generally argued that growth is not directly linked to the regime polity. Instead, the economic success of a country lies in higher investments and coherent economic policies. Nevertheless, Pakistan has witnessed a higher growth rate of GDP under military rule as compared to democratic governments. 

Since its inception, Pakistan has experienced several episodes of martial laws as well as democratically elected governments. The 66 years of the country’s existence can be divided into seven regimes; Regime 1 (1947-1958) in which the country achieved 3.1 percent growth per year. During these first 11 years, the sole emphasis of the government was on setting up a base for a sustained growth process. The GDP growth during the second phase (1958-71), in which the country was governed by a military ruler, was 6.8 percent. Regime 3 (1971-1977) was the first pure democratic spell and had a 3.9 percent growth rate. 

General Zia’s martial law, or Regime 4, had a 6.6 percent GDP growth rate, while a slower growth of 4.5 percent was observed during the second democratic regime – from 1988 to 1999. This democratic era that spanned over almost eleven years can be further divided into four short intermittent governments of the late Benazir Bhutto and Mian Nawaz Sharif, both of whom served in office for two incomplete terms. 

On average, the growth rate was 5 percent during Regime 6 (1999-2008). It was the government of General Pervez Musharraf. Although the democratic government of the PML-Q was in power during 2002-2007, it is largely believed that the real power was exercised by General Musharraf. 

Regime 7 was the democratic dispensation from 2008 to 2013 in which the country experienced a very low growth rate on average at 2.9 percent per annum. 
On the surface, it is clear that in Pakistan the growth rate during military regimes was much higher than in democratic regimes. Apart from the GDP rate, several other indicators also improved during military rules. For example, the overall public debt reduced considerably while the position of the foreign exchange reserves improved remarkably during the Musharraf regime. The standard of living increased during all three military rules. It was also observed that since industrial growth was higher during these periods, income disparity widened, which is an integral part of the development process. 

Various factors were responsible for a better GDP growth during military rules. The first was the overwhelmingly high foreign aid. The Ayub Khan government received huge sums in foreign aid. It also received the technology that helped bring about a green revolution in the country. General Zia’s government received foreign aid due to the Afghan war. During his rule in the 1970s, industrial productivity increased manifold due to investments in high-tech industries. 

Similarly, the government under General Musharraf received aid due to the country’s participation in the war against terror. Known as the Coalition Support Fund (CSF), this aid was given without any conditions attached. 

Contrary to this, democratic regimes faced several difficulties: sanctions, repayment of debt and debt-servicing of loans taken out during military regimes. The need to borrow short-term loans from the IMF - on strict conditions – also arose during the rules of democratically elected governments, which negatively affected the overall economy. 

The nature of foreign aid received by military rulers is different from the aid received under IMF programs. For instance, project-specific aid has a multiplier effect on the overall economy. If invested in a project, such aid generates employment opportunities. Moreover, due to the aid-externality effect, public, private and multinational investors are encouraged to invest in the country. 

Sustained economic growth is possible if policies are consistent, investors have confidence in the government and the rule of law is established for long intervals. This is possible if either the same government continues in power for a long period or a change in government does not result in a change of policies of the previous government. It is also observed that economic managers of military governments give special incentives to investors. Although this increases the rent-seeking behavior, yet it leads to higher growth since the investors make long-term investments. Indonesia, Malaysia, Taiwan, Singapore and South Korea are some other countries that prospered under military rule. Unlike a democratic government which functions amid the constant fear of a military takeover and faces criticism of the opposition as well as the public, military governments are hardly answerable to any authority and mainly work without consensus. In short, such governments do not have to face the political and legal hurdles which a democratic government can face in the implementation of its policies. Since a military government is not bound by political exigencies and can afford to look beyond self-serving goals such as getting elected in the next elections, it can easily formulate and implement policies which may not be people-friendly in the short run. Another advantage enjoyed by military governments is that they are less prone to political instability as compared to democratic regimes. Dr Eatzaz, Acting Vice Chancellor of the Quaid-e-Azam University, terms the 1990s as an era “marked by musical chairs of democratic governments” of Benazir Bhutto and Nawaz Sharif. The collapse of one elected regime after another resulted in significantly low economic growth. Ironically, there was political stability during all three military rules and hence the country registered higher growth. It can be said that growth is not linked to the system of governance but instead to the policies adopted by a government. In military regimes there is less confrontation and more freedom to opt for different policies and implement them. This gives positive signals to investors as they hope that their objectives will be achieved without much difficulty. It is thus easier for them to take crucial investment-related decisions. However, the role of foreign aid cannot be ignored as it has vital importance, especially in the context of economic growth of Pakistan.

How big is GSP Plus?

The article was Published in Money Matter, February 10, 2014
   

Energy projects, luring foreign investors to the country, implementing Vision 2025, kicking off the privatisation process and securing GSP Plus status are among the important endeavours of the current governemnt since they took charge in June 2013.

Although securing GSP Plus status is an important achievement for the current government, the benefits of the trade agreement with the EU are exaggerated.

What is GSP Plus? It is a special incentive scheme which provides a complete waiver on the exports of specific products. GSP Plus provides special treatment to developing countries and least developed countries to export their products at a lower tariff rate compared to MFN tariff rates. However, the agreement comes with conditions which have to be fulfilled by the country that is awarded GSP Plus status. These conditions relate to the standard of living and working conditions, implementing the international convention of human and labour rights, good governance and environment.

GSP Plus status, which came into force on January 1 this year, gives Pakistan free trade access on zero duty to the European market for the next ten years. It sounds quite grand but only 75 products are allowed on duty-free access to the European markets with a condition that it must not exceed 6% of the EU’s total imports.

The limited number of products has reduced the scope of potential benefits Pakistan can earn from the agreement but it is still expected that Pakistani exports will increase by $1 billion to     $2 billion. The numbers are not too big but the status will have a possible externality effect through employment generation in upstream industries as well as services sectors. Minister for Commerce and Trade Khurram Dastagir Khan ambitiously assumes that 100,000 people will get employment in different sectors due to the GSP Plus agreement. Nonetheless half of that number would also be satisfactory.

However, there is no free lunch. The EU has placed 27 compliance restrictions on Pakistan which relate to child labour, standard of living of employees, environment and governance. Consequently, the European Union (EU) will closely watch Pakistan’s human and labour rights laws, governance and environment protection laws. Any violation could lead to temporary or even permanent suspension of the agreement. Moreover, ensuring the enforcement of the above mentioned laws would increase the cost of production as well.

And while securing GSP Plus status is being touted as a major achievement of the current government despite it being an initiative of the previous government, there are certain hurdles which still need to be overcome to get the required benefits of the agreement.

The first hurdle is the availability of energy, which is the essential component in the production process, as power outages have led to lower growth in almost all sectors of the economy. An understanding needs to be developed between firms and the government to provide uninterrupted supply whenever necessary, especially to firms involved in exporting commodities to European countries.

The second problem deals with the lack of available exports surpluses. The problem can be addressed through horizontal networks. However, due to lack of clusters and networking among the firms, the overall benefits may not be exploited. Another issue is implementing the 27 constraints which are imposed on Pakistan. Who will ensure that the entire conditions are being met?

Another interesting restriction of GSP Plus is that the share of exports of any product cannot exceed six percent of total EU imports of that product. Who will regulate this process if we are giving free hand to the firms to export? Who will calculate whether we are exporting each product within our limit? Since a violation of these conditions would lead to either temporary or permanent suspension of GSP Plus, the government will have to devise a foolproof mechanism to monitor these dealings.

No doubt our current account balance would improve through additional exports under the GSP Plus incentive scheme. Moreover, we need to borrow $1 billion less if our exports increase by $1 billion. Nevertheless, the expectations to increase exports by more than $2 billion under GSP Plus status are ambitious because (i) few products of leather garments, textiles and carpets are allowed (ii) value added products are not among the major exportable items and (iii) GSP Plus is limited to one segment of the industry.

The role of lobbyists is crucial in the approval of GSP Plus. Therefore it would be great if lobbyists keep negotiating with European countries to allow exports of more products at zero duty as well as if the quota restrictions could be increased from the current 6 percent. Although the latter suggestion is only be beneficial if we have energy to produce as well as exports surpluses to export.

More importantly, in the era of globalisation, we need to reduce our transaction costs and compete in the world market. GSP Plus alone is not the solution. We also need to think long-term and devise an alternate strategy if GSP Plus is not renewed after ten years or suspended due to a violation of conditions. Value addition is the key to increase the value of exports. Branding is also another way to increase value of exports

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Pakistan gets GSP Plus status

Published in PIQUE January, 2014 http://pique.pk/economy/03-Jan-2014/pakistan-gets-gsp-plus-status

Pakistan gets GSP Plus status

Good news for the economy

Economic revival has been at the top of Prime Minister Nawaz Sharif’s government’s priorities and it was evident that despite several problems faced by the economy, and people expecting a relief package, the 2013-14 Budget was pro economic revival. The major challenges to the government are overcoming the crippling electricity shortages, abolition of the circular debt, reduction of fiscal deficit and public debt and an increase in the total tax revenues.

For a revival of the emaciated economy, the government needs to provide basic infrastructure such as energy, availability of raw materials, machinery etc. Moreover, the government should also facilitate industries and agriculture to get market access at lower cost. Lower cost can be achieved by giving incentives or introducing reforms in such a way that it facilitates businesses, increases competition and provides full information of markets they are dealing with.

Due to increase in imports — and partly due to increase in oil prices— our trade deficit is creeping up. Our exporters have been asking for several incentives as well as market access to several countries, including the European countries. Specifically, GSP+ status was continuously raised at various forums during the formation of the trade policy. Finally, Europe has given us GSP Plus status and the government has portrayed it as a triumph.

What is GSP Plus?

GSP stands for Generalised System of Preferences. It gives special treatment to Least Developed Countries, LDCs, and developing countries to export their products at a lower tariff rate compared to Most Favoured Nation tariff rates. However, GSP is different from GSP Plus. GSP arrangement reduces tariff  substantially whereas GSP Plus is a complete waiver on the exports of specific products, which are agreed in the agreement with a condition that standard of living and working conditions of the labor will be improved and not exploited at any cost. In short, GSP Plus is a special incentive arrangement, focusing on sustainable development and good governance. Any country that gets GSP Plus status must implement international convention of human and labor rights, good governance and environment.

The long-awaited GSP Plus status has been given to Pakistan with 409 to 182 votes by the EU Parliament, which will be effective from 1st January 2014. Prior to this development, Pakistan exporters enjoyed concessionary access to European markets from 2002 till 2005. The current GSP Plus status gives Pakistan free trade access on zero duty to the European market for the next four years. Nonetheless, not all products are included in this agreement. Pakistan has been able to finalise 75 products which will be allowed a duty-free access to the European markets on one condition that it will not exceed 6% of total imports of EU.

Advantages of GSP Plus

GSP Plus has already been granted to Bangladesh, Sri Lanka and India. All the three countries are Pakistani competitors, especially in textile exports. Thus, Pakistani exports were at a massive disadvantage for the last many years because Pakistani exporters had to pay significant percentage of duty for sending their products to European markets. Therefore, after the GSP Plus status, it is expected that Pakistani exports will increase by $1 billion to  $2 billion.

Although, only 75 products are finalised in the agreement of GSP Plus, but it will also benefit other industries due to externality effect. Moreover, it will generate employment in both upstream and downstream industries. According to Khurram Dastgir Khan, the state minister for commerce and textile industry, about 100,000 people will get employment opportunities. It might be an ambitious figure but even if half of it is achieved, it will indeed be good news.

Potential Disadvantages

The agreement of GSP Plus has lots of constraints attached to it. These constraints in a way are non-tariff barriers. Nevertheless, since Pakistan will get preferential treatment, the Europeans may be inclined to put certain restriction on us. Consequently, the European Union (EU) will be closely watching Pakistan’s human and labor rights laws, governance and environment protection laws.

If any of the 27 conditions is violated, the GSP Plus status can be suspended. For example, GSP status of Bangladesh was suspended by US this year when labourers died due to fire incidents in several Bangladesh factories. According to U.S., Bangladesh has not taken enough steps to give its workers the internationally recognised labor law rights. Therefore, the government as well as industrialists who are exporting their products under the GSP Plus program have greater responsibility to ensure the enforcement of international standard of human & labor rights in the country to improve working conditions of labor, including income, health and safety of the workers besides, environmental protection at all levels. Otherwise, there is a possibility that in case of any untoward event, the GSP Plus status can be revoked.

What to Expect

Although it is encouraging that Pakistan has been granted GSP Plus status but a critical question is whether can we produce and then export goods, given that there are energy shortages and lack of available exports surpluses.

The energy shortages, specially, pose a key problem and it needs to be addressed immediately. It was reported that industries who will export to European countries will get  an uninterrupted supply of energy. However, the finance minister announced in the second week of December that people should brace for more power shortages. This has caused a lot of trepidation amongst the industrialists.

Moreover, we have a very narrow base of exports to European countries. We are only exporting leather garments, textiles and carpets to Europe and need to expand our export base. There are good chances that GSP Plus can help bring foreign investment to Pakistan. If both FDI and exports go up then current account deficit may decline. On the other hand, if money supply is increased and investment is not done with equity financing then inflation will increase as well.

In conclusion, GSP Plus status is indeed an achievement and Pakistan needs to exploit it to full potential. We, however, also need to think long term and devise an alternate strategy if GSP Plus is not renewed after four years.

For clean and renewable energy

The Article is Published in Money Matters on Monday January 6, 2014

Energy is an essential component of an economy, which drives the growth of manufacturing and services sectors and helps run tube wells for the agriculture sector. Hence, it is one of the most vital inputs to boost a country’s GDP growth.

The last six years’ export data reveals that the country’s exports increased from $17 billion in 2006-07 to $24.8 billion in 2010-11. Nevertheless, exports declined to a certain extent in 2011-12.

In today’s age of globalisation, it is critical for countries to open up their markets to global players and for export-oriented sectors to adopt innovative methods of production to increase the country’s exports.

The energy shortages will have an adverse impact on exports if the technology we are using in our production sector demands more energy for more production.

Here is a research question for us that can we associate our exports performance in the last six years to technical effect or government was able to divert sufficient resources to exports-oriented industries.

Muhammad Shahbaz from Comsats has similar findings in his research paper, presented at the conference. He emphasised on the use of lower energy-intensive technology for production, which has lower CO2 emissions as well as lower cost of production.

Since the oil prices are creeping up and we are dependent on the use of furnace oil and thermal energy, it is difficult to control the prices of energy in the long run. Although the energy prices are administered prices and the prime minister can ask for energy prices not to be increased, that may have adverse impact on the overall economy. Since the government needs to give subsidies if it doesn’t increase prices and later on borrow the same amount either from the schedule banks or the State Bank of Pakistan. Therefore, inflation is inevitable either way. It can be stopped or mitigated for a short period but eventually it will go up.

More alarmingly, since the negative consequences of BP oil spills remain, cost of oil exploration will be higher in future. Thus, we may not experienced a decline in oil prices due to decline in production. Instead, the prices of oil will increase. There is a need for energy mix to avoid the humungous oil import bill in future which further dampens the problem of balance of payments and then asking for short-term loans from IMF to correct the balance of payments problems.

Another frightening situation may arise if we do not change the prevailing energy-mix situation. Even though the share of thermal energy will decrease in the overall energy mix, overall production remains the same. We may experience an increase in the oil import bill. I U Mangla and Jamshed Uppal, foreign professors from Western Michigan University, USA, and Catholic University, USA, estimated that if dependence on oil to produce electricity continues, by 2024-25 we may need $20-$24 billion just to cover the expenses of the oil import bill, which currently stands at $15 billion. Therefore, as suggested by Shahbaz we need to import energy efficient plants to reduce energy intensity. Moreover, as Mangla and Uppal suggested, we need to increase our exports to earn more foreign exchange. Export earnings can be increased through value-addition of our products. One way of value addition is branding which I have discussed in my article in Money Matters a few weeks ago. Vision 2025 has also emphasised on the exports promotion through value-addition. Nevertheless these policies have failed in the past due to lack of available infrastructure, especially energy supply, in the last few years.

Energy mix, in a nutshell, is necessary to mitigate the adverse impact of increase in oil prices. Increase in exports earnings is inevitable for the country to cope the problem of increase oil import bill. This implies that the importance of energy will be the focus of research for the next few years since everyone is talking about energy shortages, climate change and clean energy. More importantly, clean energy is the topic of future research projects since the world is moving towards clean and renewable energy and Minister for Planning Development and Reforms Ahsan Iqbal has also emphasised the use of clean and renewable energy projects at the PIDE 2013 AGM. The current government is looking forward to setting up plants to produce clean and renewable energy in Pakistan, such as usage of clean coal, wind power, and solar power. Therefore, we can expect that the problem of energy shortage will be overcome and the dependence on thermal energy will be lessened.

Evaluating the Performance of 100 Days of PML-N

Article appeared in October PIQUE Magazine
http://pique.pk/economy/07-Oct-2013/evaluating-the-performance-of-100-days-of-pml-n

Despite massive obstacles, government seems headed in the right direction

Economic revival was the top priority of PML-N government when they took power after May 11 elections. However, they had given an impression that they have already done their homework, were just waiting to take control of power and would fix the troubling economy sooner than later. But soon the government realized its limitations.

To be fair, the government inherited an economy in a shambles. Inflation is on the rise; circular debt has reached Rs. 950 billion, budget deficit is at its peak. There wasn’t any fiscal cliff for the government, money printing, T-Bills auctions, external debt, government borrowing from schedule banks and other public loans have already been taken to their limit to finance budget deficit. Too many un-targeted subsidies, including Rs. 1.4 trillion subsidies to energy sector, huge energy shortfall, gigantic public debt with more pinching payments of debt servicing, low growth of GDP, and fall in foreign exchange reserves, the government inherited a plethora of bad indicators.

IT is difficult to explicitly spell out the performance of any government in the first 100 days because most of the indicators have minimum of 3-6 months lag effect. However, we can examine the policy actions taken by the government and their possible impact on the overall economy.

Budget document, which was the first outcome of the current government, was expected to give some relief to the middle class, lower middle class and the poor. However, it has apparently pushed them towards more misery by imposing one extra percent GST on them and not subsidizing wheat flour and other necessities, which increases the price of goods in their basket. Moreover, increase in utility, petrol and CNG prices by 12 percent has already damaged the expectations formed by the people from the current government. Most of the subsidies were reduced or removed in the Budget. However, Rs. 503 billion were sanctioned for the payment of circular debt. Other negative points which have affected the expectations of the current government are : 5 percent extra witholding-tax  imposed on cellphone users, exchange rate is depreciating (8.4 percent), and overall inflation is going up (more than 3.2 percent), which pressurizes the financial market thus result in increase in interest rate by 50 basis points.

In the rest of the article, we will try to explore the possibilities of curbing the above mentioned increase in taxes and prices, depreciation in exchange rate and reduction in subsidies.

As far as overall inflation is concerned, it increased due to three reasons during 100 days of PML-N government: (1) Ramzan effect (2) persistence in inflation and (3) lagging effect of previous policies taken by the last government. Artificial control of prices is not a good idea at any time.  Finance Minister Ishaq Dar wanted to intervene in the market and activate district-level price control committees for fixing, monitoring and enforcing controls on prices of essential items. But it would not have worked.  Therefore, it would be illogical to blame current government for increase in inflation in its first 100 days.

Exchange rate is the second most talked variable after inflation in the society. No doubt the depreciation in exchange rate was too much after the current government took charge. Though, real effective exchange rate is still overvalued by 5-6 percent, therefore one should not be surprised if it depreciates more in the next few weeks. Although we cannot rule out IMF conditions but most of the times these rumors. Exchange rate cannot be controlled unless: (i) we remove the differences between our inflation and world inflation (currently our inflation is more than world inflation) (ii) our current account balance becomes surplus or becomes zero and (iii) we attract foreign direct investment and foreign portfolio investment, which is possible by removing the barriers and constraints to investment such as terrorism and energy shortages.

Foreign exchange we earn from foreign investment will then be used to artificially control the exchange rate, as we used to do in 2006-07 and 2007-08. Therefore I will not blame the current government for depreciation in exchange rate.

Petrol prices are adjusted according to change in international oil prices or if there is a change in exchange rate. Since June 2013, the overall trend shows increase in oil prices, which is the main reasons for increase in petrol prices. Moreover, exchange rate in the last 100 days depreciated as well and thus, in Rupee terms, domestic petrol prices have also increased. Therefore I would not blame the current government on increase in petrol prices.

Other than above mentioned problems, the public complains that government has not done sufficient work to eradicate problem of State Owned Enterprises, which costs us Rs. 500 billion a year. The amount can be used to finance the circular debt but due to its presence, the government needs to borrow required amount from either State Bank of Pakistan or schedule banks, which pressurizes inflation and crowd out investment.

However, recently announced privatization policy by the government to sell 26 percent of PIA shares may reduce some loss of PIA but they are committed not to lay off any employee. It would be interesting to see that how 26 percent PIA privatization would help mitigate the problem of Rs.500 billion loss. Moreover, Railways is also among the loss making, SOEs which is in revamping stage. It seems government does not either want Railways to be privatized or it will make it profitable and then sell it. In concise manner SOEs are hurting Rs. 1.37 billion daily, which is a lot and if we calculate it on 100 days then we have already lost Rs. 137 billion on these SOEs if the ultimate loss remained at Rs. 500 billion.

Heavy debt burden is one of the biggest problems current government is facing, with depreciation in exchange rate and increase in overall inflation. Moreover, increase in the net domestic assets will further increase pressure on the government if non-performing loans will increase. Thus, government, and especially State Bank of Pakistan, need to seriously follow non-performing loans, which needs to stay as low as possible. Otherwise, increase in net domestic assets will results in increase in inflation without having any impact on real sector.

Terrorism and energy crisis are among the major constraints of investment in Pakistan. Both the problems need to be addressed for economic revival. The government has been successful in mitigating energy shortages and came to an agreement in All Parties Conference to tackle terrorism although the negotiations with terrorists have not yet been started. Nevertheless, problem of energy shortage has lessened but not completely fixed. Strong energy policy by the government ensures continuous electricity supply for the next 10-13 years. If both the obstacles are removed by the government in the next two to three years, it would be an astounding work for Pakistan for next many years. 

Different projects have been signed with Chinese and Turkish investors and government, and private as well, are investing a lot in the infrastructure projects but investment in soft infrastructure is also needed. Soft infrastructure implies reforms process, which is essential for removal of barriers and constraints prohibiting investors from investing in Pakistan. For Example, inefficiency in customs, custom formalities needs to be removed. Clearance of consignments is among the major problems due to weaknesses in custom administration and cumbersome regulatory processes. Excessive procedural requirements and too much reliance on the custom inspectors, who have extra discretionary powers, create more complex situations including corrupt practices. Regulations either related to tax, health, labor laws or environment need to be transparent. Moreover, environment of lesser regulations are required to give free business environment with lesser anomalies.

The speech by Prime Minister Nawaz Sharif on Sept. 21 was very interesting. He announced six projects for youth including Micro Interest Free Loans Scheme, Small Business Loans Scheme, Youth Training Scheme, Youth Skill Development Scheme, Fee Assistance Scheme and PM’s Scheme for Laptops Provision. Although they have allocated Rs. 20 billion for the six major projects, which is not too much, but I am hoping that they will increase the amount by next year. Moreover, to keep transparency in these small projects, strict monitoring and evaluation of these programs is needed. Apart from the first five initiatives, I have my own reservations on the laptop scheme. It is more of a political gimmick than a youth development policy. Instead of distributing laptops to the individuals, they should setup IT/computer labs in schools so that more than one user can take benefit from it.

The chances of economic revival are very bleak in the first year of the government in the presence of high fiscal deficit as well as circular debt, debt servicing, Rs. 636 billion loans from schedule banks and rise in inflation etc. However, based on reputation and then the policies were adopted by the government, the stock market is giving us positive sign. It has gone up by 3,000 points since the government has taken control. Thus as far as economic revival is concerned and it seems that government is going in the right direction.

Exports Promotion through Branding

The article appeared in the Money Matters on December 16, 2013

In the last three decades, successive governments have emphasised the importance of export promotion.  But, the country’ export performance still remains dismal. Although Pakistan’s exports have increased from 10.5 percent in 1980 to 16.8 percent in 1990 and currently stand at 21.3 percent, the share of manufacturing exports and the terms of trade have declined in the last ten years.

The Ministry of Planning and Development is in process of developing Vision 2025 and the Five-Year Plan. Similar to its previous plans, more emphasis is being placed on increasing exports through value addition, which can take place through industrial development.

To achieve the aforesaid goal various strategies including technical upgradation; improvement in business environment; restructuring of industries; internalisation of innovation; tariff escalation and tariff rationalisation; export-oriented industrial policies; research and development; human resource development and enhancement of workers’ skills and the establishment of industrial clusters, estates and zones are being discussed by the economic policymakers. However, all these strategies have been discussed and partially implemented before but the issue of branding has not been taken into consideration as yet.

A brand name is the name of a distinctive product or service, which people can associate themselves with. It is an idea or image of a specific product or service that consumers can connect with, by identifying the name, logo, slogan, or design of the company who owns the idea or image.    In today’s age of globalisation and e-commerce, foreign buyers can ask for any product or service by looking at the brand name.

Building a brand name is none other than building trust with one’s employees, customers and stakeholders. In terms of marketing, a brand name represents the value of a company. The assumption that only big companies have better brands is incorrect. Strong brands help consumers know what to expect, regardless of the company size. In addition, a brand name helps develop a unique product or service that develops customer loyalty overtime. For instance, even though Cola is a brown, sweetened beverage, a loyal Coca Cola customer will always prefer Coca Cola over other brands.

Similarly, a significant component of branding is how much a certain brand is valued or its reputation in the market. Unique selling proposition is another factor that makes a product or service different from and better than that of competitors. Reputable brands deliver their message clearly; maintain their product or service credibility; form emotional connections with their prospective consumers; motivate buyers and solidify customer loyalty.

A brand name represents the quality of a product or service, which determines its price. It also makes it easier for local and foreign buyers to decide what to purchase and in what quantity. In other words, a brand name gives potential clients a better idea of what they are buying, thus making the purchasing decision easier.

Consequently, consumers are ready to pay a higher price if they see that the product quality is better than what is available in the market. Foreign buyers are also willing to buy a high quality product, which leads to more foreign exchange earnings for the country. For example, a few products that have a competitive advantage over their competitors include: Coca Cola and Pepsi Cola as compared to other Colas that may have almost the same taste; various smartphones against other ordinary phones and among them, iPhone is the most reliable and expensive brand both globally and domestically; Bareeze as compared to other similar clothing outlets and Shan Masala has its own significance as compared to other spices available in markets. 

On the other hand, when it comes to the services sector, for instance the construction sector, most of the materials used are similar in nature for building buildings, commercial centers and homes. However, if the products being used are branded then a reliable brand name has more demand in the market. Branding in the construction industry is more profitable in terms of value addition that pays more when exported to the other countries. Nevertheless, the construction services sector should have certain features such as creativity, durability and integrity, which add to its branding value.

The above discussion leads us to the conclusion that branding is critical to increase a country’s export earnings through value addition. However, producers want to protect their rights to produce and sell products, thereby making it necessary to enforce patent laws in the country.

Intellectual property rights help promote branding and invention as they protect the name, product, logo, design, image and slogan of a product. The issue of intellectual property rights has neither been discussed at length nor strictly implemented in Pakistan. This needs to be addressed on an urgent basis. Similarly, the country’s justice system should be quick and transparent to ensure that any violation of intellectual property rights would not be tolerated. In terms of law-making, clear legal ownership and copyrights should be defined as well as further licencing and conditions for franchises should be clearly laid out .

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Problems of Government Borrowing

Post is taken from http://www.economicshelp.org/blog/1504/economics/problems-of-government-borrowing-2/

problems of Government Borrowing by Tejvan Pettinger on April 15, 2011 in economics

What are the Problems of high government borrowing?

There are many theoretical problems of high levels of government borrowing. But, usually these problems don’t materialise under normal circumstances. However, as government borrowing as a % of GDP increases, the problems of government borrowing are exacerbated. With UK facing an annual budget deficit of over 11% of GDP, there are many potential problems.

Higher Debt Interest Payments. As borrowing increases, the government have to pay higher interest rate payments to those who hold bonds (lend government money). In some circumstances, higher borrowing can push up interest rates because markets are nervous about governments ability to repay. This means they have to pay even higher interest rate costs. Currently, the UK pays approximately £43bn in interest payments.

Inflationary Pressure. It is rare for government borrowing to cause inflation. But, the combination of quantitative easing and very high levels of borrowing make inflation more likely.

If markets fail to buy enough gilts to finance the deficit, the deficit can always be financed through ‘monetisation’. i.e. creating money. This creation of money creates inflation, reduces the value of exchange rate and makes foreign investors unwilling to hold UK debt. So far quantitative easing has not caused inflation because of the falling velocity of circulation. But, if the economy was close to full capacity, printing money to ‘monetize the debt’ would lead to inflation. In the case of Zimbabwe this could lead to hyperinflation.

Higher Interest rates.

To finance a budget deficit, the government need to sell bonds. If markets fear there is a chance of default, they will demand higher interest rates to give return for greater risk. Countries in the Eurozone experienced rapidly rising interest rates because of markets fears over their ability to repay. (see: bond yields on EU debt)

Higher interest rates on government bonds tends to push up other interest rates in the economy and reduces spending and investment. (This impact of higher interest rates in reducing private sector spending is known as financial crowding out)

These higher interest rates increase the cost of paying interest payments.

Crowing Out. A classical monetarist argument is that high levels of government borrowing cause ‘crowding out’. What they mean is that the government borrow from the private sector by selling bonds. Therefore, the private sector have less money to spend and invest. Therefore although government spending increases, private sector spending falls and there is no boost to the economy.

However, this is unlikely to apply in a recession because in a recession private sector saving is rising. The government are spending to offset the rise in private sector saving.

Higher taxes in the future. The government will need to reduce borrowing as a % of GDP. It means future budgets will need to increase taxes and / or limit spending. The danger is that if taxes are increased too early too quickly it could snuff out the recovery and cause a further downturn. If they don’t raise taxes markets may be alarmed at size of borrowing. There will be difficult choices for the future chancellors; it is a difficult situation to be in.