Monday, 17 December, 2012

Brig asif Haroon raJa

THE US brokered Pak-Afghan-Transit-Trade-Agreement(PATTA) on July 19, 2010 al-lowing transportation ofAfghan goods through Wagah

to India and in return Pakistan getting per-mission to use Afghan territory for trade withCentral Asian Republics (CARs). The UStwisted Pakistan’s arm to make India part ofPATTA so as to allow India to export goodsto Afghanistan and beyond through Wagahborder, grant Most Favored Nation (MFN)status to India and liberalize visa regime. Ef-forts are now in hand to pressure Pakistan toallow India to transport merchandise goodsto and from Afghanistan without giving any-thing in return except for deceptive promisesthat trade with India will be of great benefitto Pakistan. A new opening is being given toIndia despite the fact that there is a serioustrade imbalance in Indian favor.

On 2 November 2011, Pakistan agreed inprinciple to grant MFN status to India with aview to liberalize trade between the twocountries, disperse clouds of distrust, buildconfidence and bolster peace process. By De-cember 2012, India would transition to fullMFN status. Several rounds of talks tookplace to remove bottlenecks and improveoverall climate for two-way trade. Pakistanhas been insisting to remove non-trade bar-riers against Pakistani goods and ease itsquality control and customs procedures. Visaregime has been liberalized and new landroutes are being sought by India. Apart fromawarding MFN status to archenemy, Indiahas also been made part of PATTA.

MFN status to India will enable India totilt trade balance completely in its favor sinceeven now when Pakistan enjoys MFN statussince 1996, its exports to India are worth$200-$350 million only and that of Indiawithout MFN status are $2.3 billion. Currenttrade balance remains heavily in favor ofIndia. Once India is bestowed the MFN statuswithout providing protection to local manu-facturers and growers, and granted access toAfghanistan and Central Asian marketsthrough Pakistan, it would not only flood ourmarkets with cheap Indian goods and crippleour manufacturing industries, but would alsofulfill India’s dream of monopolizing the eco-nomics of South Asia and Central Asia.

Pakistan has decided to compete withIndia and grant it additional concessions ata time when Pakistan’s industry and econ-omy is highly vulnerable and fragile andthe country is at the brink of becoming afailing state. The west has already startedcalling Pakistan a failed state. PakistanGDP in 2010/11 stood at 2.4 % as againstIndia’s 8.5 %. Indian exports to Pakistanstand at $1.2 billion as against Pakistan’sexports to India totaling $268 million.

Since India’s economy is robust and vi-brant and has relatively secure environ-ment, the trade deficit is likely to growfurther. India will be in a much better po-sition to flood Pakistani markets withcheap Indian goods to destroy Pakistan’seconomy and local industry. Unable tocompete with India, it will adversely im-pact Pakistan’s manufacturing industriesand will also negatively impact Pakistan’strade with Afghanistan and with CARs.

Seeing the military and nuclear build upof Indian armed forces at a feverish pace, itsthreatening posture particularly because ofits ominous strategic alignment with USA,Afghanistan and Israel, its refusal to solveany of the longstanding disputes, its ongoingwater and covert war together with propa-ganda campaign against Pakistan, it is simplymind boggling to hear our rulers harping thatIndia doesn’t nurture ill-designs against Pak-istan. Hina Rabbani is upbeat that distrustgap between Pakistan and India is narrowingand greater people to people interaction andtrade between the two countries would helpin improving the overall climate.

The intriguing question is as to whyshould Indian business community risk trad-ing with Pakistan where industries are clos-ing down due to perpetual power shortagesand scarcity of gas, and our businessmen areshifting to Bangladesh, Malaysia and Indiadue to prolonged load-shedding, shortage ofgas, insecure environment, unstable politicalsituation and economy in dire straits? Indiadoesn’t want to help Pakistan to become eco-nomically viable but it has been its ferventdesire to make Pakistan economically unvi-able. Covert war combined with water warand propaganda war, and now supplementedwith trade war is designed to strangulatePakistan and forced to withdraw Kashmircase and forget about other disputes. More-over, knowing that India is vying to becomethe leading contender among other competi-tors in Afghanistan and is using Afghan ter-

ritory to destabilize FATA and Baluchistan,yet an understanding has been given to Indiathat it will be given access to Afghan marketsvia land route.

Once India consolidates her position inAfghanistan and establishes strategic linkswith CARs through Pakistan andAfghanistan, she will be in a position to blockor curtail Pakistan’s trade with Afghanistanand CARs, or open the trade route after ex-tracting additional favors like putting all coreissues in a cold freezer for times to come.

Should we again be misled into believingthat this time India is genuinely interestedin peace and friendship? If so, what is thebasis of optimism? What practical stepsIndia have taken to allay our legitimate fears,or to resolve outstanding issue of Kashmir,which bedevil Indo-Pak relations? For 64years Pakistan has been ceding ground towin the friendship of India but couldn’tchange the mindset of Brahman rulers. IfIndia is genuinely interested in friendshipwith Pakistan, it must prove it by actions andnot by deceptive and hypocritical sweet talk.

India has been constantly acquiringconcessions from Pakistan under deceptiveconfidence building measures but givingnothing in return. Taking into account thehostile track record of India, Pakistanshould open up its border with India fortrade with due prudence, lest it falls intoyet another trap. Grant of MFN status toIndia and land route through Wagahshould be made conditional to the resolu-tion of Kashmir, Siachen, Sir Creek andwater disputes and stoppage of Indo-Afghan cross border terrorism from Afghansoil. The US pressure and India’s guilemust be resisted with full determination.

If the matter is seen with an open eye,it's Indian hegemony being thrusted uponPakistan by the USA which our presentgovernment is too willing to accept.

Courtesy Opinion Maker

One sided concessions byPakistan to India

Peter orszag

If you want a concrete example of theunanticipated harm that could comefrom the U.S. going over the fiscal cliff,look no further than Build AmericaBonds, an efficient alternative way tosubsidize state and local investments.They are part of the spending that isscheduled to be reduced in January.

Build America Bonds, which werecreated in the 2009 stimulus bill, are ashining example of the right way to sub-sidize activities through the tax code. Thewrong way --which is also the way virtu-ally all other tax subsidies are structured-- is to provide a tax deduction or exclu-sion. This means that the tax break perdollar of subsidized activity varies withthe taxpayer’s marginal rate, and that isboth unfair and inefficient.

Consider, for example, the exemptionallowed for interest paid on state and

local bonds. A high-income taxpayer getsa larger tax break for each $1 of interestpaid on the bond than a middle-incometaxpayer who owns the same bond does.This creates a windfall for high-incometaxpayers, a variety of analyses have con-cluded. The interest rate on state andlocal bonds falls by less than the taxbreak the high earners enjoy. As a result,only about 80 percent of the forgone fed-eral revenue shows up in reduced stateand local government borrowing costs.

Direct SubsidyBuild America Bonds, by contrast,

provide a direct federal subsidy, an ex-plicit tax credit that isn’t dependent onmarginal tax rates. As a result, it is deliv-ered fully to state and local governments.As I emphasized in my previous articleon the topic, these bonds have two otherbenefits: They attract new participants,such as pension funds, and they helplower the interest rates on traditional

state and local bonds.Build America Bonds

were created by the2009 stimulus billfor issuance in2009 and 2010.During that time,state and localg o v e r n m e n t sused them to fi-nance more than$180 billion in capi-tal infrastructureprojects, saving,according to theTreasury Depart-ment, an estimated$20 billion in presentvalue relative to thecost of traditional tax-ex-empt bonds.

Which brings us tothe fiscal cliff. If the se-

quester -- the automatic budget cutsCongress agreed to as part of the 2011deal to raise the

debt ceiling --takes effect,issuers of

Build AmericaBonds will see an in-

crease in their costs be-cause the bonds’ credit is

included in the se-quester.

Federal inter-est payments are protected

from the sequester, for good rea-son. If the federal government

were to miss or unilaterallyreduce interest payments,investors would no

longer want to buy the affected asset.For most other types of spending,

though, the damage lasts only as long asthe spending reduction is in effect -- and

then quickly fades.The problem for Build America

Bonds could be fixed in various ways, in-cluding by reclassifying them into one ofthe categories that are protected againstsequestration. If the Barack Obama ad-ministration has the authority to do that,as some experts believe, it should.

Given the bonds’ more efficientstructure, it is a travesty that the author-ity to issue more of them has not been ex-tended past 2010. Subjecting the creditpayments on the bonds to a sequesterwould only make things worse.

This illustrates just one of the multipleways in which going over the fiscal cliffwould cause substantial problems. Reduc-ing the federal credits provided by BuildAmerica Bonds would harm not only thosewho have already purchased the bonds butalso any hope of reviving the program.

Courtesy Bloomberg

Fiscal cliff may unbuild America

Henry M Paulson Jr

China is experiencing its most severe economic downturn in decades, andrevitalizing its economic model is critical to future prosperity — not only inChina, but around the world.Central to that effort is the transformation of China’s cities. By adopting anew approach to urbanization, its leaders can assure more balanced invest-ment, address a major source of debt, achieve a consumption windfall andclean up the country’s environment. Otherwise, China’s economic and en-vironmental problems will worsen, with vast implications for the rest ofthe world. China’s success has been built on two pillars: investment andexports. But after decades of growth, this model is delivering diminishingreturns. There is little doubt that China must change to a new model, onethat relies on consumption to generate growth, while addressing debt andbroadening the use of sustainable energy and environmental practices.Cities, home to hundreds of millions of Chinese consumers, lie at the coreof this problem — and offer a potential solution.A flawed system of municipal finance is driving debt, corruption and dis-sent, while unsustainable urban planning has yielded polluted cities thatare destroying China’s ecosystem. Yet China’s future requires continuedurbanization, which, absent a new approach, will only make the problemworse. Cities can, however, be part of the solution: better urban policiescan put China on a healthier path forward, economically and environmen-tally. For one thing, municipal financial reform is essential because debt iscrushing Chinese cities, leaving mayors with no means of financing thecentral government’s policy mandates. Mayors have developed creativeways to raise revenues, including appropriating farmers’ land and seizingland on the outskirts of cities to sell to developers. But these practices con-tribute to urban sprawl and often feed corruption. Among other changes,China’s cities need transparent budgets and the devolution of more tax au-thority to cities. More innovative urban planning and design are alsoneeded. To achieve the country’s goals of raising living standards for abroader share of the population, cities must be better designed to yield en-ergy efficiency and environmental sustainability.China’s potential is stifled by traffic and pollution. Gazing out my hotelwindow in Beijing on a recent trip, I saw air that was hazy and polluted — astark contrast to the sparkling view of Lake Michigan I enjoy from mykitchen window at home in Chicago.This isn’t just China’s problem. Experts found that dirty air from Chinacontributed up to 20 percent of the ground-level pollution on the Ameri-can West Coast in 2010. And that is when just one-tenth of Chinese owncars. Imagine what China’s air quality will become when this numbertriples, as some experts predict it will within the next several years.Take another example: construction. Within city centers are countless “su-perblocks” — half-kilometer-square developments interspersed with hugeboulevards that create monster traffic jams and skyrocketing pollution.In response, an approach that featured smaller blocks and mixed-useneighborhoods and accessible public transportation would alleviate theseunintended consequences. Such “livable cities” would balance economicdevelopment with energy efficiency, improve air quality and reduce con-gestion. Getting China’s urbanization right will matter to us all. Fortu-nately, many in China understand this, and cooperation with the UnitedStates government, corporate world and nonprofit sector, including myown research and advocacy institute, is bringing them the tools they needto prioritize design issues in their cities and adapt infrastructure plansnow. These tools include instruction in sustainable practices for govern-ment leaders, public education in environmental issues and specializedtraining for the country’s urban planners.China must adopt this new approach quickly, before vast infrastructure in-vestment makes the current model irreversible. By 2025, China is pro-jected to have a staggering 200 cities with populations over one million.America has just nine.Global prosperity depends on China’s continuing to be an engine of growth.We all need China to reinvent its economic model. Working together on ur-banization creates progress toward joint solutions to the challenges theworld faces from overwhelming pressure on natural ecosystems, resourcesand commodities.We need Chinese cities to succeed, and we can help ensure that they do so.Henry M Paulson Jr, a former chief executive of Goldman Sachs andTreasury secretary, is the chairman of the Paulson Institute

Courtesy The New York Times

How cities can save China

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Monday, 17 December, 2012

Business

WilliaM k Black

WHY is HSBC still in operation?On the same day (December 10,2012) that the Barack Obamaadministration leaked the storyof the HSBC settlement, a story

ran in the New York Times that was full of self-praiseby the Obama and David Cameron (U.K.) govern-ments for their "cooperative approach" to crackingdown on systemically dangerous institutions (SDIs).SDIs are treated as "too big to fail" because they posea global systemic risk when they fail. The HSBC set-tlement puts the lie to the Obama/Cameron crack-down on the SDIs for it revealed a disgrace -- Obamaand Cameron treat the SDIs as too big to prosecute.Indeed, HSBC demonstrates that the SDIs' senior of-ficers are treated by Obama and Cameron as too eliteto prosecute. The propaganda meme of the NYT story-- that the SDIs would never again be given specialfavors due to reforms being adopted by Obama andCameron -- lasted four hours before it was destroyedby the disgraceful reality of the Obama and Camerongovernments' refusal to prosecute HSBC and its offi-cers for their tens of thousands of felonies.

The NYT article begins by accepting theObama/Cameron framing of the SDI issue, withoutany critical analysis. "It is one of the thorniest prob-lems hanging over the financial system: how shouldauthorities deal with the collapse of a sprawling globalbank to protect the financial system at large?" The re-porter's implicit assumption is that we must havebanks that are systemically dangerous when they fail.

This example exemplifies why implicit assump-tions are so dangerous. They exclude far better alter-natives or terrible risks from even being considered-- and they do so unknowingly. If the reporter hadmade the assumption explicitly he would have beenforced to defend it with analytics. The article ac-knowledges that SDIs drove the financial crisis thatcaused the Great Recession. In the U.S. alone thiscaused over a $15 trillion loss in wealth and led tothe loss, or prevented the creation, of over 10 millionjobs. According to the Bush and Obama administra-tions we were lucky in preventing the crisis fromgrowing vastly larger. SDIs are economic weapons ofmass destruction -- but they cause their primary de-struction inside the nation in which they reside.

Why allow a weapon of mass destruction that pri-marily destroys your own nation? That is an act of in-sanity. The City of London cannot credibly threatenthe United States by creating SDIs and threateningto destroy the UK's economy. The proponents of SDIsbear an enormous burden of persuasion to prove whywe shouldn't end the catastrophic danger they poseby shrinking them to the point where they are nolonger potential weapons of mass economic destruc-tion. Their burden is even greater when one considersthe dominant view of economists that the smallerbanks would be more efficient than the SDIs, whichare massively too large to manage. The NYT reporterdoes not even attempt to meet that burden. The re-porter also presents no indication that the U.S. andU.K. regulators even considered ending our exposureto these weapons of mass economic destruction.

The article acknowledges that trying to preventan SDI from causing a systemic, global financial cri-sis once it fails is likely to fail. First, the regulatorsare not at all sure that they can prevent a systemiccrisis with their "cooperative" proposals. Second, fewregulators would risk a global systemic crisis whenthe alternative of bailing out the failing SDI inher-ently exists. Regulators have seen the disastrous re-sults of failing to bail out Lehman.

The obvious alternative (to everyone except thereporter, the U.S. and U.K. regulators, and the Obamaand Cameron governments who have implicitly as-sumed it out of existence) is to shrink the SDIs to thepoint that they no longer pose a systemic risk and toconduct the shrinkage now before they fail. That al-ternative would vastly reduce the economic WMD andmake the banks more efficient -- a win-win solution.

The further good news is that those two "wins"are not the limits of the advantages of shrinking theSDIs before they fail. The NYT article, implicitly, as-sumes the Obama/Cameron framing of another issuecritical to determining the SDI policies we shouldadopt. "'Too big to fail' is the label for the problemthat confronts governments when a large bank is onits last legs." The implicit assumption is that SDIspose a "problem" only when they are on their "lastlegs." Had the reporter made this assumption explic-itly he would have recognized it is unsupportable.Beyond their inefficiency, SDIs pose grave risks to anation when they are profitable and growing. SDIsmake "free markets," integrity and justice impossible

to maintain, they create the perverse political powerthat produces crony capitalism, and they drive the"competition to laxity" that drives regulatory failure.I have explained most of these points in prior writ-ings, so I will summarize.

SDIs' uninsured, general creditors get bailed outeven though the contractual deal they agree to wouldnormally cause them to suffer severe losses. The re-sult is that they can borrow significantly morecheaply from general creditors than can their smallerrivals. SDIs that are insured banks receive an explicitgovernmental subsidy (deposit insurance), but theimplicit federal subsidy to general creditors is farlarger and is unique to SDIs. The very conservativeeconomists who authored the book Guaranteed toFail (2011) describe the implicit subsidy as being solarge that it is the metaphorical equivalent of "bring-ing a gun to a knife fight." They conclude that thesubsidies are so large that they inherently create "ahighly distorted market." Indeed, they argue that theSDIs that created the mortgage crisis so distorted themarket that there was "nothing free" about the mort-gage markets. The authors also explain the SDIs' im-mense political power and their ability to corruptregulators and regulation.

The HSBC case illustrates why SDIs destroy in-tegrity and justice. Public reports of the results of thegovernment investigations of HSBC describe a bankthat has been a criminal enterprise for at least 15years. The current settlement addresses only threeof the many scandals HSBC has committed over thattime period. HSBC is a recidivist of epic proportions,but the Obama and Cameron governments havefailed to prosecute HSBC or any of its officers. Whenpowerful corporations and their controlling officersgrow wealthy through massive frauds and do so withimpunity from criminal sanction integrity and jus-tice are eaten away. Effective financial regulation,supervision, and prosecutions are essential to "free"financial markets. When cheaters prosper honest

firms are driven from the markets, a point that theNobel Laureate George Akerlof explained in his fa-mous 1970 article on markets for "lemons." He de-scribed a "Gresham's" dynamic in which bad ethicsdrove good ethics from the marketplace.

Fraud and the destruction of integrity amongSDIs will tend to spread to their market rivals due tothis Gresham's dynamic. The result is another formof systemic risk.

The Justice Department, HSBC's regulators, andthe Obama and Cameron governments had the per-fect opportunity to break this Gresham's dynamicand restore justice and integrity by prosecuting andtaking vigorous regulatory steps that forced HSBC toshrink over the next five years to the point that it wasno longer an SDI. They could have done so at a timewhen HSBC was reporting very high profits ratherthan during a crisis. It was their paramount role andduty as prosecutors and regulators to break the Gre-sham's dynamic by restoring the rule of law. Doingso would have been good for the markets, for in-creased competition, for bank efficiency, for the in-dependence of the regulators and prosecutors, forsafety and soundness, and for our democracy. In-stead, they made the Gresham's dynamic far worse,shamed their institutions and professions, and be-trayed their duty to the nation and citizenry.

But things are likely far worse than this descriptionsuggests, for the pathetic truth is that there is no indi-cation that the regulators, prosecutors, or governmentleaders considered doing the right thing at HSBC. Thatis how destructive making implicit assumptions andadopting the pro-crony framing of issues is in the realworld. I hope I am wrong and that an insider will resignin disgust and disclose how she fought to shrink HSBCbut was overruled by her superiors.

The writer is Associate Professor, University of Mis-souri, Kansas City; Sr regulator during S&L debacle.

Courtesy Huffington Post

asHoka Mody

The process of official forgiveness ofGreek debt has begun. Referred to as “of-ficial sector involvement” (OSI), it in-cludes several initiatives aimed atreducing Greece’s debt/GDP ratio to124% in 2020, from roughly 200% today.Even as the deal was announced, how-ever, newspaper reports suggested thatofficials recognized that the measureswould be insufficient to meet the target;further negotiations on additional stepswould be needed at a politically moreconvenient moment.

The economist Larry Summers hasinvoked the analogy of the Vietnam Warto describe European decision-making.“At every juncture they made the mini-mum commitments necessary to avoidimminent disaster – offering optimisticrhetoric, but never taking the steps thateven they believed could offer theprospect of decisive victory.”

This strategy needs to be inverted –and Greece offers a real opportunity toget ahead of the curve. Instead of dribletsof relief, a sizeable package, composed oftwo elements, is the way forward. First,as Lee Buchheit, the attorney who over-saw the Greek private restructuring, hasproposed, maturities on official Greekdebt could be greatly extended. A simplestructure would be to make all debtpayable over 40 years, carrying an inter-est rate of 2%. This would move Greeceand its official creditors beyond the con-tinuous angst that now prevails.

The second element of the debt-re-lief package would be more innovative: IfGreece’s economy performs well, thegenerous extension of maturities can beclawed back or the interest rate raised. Aformula for this could be linked to thedebt/GDP ratio – a scheme with advan-tages that transcend the Greek case. Theidea of linking debt relief to ac o u n t r y ’ sdebt/GDPratio hasb e e naround for awhile, but hasnever gainedsignificant ac-ceptance. Ap-plying it inGreece would bea highly visibletest; if successful,it would set a valu-able precedent.

Why bother?Because the verypremise of the cur-rent deal and the ex-pectations it sets outare wrong. First, thenotion that there is asmooth transition pathfor the debt/GDP ratiofrom 200% to 124% isfanciful. Second, even if,by some miracle, Greecedid reach the 124% mark by2020, the claim that its debt

will then be “sustainable” is absurd.Thus, continuing down this path will

further erode policymakers’ credibility –not that they seem to care – while impos-ing on the rest of the world a persistentsense of crisis and uncertainty, with realfinancial and economic costs.

Make no mistake: poli-cymakers’ track record on

f o r e c a s t -

ing Greek economic performance duringthe crisis has been an embarrassment. InMay 2010, the International MonetaryFund projected – presumably in concur-rence with its European partners – thatGreece’s annual GDP growth would ex-ceed 1% in 2012. Instead, the Greekeconomy will shrink by 6%. The unem-ployment rate, expected to peak this yearat 15%, is now above 25% – and is stillrising. The debt/GDP ratio was expectedto top out at 150%; absent the substantial

write-down of privately held debt,which was deemed unnecessary,

the ratio would have been closeto 250%.

In September 2010, fourmonths after the official

Greek bailout was put inplace, the IMF issued a

pamphlet assertingthat “default in

today’s advancedeconomies is

unnecessary,u n d e s i r -able, andunlikely.”The con-

clusion was thatofficial financing

would carry Greece pastits short-term liquidity

problems. Calls for immediatedebt restructuring went unheeded.

Six months later, after substantial offi-cial funds had been used to pay privatecreditors, the outstanding private debt

was substantially restructured.Such were the errors committed over

short time horizons. Relatively speaking,2020 is an eternity away. Even assumingbetter forecasts, the projection of 124%could be a gross underestimate. The pre-cision of the numbers underpinning thedeal is a façade, if not a reflection of analternate reality.

And, again, even if Greece somehowdid achieve the 124% milestone, its debtwould still not be sustainable. At thatpoint, Greece would merely be where itstarted in May 2010. The most reason-able comparison is with Latin Americancountries during their debt crises in the1980’s and 1990’s. Despite significantlylower debt/GDP ratios and continuousdebt restructuring, they eventuallyneeded the large debt reduction thatcame with the issuance of Brady bonds toachieve some breathing room.

Getting ahead of the curve will giveGreece a realistic chance of controllingits own destiny. It will also be a reminderof the dangers of rushing in with officialmoney where private debts have becomeunsustainable. Staying the course, asSummers warns, will lead only to “need-less suffering” before that course in-evitably collapses, bringing Greece – andmuch else – crashing down.

Ashoka Mody is a visiting professor ofInternational Economic Policy at theWoodrow Wilson School of Public and In-ternational Affairs, Princeton University.

Courtesy Project Syndicate

Greece’s bogus debt deal

Why did Obamaand Cameron save acriminal enterpriselike HSBC?

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