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Economics of inner life1

Harmonizing moral and spiritual values with the economic ones may bring the peace the
whole world needs.
Economic science focuses on our material activities, studying how we can get maximum
satisfaction through material goods and services. Religion, on the other hand, draws
humanity's attention in the opposite direction: towards God, who is above and beyond all
matter and is indivisible and untouchable. If religion is about mankind's inner life,
economics is about our outer life.
This antinomy expresses itself in different forms in the great religions and has naturally
often been an impediment to economic progress.
In Buddhism there is a strong emphasis on the transient character of material life. Birth
and death, growth and decay all is Samsara: an illusion.
Peace and salvation can only be found in truth, which is eternal and everlasting. The truth
is realized in Buddha. The gospel of Buddha therefore admonishes the faithful to
extinguish in them every desire that antagonizes Buddha. By achieving spiritual
evolution, the followers too will become like Buddha. To come to this end, where all
sorrow ceases, they are instructed to follow the eightfold path of right comprehension,
right resolution, right speech, right acts, and right way of earning a livelihood, right
efforts, right thoughts and the right state of peaceful mind.
In Hinduism, for example in the Bhagavad-Gita, there is a clear recognition that action in
the world is necessary. But work should be done without attachment to the fruits of the
work. We are all forced to act, but we should act with self-control and the results of the
action should be renounced. Mankind's aim should not be satisfaction of its own needs, as
is assumed in economics, but in doing one's duty. This duty is seen as given for every
individual according to his or her situation in life, and is worked out in the caste system
which has been a serious impediment to economic development.
In Islam, the believer is told that life hereafter is preferable to the life in this world. This
again draws the attention and longing of the faithful in a direction opposite to worldly
life. Recently some writers have tried to develop 'Islamic economics'. Drawing from the
Quran and other Islamic sources, they are trying to restructure economic thought and
practices on the basis of Islamic teaching. Many economic practices like the payment of
interest, insurance, arbitrage, speculation and indexation are considered un-Islamic. But
the injunctions to avoid these economic activities will either impede economic growth or

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these injunctions will not be followed, creating hypocritical arrangements as in Islamic

banking where interest on deposits is disguised as a 'mark-up' or 'commission'.
Christianity also teaches that humanity's aim should be a heavenly, not an earthly,
treasure. Medieval Christianity imposed some restrictions on economic activities. There
were injunctions for just prices and interest on loans was forbidden. Economics was
subordinated to religion, just as science, ethics and aesthetics were. This was a serious
hindrance for the development of market capitalism.
Seeing how religion guided mankind in a direction opposite to the striving for the
satisfaction of material needs, the question arises as to how the breaking of these
religious barriers came about in the West.
The great German sociologist Max Weber has shown that crucial support for this
breakthrough came from Protestantism, and notably from its Calvinist version, developed
by John Calvin in the 16th century. That was the beginning of the modern area of
But Roman Catholic Church reconciled itself, with certain qualifications, with market
capitalism only in the late 20th century. The different influences of Protestantism and
Roman Catholicism on economic growth have also been statistically confirmed in a
research paper. Bradford de Long, an economist and econometrician, has carried out a
striking study of some nations comparing their performance during 1870-1979. He
discovers that Protestant nations show higher growth rates than the Roman Catholic ones.
Once the opening for economic forces had been created in the West, market capitalism
developed with great power. With industrial Revolution in England it moved from the
field of trading to that of manufacturing industry. Under the protection of colonialism,
market-system spread from Europe to other parts of the world.
Socialist attempts to plan economic development have generally also failed because of
inefficiency, lack of innovation and the dangers of corruption.
Thus the debate over the best form of economic organization in this situation has been
won by market capitalism. The strength of the system is that it uses individual selfinterest for material gain to promote economic activity. This stimulates effort, investment
and entrepreneurship and thus brings all economic activities together in a market
equilibrium that creates a growing material welfare for all. This is what inspired Francis
Fukuyama, the best-selling sociologist, to described market capitalism's impressive
victory as the 'end of history'.
The question has often been asked: is this a truthful picture of mankind? Is this picture
not in conflict with the religious and spiritual nature of mankind? Certainly there are
many motivations at work in human inter-relationships other than material self-interest.

Adam Smith, the founding father of classical economics, clearly realized this. Besides his
best-known work The wealth of Nations, he also wrote The Theory of Moral Sentiments,
a moral and psychological work in which he emphasized the importance of sympathetic
feelings, culminating in universal benevolence. The new approach of 'behavioral
economics' introduces many psychological elements into macro-economics theories, as
has been done in Keynes's famous General Theory of Employment, Interest and Money
of 1936.
Fukuyama points out in his famous book Trust that classical economics with its
fundamental model of rational self-interested human behavior is correct about 80 per cent
of the time. But that leaves another 20 per cent of human behavior which is not fully
explained by economics. In fact, he says, we have what is called 'bounded rationality'.
For example, as all spending possibilities are not known to everyone, certain docility in
following advice and information in society can play a role. Generally accepted social
values can also be influential.
The crucial question, therefore, is how could the gradual re-integration of religion in our
life influence the economy? Here we can find a source of moral values that is both
universal and rooted in the depth of our own being.
The solution is to become conscious of our soul, the divine spirit of our true being. That
spirit pervades the whole universe and is in all human beings. It is the same spirit in all: it
is really universal. When we open our heart to this spirit, forgetting our limitations, we
discover that real happiness lies in maintaining harmony with all our fellow-beings and
with the conditions surrounding us. Harmony brings peace, and that reflects the inner
unity of creation. It is fundamentally good and fills our heart with deep happiness. It is
the living source of all moral and social values as they have been expressed and worked
out in different cultures by great religions. From this source a harmonizing influence can
flow into the economy and the whole society.
But the question remains: how can this be built into economic theories? We cannot
always say, this economic action is right and therefore legitimate and that one is not. It is
often very difficult to create and maintain harmony in economic decision-making. It is
constantly threatened by different views and interests of people around us. Harmony can
only be maintained if we try to understand these different views and interests. Then we
can rise above our limitations and built bridges. It requires an open heart and self-control.
In fact some enlightened management consultants now make recommendations that are
exactly in the line with what was described earlier as a natural approach towards a
spiritual leadership. Dana Zohar in Rewiring the Corporate Brain stresses the need for
leaders to develop emotional and spiritual intelligence besides mental understanding.
Instead of dictatorial leadership, she favors a leader who relies on trust and feeling.
Peter Senge, in his inspiring and practical book The Dance of Change, stresses that a
leader should not see his organization as a machine but as a living system, a human
community. Senge points out how important it is that leaders on all levels should get as

much responsibility as is possible in their part of business. There should be harmony

between the purpose of the organization and the values espoused by leaders and workers.
That will create motivation -- what Senge calls "emotional engagement". Issues relating
to environment can also find their place in visionary business-leadership.
All beneficial features of a new, responsive and serving leadership will grow naturally
once the leaders have an awakened heart, attuned to the ultimate reality of the universe.

The Global Economy and National Politics2

Market-driven Economy
The advent of economic globalization meant that national politics had to be analyzed in a
new way, focusing on the causal chains linking global markets forces to national politics.
Politics used to be thought of as an autonomous field of activity, and the management of
the national economy was seen as one of the most important task of government. Now,
however, it is generally agreed that capital mobility across national borders means that
national government can influence the domestic economy only by controlling inflation
and trying to facilitate the competitiveness of locally-based companies through supplyside measures. Highly generalized books with titles like, The End of the Nation State,
False Dawn, The Best Democracy Money can Buy, Captive State or Internationalization
and Domestic Politics conclude either that the nation state has been consigned to the
rubbish-bin of history or that, on the contrary, the constraints the extent to which politics
and policy in any particular country are conditioned, or even determined, by global
economic forces, and what this implies for democracy and the collective values on which
it depends.
The international trading regime established in 1944 at Bretton Woods succeeded
brilliantly in its aim of permitting global trade to expand without risking more worldwide depressions like the one that had culminated in the Second World War. Bretton
Woods also set the institutional foundations of three new International Economic
Organizations. The International Monetary Fund (IMF) was created to administer the
international monetary system. The International Bank (The World Bank) was initially
designed to provide loans for Europes post war reconstruction and development. During
the 1950s, however its purpose was expended to fund various industrial projects in
developing countries around the world. Finally the Generally Agreement on Tariffs and
Trade (GATT) was established in 1947 as a global trade organization charged with
fashioning and enforcing multilateral trade agreements. In 1995, the World Trade
Organization (WTO) was founded as the successor organization to GATT.
The Bretton Woods regime contributed greatly for almost three decades of what some
observers have called the golden age of controlled capitalism. In the decades following
World War II, even the most conservative political parties in Europe and the United
States rejected those laissez-faire ideas and instead embraced a rather extensive version
of state interventionism propagated by British economist John Maynard Keynes, the
architect of Bretton Woods system. By the 1980s, however, British Prime Minister
Margaret Thatcher and US President Ronald Reagan led the Neoliberal Revolution
against Keynesianism, consciously linking the notion of globalization to the liberation
around the world (Neoliberalism is rooted in the classical liberal ideas of Adam Smith
1723-1790 and David Ricardo 1772-1823, both of whom viewed the market as a self2

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regulating mechanism tending toward equilibrium of supply and demand). The Neoliberal
economic order received further legitimation with the 1989-91 collapse of communism in
the Soviet Union and Eastern Europe.
As pointed out above, the IMF and the World Bank emerged from the Bretton Woods
system. During the Cold War, their important functions of providing loans for developing
countries became connected to the Wests political objective of containing Communism.
Starting in the 1970s and especially after the fall of Soviet Union, the economic agenda
of the IMF and the World Bank has synchronized Neoliberal interests to integrate and
deregulate markets around the world.
In return for supplying much-needed loans to developing countries, the IMP and the
World Bank demand from their creditor nations the implementation of so-called
Structural Adjustment Programmes. Unleashed on developing countries in 1990s, this
set of Neoliberal polices is of referred to as the Washington Consensus. It was devised
and codified by John Williamson, who was an IMF advisor in 1970s. Williamson,
required governments to implement structural adjustments in order to qualify for loans.
And some of adjustments are Financial Liberalization, Trade Liberalization, coupled with
the abolition of import licensing and reduction of tariffs, Privatization of state enterprises,
and Deregulation of the economy. It is no coincidence that this programme is called the
Washington Consensus for, from the outset, the United States has been the dominant
power in the IMF and the World Bank. A large portion of the Development Loans
granted by these institutions has either been pocketed by authoritarian political leaders or
has enriched local businesses and the Northern Corporations they usually serve.
Sometimes, exorbitant sums are spent on ill-considered construction projects. The largest
share of the national budget is spent on serving outstanding debts. For example, in 1997,
the developing countries paid a combined $292 billion in debt service, while receiving
only $269 billion in new loans. This means that the net transfer of wealth from the global
South to the North was $23 billion.
The total value of world trade exploded from $57 billion in 1947 to an astonishing $6
trillion in the late 1990s. In the last few years, the public debate over the alleged benefits
and drawbacks of free trade reached a feverish pitch as wealthy Northern countries have
increased their efforts to establish a single global market through regional and
international trade-liberalization agreements such as NAFTA and GATT. During the
1990s, new satellite system and fibre-optic cables provided the nervous system of
internet-based technologies that further accelerated the liberalization of financial
transaction. The best picture is being presented by the Microsoft CEO Bill Gates bestselling book business@the-speed-of-thought. In 2000, e-business, firms, and
other virtual participants in the information-based New Economy traded about 400
billion dollars over the Web in the United States alone. Yet a large part of the money
involved in these global financial exchanges has little to do with supplying capital for
such productive investment as putting together machines or organization raw materials
and employees to produce saleable commodities. Most of the financial growth has
occurred in the form of high-risk hedge funds and other purely money-dealing currency
securities markets that trade claims to draw profits from future productions. The worlds

financial systems are characterized by high volatility, rampant competition, and general
TNCs (Transnational Corporations) are the contemporary versions of the early modern
commercial enterprises. By the end of 1980s TNCs were responsible for more than half
of the worlds trade in manufactures, and perhaps three-quarters of all trade in services:
according to one estimate, in 1994 the 500 largest TNCs controlled three-quarters of all
world trade. TNCs also controlled 80 per cent of all land under export crops, and the
marketing channels for large number of primary commodities. Powerful firms with
subsidiaries in several countries, their numbers skyrocketed from 7,000 in 1970 to about
50,000 in 2000 with 508,000 affiliates. Enterprises like General Motors, Wal-Mart,
Exxon, Mobil, Mitsubishi, and Siemens belong to the 200 largest TNCs, which account
for over half of the worlds industrial output. None of these corporations maintains
headquarters outside of North America, Europe, Japan, and South Korea. In 1999, 142 of
the leading 200 TNCs were based in only three countries, the United States, Japan, and
Rivaling nation-state in their economic power, these corporations control much of the
worlds investment capital, technology, and access to international markets. In order to
maintain their prominent positions in the global marketplace, TNCs frequently merge
with other organizations. Some of these recent mergers include the $ 160-billion marriage
of the worlds largest internet provider, AOL, with entertainment giant Time-Warner; the
purchase of Chrysler Motors by Daimler-Benz for $43 billion; and the $115-billion
merger between Sprint Corporation and MCI WorldCom. A close look at corporate sales
and country GDPs reveals that 51 of the worlds 100 largest economies are corporations;
only 49 are countries. Hence it is not surprising that some critics have characterized
economic globalization as corporate globalization or globalization-from-above.
GDP ($ Mil)
General Motors
South Africa
Exxon Mobil
Royal Dutch/Shell
Honda Motor
Credit Suisse
Source: Sales: Fortune, GDP: World Bank, World Development Report.

Sales ($ Mil)

TNCs have consolidated their global operations in an increasingly deregulated labor

market. The availability of cheap labor, resources, and favorable production conditions in
the global south has enhanced corporate mobility and profitability. Accounting for over
70% of world trade, their ability to disperse manufacturing processes into many discrete
phases carried out in many different locations around the world reflects the changing
nature of global production. Such transnational production network allows TNCs like,
General Motors, Nike and Volkswagen to produce, distribute, and market their products
on a global scale. Production could also now be divided up in new ways the most laborintensive in low-wage countries, those most dependent on sophisticated technology in
high-wage countries, those showing the highest profits in low-tax countries and so on.
Transnational production network augment the power of global capitalism by making it
easier for TNCs to bypass nationally based trade unions and other workers organizations.
Corporations are also sophisticated lobbyists at the supranational as well as national
levels of power, often with diplomatic backing by their home states. The chief executive
of a major TNCs seldom has to wait long for an appointment with a minister. Following
the defeat of the OECDs proposed Multilateral Agreement on Investment in 1998, this
political project became focused instead on the World Trade Organization (WTO) and
when the Seattle meeting of the WTO ended in failure the strategy shifted to securing
more limited regional agreements that could gradually be linked together into an
eventually global system. The authors of these plans are the chief executives of the
largest TNCs and their staffs, organized in bodies like European Round Table, the
International Chamber and the Transatlantic Business Dialogue (TABD), working closely
with officials of the European Commission and the US Department of Commerce, and
strongly supported by some states notably Britain.
The power to tax is the foundation of national sovereignty yet the complexity of
contemporary TNCs financing, combined with the network form of organization, enables
them to limit the bite of all. TNCs have opposed attempts at the strengthened regulatory
cooperation between states. Instead, they have developed legal structures for
transnational corporate capital which take advantage of the ambiguities, disjuncture, and
loopholes in international tax system. And perhaps half of the industrialized worlds stock
of money resides in or passes through tax havens.
In short, we have to recognize how far the balance of power between governments and
corporations has shifted. Perhaps the best comparison is between most states today and
municipalities in the past. Susan Strange is right to insist that transnational corporations
should now be put centre stage in any realistic analysis of domestic politics, not just in
the analysis of international relations.

Postmodernism and its impact on Worlds Economy3

Modernism and its successor post-modernism have created societies and economies
driven by ruthless pursuit of self-interest. But now the tide may be turning against the
ideas and ideals inspired by a Godless, Darwinian view of the universe
Postmodernism is one of the most important trends shaping our world today, in modern
times it has become one of the most discussed concepts. We can look at postmodernism
in the light of the generally accepted definition The stage after modernism, a trend that
emerged in reaction to modernism. The considerable debate that what kind of
understanding postmodernism proposes in such fields as science, economy, art and
philosophy. The climate of chaos, confusion and uncertainty in present-day societies is
sufficient to understand that. Even if postmodernism is regarded as a criticism of modern
culture, which has left mankind facing a huge impasse, it is actually rising to prominence
on the back of the spiritual emptiness and collapse caused by the modern age. We
need, therefore, first of all to consider the concept of modernism that this system is
built on.

Modernism is generally regarded as equivalent to the civilisation built by the West. These
are the ideologies and movements that emerged with the Enlightenment. The main point
that makes this system that developed and strengthened. During 19th century Europe
abandoned everything to do with its history and traditions that was a time when this
system modern emerged and strengthened. So what kind of world view was that, and
what did it change in the Western world? The answers to these questions will help us

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understand the ideological roots of postmodernism. The process today known as

modernism began with the Enlightenment, which fundamentally altered the Western
societies. Until that time, religion had been the basic principle of the life of societies.
With the Enlightenment changes began to appear. The starting point for that change was
the materialist approach. The spread of philosophies of anti-religious thinkers, Western
societies began to break with religious morality. Materialist and human-centered
ideologies and movements began to indoctrinate people with the idea that there was
nothing beyond the life of this world, and the entire universe were the result of blind
chance. Materialist and atheist theoreticians emerged one by one in the fields of, science,
philosophy, sociology, economics and psychology.
Materialists such as Diderot and Baron d'Holbach, suggested that the universe was a
collection of matter that had existed forever, and that there was no world of existence
outside matter. In the 19th century, materialism and atheism spread further. Thinkers such
as, Marx, Engels, Nietzsche, and Freud applied atheist thought to different spheres of
science and philosophy.
The greatest support for materialism came from Charles Darwin, who rejected creation
and replaced it with the theory of evolution. Darwinism supplied a so-called scientific
answer to the question of how living things and man had come to be, which atheists
had been unable to answer for centuries.
At the end of the 19th century, atheists came up with a world view that they thought
explained everything. They denied that the universe had been created and there was no
purpose behind the cosmos. They believed that Darwinism had answered the question of
how living things and man had come into existence. They thought that history and
sociology had been explained by Marx and Durkheim, and psychology by Freud. Yet all
of these atheist assumptions were eventually torn down by scientific, political and social
developments in the 20th century. Discoveries and findings in a wide range of different
spheres, from astronomy to biology and from psychology to social ethics radically tore
down all atheist assumptions.
One of the greatest proofs of the defeats suffered by materialist ideologues was the
disaster suffered in the social arena. Those ideologies that developed from materialism,
headed by fascism and communism, proved to be destructive forces. The concept of
morality underwent total degeneration: Together with the dominance of the materialist
worldview, fidelity, loyalty, sacrifice, honour and honesty ceased to be important virtues.
The fact that moral values like hospitality, making sacrifices for each other, solidarity,
and generosity totally disappear in society were no longer regarded as being of any worth
resulted in such virtues being regarded as a kind of naivety. Selfishness, ruthlessness,
injustice and unfairness came to be regarded as the norm. In this social Darwinist climate
in which helping others had been replaced by a common desire to earn and consume
more, oppressing the weak and ruthlessly exploiting the unfortunate.

In an environment without religion, the first concept to be eliminated is that of the family.
Values such as loyalty, fidelity, allegiance, love, and respect, which sustain the family, are
totally abandoned. It must be remembered that the family is the foundation of society and
if the family collapses, so does society. Even the state and the nation have no reason to
exist, since all moral values that underpin the state and the nation have been obliterated.
Furthermore, there is no reason left for anyone to feel respect, love or compassion for
anyone else. This leads to social anarchy. People do not value each other as the human
beings they are, because they see each other as beings that have evolved from monkeys.
Here, the main logic is that people are good to each other only if they can expect some
profit in return.
One of the major deceptions of the ideologies that emerged together with modernism was
the idea that there could be morality without religion, and that people could display
proper morality under those conditions. That is a terrible deception. History is full of
examples that demonstrate how once the proper behaviour that religion instills in the
human soul and God's guiding rules cease to apply, then true morality can in no way be
established. Postmodernism is an idea that recognises the emptiness of the values, criteria
and aims of modernism.
The greatest error of postmodernism is relativism in other words, the mistaken idea that
all values and beliefs change from person to person, and they are all relative ideas
containing no absolute truth. Truth as a relative idea is actually an erroneous deception.
Postmodernism offers mankind no solution. It is another error that leads mankind to
ideological chaos, in which man has no absolute values or aims.
Today, advances in various different spheres, such as cosmology, biology, psychology,
medicine and sociology have accelerated the collapse of materialism and atheism. Today,
modernism and atheism, and thus the ideologies built on them, are undergoing a rapid
collapse. The American writer Patrick Glynn in his book God: The Evidence, The
Reconciliation of Faith and Reason in a Postsecular World makes this comment on this
collapse: Over the course of a century in the great debate between science and faith, the
tables have completely turned. In the wake of Darwin, atheists and agnostics like Huxley
and Russell could point to what appeared to be a solid body of testable theory purportedly
showing life to be accidental and the universe radically contingent. Many scientists and
intellectuals continue to cleave to this worldview. But they are increasingly pressed to
almost absurd lengths to defend it. Today the concrete data point strongly in the direction
of the God hypothesis. (p. 19-20, 53)
Here this should be worthwhile if we look the Postmodernism and the shaping and
reshaping of worlds economy. Fernand Braudel, Civilization and Capitalism, 15th-18th
Century, in 3 volumes, emphasizes that capitalism is something different from the market
economy, a distinction that should be kept in mind in understanding. In lectures in 1976,
he said, despite what is usually said, capitalism does not overlay the entire economy and
all of working society: it never encompasses both of them within one perfect system all
its own. The Braudels focus on everyday life in Capitalism and Material Life represents
a concern shaping many areas of study after 1950, a movement from the study of elites to

those of more ordinary people. This entered archaeology, as excavations moved from the
palaces and temples to remains of foods, bones, and the dwellings of the poor, or lack
thereof. Braudel's emphasis thus fit very well into much Marxian history and with a view
that capitalism grew at the expense of the lower classes.
The foremost theoreticians of Social Darwinism prepared a scientific support for
capitalism. Herbert Spencer, the main theorist of Social Darwinism, who introduced the
principles of Darwinism to the life of society, if someone is poor then that is his mistake;
nobody must help this person to rise. If someone is rich, even if he has acquired his
wealth by immoral means, that is his competence. For this reason, the rich man survives,
while the poor man disappears.
In his article Darwin's Three Mistakes, the evolutionary scientist Kenneth J. Hsu, reveals
the Darwinist thoughts of America's foremost capitalists: Darwinism was also used in a
defense of competitive individualism and its economic corollary of laissez-faire
capitalism in England and in America. Andrew Carnegie wrote that the "law of
competition, be it benign or not, is here; we cannot evade it." Rockefeller went a step
further when he claimed that "the growth of a large business is merely a survival of the
fittest; it is merely the working out of a law of nature." As has been seen from what has
been explained so far, capitalism has dragged human beings to worship only money and
the power that comes from money. This capitalist morality holds sway in almost all
societies in our day.
Another feature of capitalist society is the way it gives room to inequality within itself. In
societies of this kind the divide between rich and poor grows ever wider, as the poor grow
poorer, the wealth of the rich grows greater. For the last 150 years people and societies
which possess this ruthless make-up have begun not to be condemned or criticized like
the others. Behavior of this sort began at last to be accepted as a law of nature.
Robert E. D. Clark explains the situation this way: Evolution, in short, gave the doer of
evil a respite from his conscience. The most unscrupulous behaviour towards a
competitor could not be rationalized; evil could be called good.
The moral bankruptcy of all these experiences over the last two centuries, experienced
by most of mankind today and the disasters that led to it, have spelt the end of both
modernism and all the atheist movements that emerged after it.
Today, the world suffers the consequences of a disregard of the values of religion. A
culture of violence prevails in our societies caused by a godless way of life. This culture
drives people to depression, chaos, poverty, war and exploitation. The system shaped by
this culture has now been unmasked with all its contradictions. Scholars and sociologists
maintain that only an approach from outside this culture can eradicate the chaos brought
about by post-modern culture.


Islamic financial system is strongly tied to the globalised international capitalism. Yet
some recent political events have put Islamic financial instruments and organisation
under a huge Western scanner.
The theme of Islam as a new global enemy has become fashionable in certain policy
circles. A number of academics and policy pundits posited the fundamental
incompatibility between Islam and western values. In certain foreign-policy circles given
the threat vacuum, Islamic fundamentalism was often designated as the most likely
successor to world Communism as the single greatest threat to American interests. The
influential journal Foreign Affairs, carried debate: Is Islam a Threat? Judith Miller
answered yes, Leon Hadar answered no. Harvard Universitys Samuel Huntingtons
book The Clash of Civilizations was appealing to foreign-policy experts who since the
end of Communism, had been frantically looking for a new foreign-policy doctrine and
Anti-Islamic punditry became something of a cottage industry.
The 1974 OIC summit in Lahore voted to create the inter-governmental Islamic
Development Bank (IDB), which was to become the cornerstone of a new banking
system inspired by religious principles. In 1975, the Dubai Islamic Bank, the first
modern, non-governmental, Islamic bank came into existence. In 1979, Pakistan became
the first country to announce the full Islamicization of its banking sector which was
followed by Sudan in 1983. The first paradigm of modern Islamic banking was
established in those years. Although commerce had always been central to the Islamic
tradition profit from pure finance was viewed with suspicion. Islam prohibits riba,
literally meaning increase the term has been variously interpreted sometimes as usury or
excessive interest more often as any kind of interest.
Islamic finance, in the context of cold war, firmly embedded in the US-centered
international political and economic order. Banking and finance is by nature oriented
towards preferring the status quo. It gives them stability and they easily penetrated in new
markets. Islamic banks established links with the local power structure, and operated
within the political, economic and regulatory framework. At the international arena,
because of their lacking experience the major Islamic groups were keen on working with
international financial institutions. And international capitals of Islamic finance were
London and Geneva.
Playing the Islamic card was not simply an ad hoc response to the Soviet invasion. This
was expressed in a 1998 interview by Zbigniew Brzeinski, former national Security
Advisor in the Carter Administration. He had conceived the secret operation which had
the effect to bring the Russians into the Afghan trap six months before the entry of

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Soviet troops. Religious fanaticism was necessary to justify a jihad or holy war against
the Soviets. The rise of some unruly Islamists was the price to pay for the liberation of
central Europe and the end of Cold war. Throughout the Reagan years the Crusade
against Godless Communism continued.
By 1990, it was clear that major new political and economic forces were at work. The
previous year had seen the fall of Berlin Wall and the Soviet decision to withdraw forces
from Afghanistan. It was then President George Bush first spoke of a New World Order.
Capitalism and the market economy were interpreted as the victory over the battle against
socialism and central planned economy. That year marked the beginning of the
Globalization Decade: new global rules, norms and institutions emerged, with attendant
impacts on Islamic politics and finance.
Now Washington Consensus was conquering the world. Structural adjustment policies
became the order of the day. International aid was linked to the dictations of the
International Monetary Fund (IMF) and World Bank. A new trend was the rating of
countries by rating agencies and other proxies in order to reassure the markets
Banking and finance experienced the transformations. The lifting of restrictions on
capital movements financial markets became increasingly interconnected and financial
market regulators no longer held full sway over their regulatory territory. New derivatives
were created by the risk managers to fulfill a variety of commercial and investment
needs. Financial engineers were in a position to create new financial products through
slicing and splicing. Traditional loans and other financial assets were securitized.
During this period the Islamic World experienced major economic, political, religious and
demographic transformations. Notably the rise of Asian tigers, the emergence of new
Islamic states following the collapse of the Soviet Union, a changing oil market, the
emergence of new Islamic middle class and growing Islamic presence in the West. And
above all Islamic revivalism. There were many obvious reasons for this revivalism:
notably the vacuum left by secular ideologies, socialism that were both described both
politically and economically. We can also count identity crisis and the search for roots in
a world dominated by commercialism and materialism.
By the 1990s most conventional banks in the Islamic World started offering the option of
Islamic windows. In the new world of global finance, riba was no longer the central
theo-logical sticking point now concerns over gharar (risk, uncertainty) drew the
attention of scholars. Major financial institutions such as Citibank, HSBC developed
Islamic departments or subsidiaries. In Europe and America Islamic institutions were
established to cater the local Muslim communities. Much of the new ijtihad on Islamic
finance is conducted in cooperation between conventional and Islamic institutions, and
surprisingly often outside the Islamic world like Harvard Islamic Finance Program
(HIFIP). Now despite the authenticity of the financial products which are offered by
Islamic banks one can see that in many countries Islamic institutions were more
innovative and dynamic than their conventional counterparts.

In the pre-September 11th period, the incipient hostility of the New World Order to
Islam had direct and indirect impacts on financial institutions in a certain respects. The
advent of global regulation robbed national regulators of some of their previous
autonomy. Now central bankers in the Islamic world had to comply with the dictates of
international bodies such as the Basle Committee on Banking Supervision of the Bank of
International Settlements, the IMF, the World Bank and the WTO. They were expected to
impose new rules and norms like Basle or Cooke ratios, Core Principles of Banking
Supervision. Most Islamic techniques had conventional counterparts they did not always
fit conveniently within existing regulatory regimes. Their main financing techniques
often implied specific contractual obligations and different levels of risk than their
conventional counterparts. Islamic banks were considered that they should not be
subjected to the same prudential financial ratios and capital requirements as conventional
banks. The attitude of many Western regulators could be summed up in a famous
statement by Robin Leigh-Pemberton, the former governor of the Bank of England, to the
effect that Islamic banking is a perfectly acceptable mode of investment, but it does not
fall within the long-established and well-understood definition of what countries banking
in this country.
Many Islamic financial institutions belonged or were otherwise associated with
transnational groups such as Geneva-based Dar al-Maal al-Islami (DMI) or the Bahrainbased Dallah al-Baraka Group. Both are controlled by Saudi citizens, but do not operate
commercial banks in their home country. From the standpoint of ownership and control,
many Islamic institutions could not comply with the comprehensive consolidation
supervision by the home country regulator requirements. Another reason for the increased
scrutiny of Islamic institutions was that had come to the attention of international
regulators at the time of the Bank of Credit and Commerce International (BCCI) scandal
in 1991.
Islamic Finance was neither well-known nor well-understood by those circles. For those
who assumed that Islam had sinister designs, Islamic institutions could only look
suspicious. As we saw, in reality Islamic financial institutions were firmly committed
with international status quo. There had been only one instance where Islamic finance
had been used to upset the status quo: it was in the Sudan, where Sheikh Hassan al-Turabi
took advantage for his association with the Faisal Bank to build his power base. Other
suspicious links could be found through they were primarily linked to the blowback
from the afghan trap.
The events of September 11, 2001 marked the beginning of a view that Islam is the new
enemy. The clash of civilizations theory went mainstream. Anti-Islamic policy makers
such as Daniel Pipes and Steven Emerson and a journalists like Stephen Schwartz,
exerted unprecedented influence on public opinion and policy-making. In his 20
September 7, 2001 speech to Congress, President Bush asked: why do they hate us? He
foreclosed any discussion of US foreign policy when he uttered another famous line: if
youre not with us, youre with the terrorists. As a result most debates have focused on
the presumed essence of Islam and its problematic relations with the west. For Bernard

Lewis, the root of Islamic rage and resentment could be found in the hatred of western
modernism and secularism.
Islamic finance, which had long been perceived as a moderating element in Islam, found
itself as never before in the crosshairs of law enforcement. The magnitude of the attacks
of September 11th led to suggestions that sophisticated financial network were behind
the attacks. In the new kind of war against terror, the uniform would be in the words of
Defense Secretary Donald Rumsfeld bankers pinstripes and programmes grunge just as
assuredly as desert camouflage. So the first battle took place on the financial terrain. On
Sunday, 23 September, flanked by Treasury Secretary Paul ONeill and Secretary of State
Colin Powell, President Bush announced: we have launched a strike on the financial
foundation of the global terror network. A presidential decree simultaneously blacklisted
twenty-seven individuals and groups. Since most assets linked to terrorism were outside
the US, the president gave notice to the international financial community: If you do
business with terrorists, if you support or sponsor them, you will not do business with the
United States of America.
The template for the financial war was the money-laundering apparatus in place since the
war on drugs of the 1980s. the rationale for the surveillance and control of financial flows
was twofold: first they could untangle money puzzles and yield a great deal of
information about subversive and otherwise shadow groups; second, the use of economic
and financial tools embargoes, asset seizures, and the like-would eventually take profit
out of crime. More people leaned about Islamic finance and it took six months for
Treasury Secretary Paul ONeill, the official in charge of the financial war on terror, to
learn, in March 2002 following meetings in Saudi Arabia, Kuwait and Bahrain, that
Islamic banking was a legitimize way of doing business.
In a business where reputation matters greatly, the image of leading Islamic institutions
suffered a devastating blow. At a November 2001 Islamic Banking Conference in
Bahrain, the two leading figures in Islamic finance expressed dismay at the smear
campaigns against their institutions. Prince Muhammad Al-Faisal said: The West is
raising various questions. But these questions are not raise with us but with experts
who do not know anything about this. As for Sheikh Saleh Kamel, founder of the al
Baraka Group and chairman of the Council of Islamic Banks, he declared: The concept of
Islamic banking is one of the creative methods of Islam to serve the economic and social
welfare of Muslims. But some circles tried to use the September 11 th attacks to launch a
campaign under the false pretext that these Islamic banks are the source for financing
Guilt by association hit Islamic institutions from different sides. With every new list of
suspect organizations which included such as Bank al-Taqwa, hawalas ( money-transfer
outfits) such as Al-Baraka Investment and Development Company, and Islamic charities
such as Al-Wafa. Islamic financial institutions were also affected in their dealings with
international banks. As know your customers rules were tightened, new rules on
correspondent banking required that banks ensure that none of their correspondents was,
wittingly or un wittingly involved in financing terror.

A report prepared by self-styled nonpartisan committee of experts on terrorist finances

sponsored by the Council of Foreign Relations in New York concluded: It is worth stating
clearly and unambiguously, if only because US government spokespersons have not: for
years, individuals and charities based in Saudi Arabia have been the most important
source of funds for Al Qaeda, and for years Saudi officials have turned a blind eye to this
problem. The committee, headed by Maurice R. Greenberg, chairman and chief executive
of the American International Group, included William H. Webster, former director of the
Federal Bureau of Investigation and the Central Intelligence Agency; David Cohen,
deputy commissioner for intelligence of the New York City Police Department; and
William F. Wechsler, former director for transnational threats at the National Security
The new narrative mixed facts-Saudi Arabia had promoted its Wahhabi Brand of Islam; it
had generously funded Islamic groups worldwide and in particular the Afghan Arabs
who were behind the attacks, and fifteen of the nineteen hijackers were Saudi citizens,
with a new storyline the Saudi paid off extremists so that they would stir trouble abroad
and not on Saudi soil.
It was only a time before the question of financial compensation would rise. On 15 august
2002, lawyers for relatives of 600 victims filed in US District Court in Alexandria, VA.
New York Senator Charles Schumer suggested that $ 3.1 billion seizes from Muslim
charities should be used to compensate American victims. Leading figures of Islamic
finance and major Islamic institutions, Prince Mohammad Al-Faisal and his Dar al-Maal
al-Islami, Sheikh Saleh Kamel and his Dallah al-Baraka Group, the Al-Rajhi Banking and
Investment Corporation and so on were among eighty defendants accused of
racketeering, wrongful death, negligence and conspiracy. Other defendants included two
Saudi Princes, the government of Sudan, seven banks and eight Islamic foundations. The
fifteen lawsuits modeled after action filed against Libya in the Pan Am flight 103 disaster,
aimed to force the sponsors of terror into the light and subject them to the rule of law by
seeking an amount in excess of $ 1 trillion.
As a result of these developments there was a dramatic slowdown in the integration of the
major Islamic institutions in the global economy. Sheikh Saleh Kamel went as far as to
call for a repatriation of Islamic funds, declaring: The West has always been hostile to
Islamic banking, and Al-Baraka Bank was even closed down in London. Therefore it is
time Muslim financial institutions and individuals bring back their money from the West
to invest in Muslim countries and develop this industry in the region. The call for
repatriation of funds did not go unheeded. Islamic institutions suffered a blow but
demand for Islamic products has continued unabated, and the number of conventional
institutions offering Islamic windows or Islamic products has kept growing, both inside
and out side the Islamic world. Latest development in Pakistan both in number of Islamic
banks and Islamic financial products are major visible change in the mindset. Actually the
demand was very much there in the Muslims now the Islamic banks or other banks and
financial institutions are getting the huge profits of untapped portion of the market.

Political Islam now, is far from dead under the relatively free conditions in the Islamic
world. In Turkey, Algeria, Palestine Bahrain and Morocco moderate but dissident Islamist
groups achieved, despite numerous obstacles, significant gains. These developments
caught the west by surprise. It was assumed that the only choice was between secularism
and radical Islamism. The nature of political Islam that will define the coming years will
depend on the interplay among countless factors, some related to the Islamic World itself
like the problems of persistent poverty, corruption, alienation as well as gap between
rulers and ruled and other related to the interaction between Islam and the West.

Darwinism's 'natural' links to capitalism and

While investigating Darwinism's political influence, keep in mind that this theory is
related not to one single ideology, but to too many seemingly different ones. Apart from
capitalism and communism, the wide spectrum of ideologies relying on Darwinism
includes racism, imperialism and fascism. The common point that all these apparently
independent, even contrary, ideologies share is their opposition to monotheistic religions.
In order to understand this relationship we must examine the European culture in the 18th
and 19th centuries. Beginning in the second century A.D. under the Emperor Constantine,
Europe gradually accepted Christianity. Christian culture held sway until the
Enlightenment of the 18th century, when a number of artists and thinkers began
embracing the influence of pagan Greek and Roman culture and consequently, rejecting
the dictates of religion. The Enlightenment's most important political result was the
French Revolution, which was not only an uprising against the ancient regime, but at the
same time, a revolt against religion.
The foundation of the French Revolution was established by the influence of such antireligious thinkers as Voltaire, Diderot and Montesquieu. From 1789 on, the
Enlightenment's pagan, anti-religious tendencies became obvious. After an intense
propaganda campaign, the Jacobins came to lead the revolution, established a movement
against orthodox Catholicism, and even managed to create a new religion. Revolutionary
worship, seen first during the national Feast of the Federation on July 14, 1790, spread
quickly. Robespierre, one of the leaders of the bloody revolution, explained its rules and
principles in a report, wherein he called it 'The Worship of Supreme Being'. Paris's
famous Notre Dame Cathedral was changed into what he called the Temple of Reason.
Statues of Christian saints were removed from the cathedral walls, replaced by the statue
of an allegorical woman called the 'Goddess of Reason'. In the course of the French
Revolution, many priests and nuns were killed; churches and monasteries were plundered
and destroyed.
In the 18th century, few thinkers adopted materialism, but it became much more
widespread in the 19th, overflowing the borders of France to take root in other European
countries. the philosophy of materialism reawakened and began to spread throughout
Europe. As a result of flawed logic, materialists reject the existence of God and cannot
conceive that all things continue to exist by God's will. These ideologies leaders see
religious beliefs and values as impediments, and use Darwinism as a weapon to destroy
them. For example, capitalists claim that a Darwinist outlook is needed to legitimate the
ruthless 'struggle to survive' evident in the free market. In this way, they support the very
communism that they oppose.

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The philosophy of materialism reawakened and began to spread throughout Europe.

Certain ancient Greek philosophers had first proposed this philosophy, which believes
that only matter exists, those living things -- indeed, human consciousness itself -- are
only 'matter in motion'. In the 18th century, two important names in the French
Revolution, Denis Diderot and his close friend Baron d'Holbach, adopted this philosophy
and imposed it on the people. In his book 'Systeme de la Nature' (The System of Nature)
published in 1770, Baron d'Holbach used a few so-called 'scientific' suppositions to
propose that only matter and energy existed.
Anton Pannekoek's book' Marxism and Darwinism 'refers to this interesting paradox. He
describes the support given to Darwinism by the bourgeoisie (Europe's wealthy capitalist
class) in these words: "That Marxism owes its importance and position only to the role it
takes in the proletarian class struggle, is known to all. . . Yet it is not hard to see that in
reality Darwinism had to undergo the same experiences as Marxism."
Darwinism served as a tool to the bourgeoisie in their struggle against the feudal class,
against the nobility, clergy-rights and feudal lords. What the bourgeoisie wanted was to
get rid of the old ruling powers standing in their way. With the aid of religion the priests
held the great mass in subjection and ready to oppose the demands of the bourgeoisie.
Natural science became a weapon in the opposition to belief and tradition; science and
the newly discovered natural laws were put forward; it was with these weapons that the
bourgeoisie fought.
Darwin's theory that man is the descendant of a lower animal destroyed the entire
foundation of Christian dogma. It is for this reason that as soon as Darwinism made its
appearance, the bourgeoisie grasped it with great zeal. Under these circumstances, even
the scientific discussions were carried on with the zeal and passion of a class struggle.
The forces that held sway in Europe saw Darwinism as a rare opportunity to legitimise
the capitalist order they had established in their own countries, and their imperialist
colonial systems throughout the world. Darwinism's scientific inconsistency, its
imaginary suppositions and nonsensical claims have totally been ignored. Those who
regard it as a weapon against religion and morality have disseminated it for ideological
But the capitalist class responsible for Darwinism's dissemination has supported both this
theory and its rival. Why? Because Darwinism's spread and the concomitant destruction
of religious belief have benefited Marxism as much they have capitalism. Religion
teaches such values as moderation, modesty, brotherhood, self-sacrifice and compassion.
With these removed, society becomes a savage arena in which the 'struggle for survival'
among capitalists goes on, much as does the class struggle between capitalists and
Capitalism means the sovereignty of capital, a free and unrestricted economic system
totally based on profit and where society is in competition within these criteria. There are
three important elements in capitalism: individualism, competition and profit-making.

Individualism is important because people see themselves not as a part of society, but as
'individuals' standing alone on their own two feet. 'Capitalist society' is an arena where
individuals compete with one another under very harsh and ruthless conditions just like
that described by Darwin, where only the strong survive, where the weak and powerless
are crushed and eliminated.
According to the logic capitalism is based on, every individual -- and this can be a
person, a company, or a nation -- must only fight for its own development and advantage.
In this war, the best producers survive, the weak and incompetent are eliminated. What is
seen as worthy of attention is not human beings, but economic development, and goods.
For which reason the capitalist mentality feels no ethical responsibility or conscience for
the person whom it crushes underfoot and climbs on top of and who has to live in great
difficulty. This is Darwinism put into total practice in society in an economic way.
Materialism was adopted by anti-religious forces, which started to impose it on European
societies. Propaganda insisted that materialism was the foundation of reason and science
-- a deception that quickly spread among the enlightened, moving first from France to
Germany and then, gradually, throughout the rest of Europe. In this respect, Freemasonry
was an important ally. Masons adopted materialism as a religion and, in the 19th century,
many enlightened Europeans became its members. As this ancient dogma spread, there
were attempts to adapt materialism to several branches of science: To natural science, by
the English naturalist Charles Darwin. To social science, by the German philosophers
Karl Marx and Friedrich Engels.
The scientific importance of Marxism as well as of Darwinism consists in their following
out the theory of 'evolution'. Thus, both teachings, the teachings of Darwin and of Marx,
the one in the domain of the organic world and the other upon the field of human society,
raised the theory of evolution to a positive science. In doing this they made the theory of
evolution acceptable to the masses as the basic conception of social and biological
Darwinism and Marxism are fully compatible in two basic arguments: Darwinism
proposed that all existing things consist of 'matter in motion'. This alleges that God
neither created nor ordered matter and that therefore, all life arose by chance. Human
beings are a species of animal, evolved from other, lesser animals. But these claims rest
on no scientific proof and have been proven false be subsequent scientific discoveries.
But Darwin's theory harmonises with the views of Marx and Engels, who believed that
only matter existed, and that the whole of human history can be explained in material
Darwinism proposed that 'conflict' is the motivating force that brought about
development in living creatures. His basic supposition was that the natural world's
resources weren't sufficient to support living things; that therefore, organisms had to fight
a constant struggle that drove evolution. The dialectical method adopted by Marx and
Engels is the same as Darwin's. According to dialectics, the single motive force

underlying development in the universe is the conflict between opposites. Human history
has progressed by means of this conflict. Humanity itself has advanced in the same way.

In fact, Karl Marx was the first to realize Darwin's important contribution to materialism.
Reading Darwin's 'The Origin of Species' after its publication in 1859, Marx found in it
great support for his own theory. A letter he wrote to Engels on December 19, 1860, says
that Darwin's book "contains the basis in natural history for our view." In a letter to
Lassalle in January 16, 1861, he says, "Darwin's book is very important and serves me as
a basis in natural science for the class struggle in history."
Marx's dedication to Darwin of his greatest work, 'Das Kapital', shows the common mind
that they shared. In the German edition of his book that he sent to Darwin, Marx wrote
with his own hand, "To Charles Darwin from a true admirer, from Karl Marx."
Capitalism and communism gave birth to two results: claims that continuous conflict is
necessary, and steps to eradicate humanity completely, leading to endless bloodshed,
which we are examining around us not in this century but the 20th century is a good
example in the shape of two world wars.
Despite their differences, both capitalists and communists found common ground in their
opposition to religion, and for that opposition, they found great support in Darwinism.
For this reason, communists believe that before the revolution can occur, a society must
first become capitalist. According to this idea, along with the general adoption of
'capitalist morality' (where Darwinist propaganda plays a vital role), a society must first
discard religion before communism can grow. In Vladimir Lenin's 1909 article titled 'The
Attitude of the Workers Party to Religion' the communist leader describes the role played
by the capitalist bourgeoisie in opposing religion: "the task of combating religion is
historically the task of the revolutionary bourgeoisie. In the West, this task was to a large
extent performed by bourgeois democracy. Both France and Germany have a tradition of
bourgeois war on religion, which began long before socialism. In Russia, because of the
absence of bourgeois-democratic revolution, this task too falls almost entirely on the
shoulders of the working class." Lenin's words show that in essence, the opposition
between capitalism and communism is an 'inner conflict' only. Religion is their common

Growth of an unequal world6

It's hard to find conclusive evidence for a positive link between trade liberalisation and
poverty reduction.
Globalisation is not a shortcut to development. Economic development has always
required a prudent blend of domestic innovations with imported practices. But political
leaders and policymakers look in a hurry to catch the momentum generated by
globalisation. Openness mantra which is always backed by the senior officials of the
International Financial Institutions like the World Trade Organization (WTO) and
International Monetary Fund (IMF) has been repeated in so many times that it is now
viewed as an essential component of a country's development strategy. Poor nations are
diverting resources from key domestic issues to global economic integration. This is bad
news for them.
The global integration agenda is based on shaky empirical ground and seriously diverts
policymakers' priorities. Openness does not deliver on its promises: the developing
countries that have embraced the integration orthodoxy are now discovering this fact.
Simply opening borders is insufficient: It needs to be complemented by a thorough
institutional reform. Developed countries took generations to achieve the level of
openness their economies have but now they want poor countries to do the same thing in
minimum time. The examples normally are given of the fastest growing countries like
China, India, East and Southeast Asia, but policymakers in these counties implemented
trade and investment liberalisation in an unorthodox manner. These countries worked
gradually and sequentially. China worked on two-track strategy which is a highly
unorthodox way and practically violates every rule in the guide book. Secondly India,
which achieved significant growth rate in the 1980s, remains one of the most highly
protected economies. These countries have combined their outward orientation with
unorthodox policies. The only clear pattern is that countries dismantle their trade barriers
as they grow richer. They liberalise trade gradually over a period of decades not years.
And when the World Bank holds such countries up as proof that liberalisation works, this
is hypocritical, to say the least. Another worry about this sort of attitude is that it fails to
distinguish clearly between trade policy and quantity.
Ask any World Bank economist what is required for trade liberalisation and he is likely to
provide a laundry list of measures beyond the simple reduction of tariff and non-tariff
barriers. As the promise of trade liberalisation fails to materialise, the prerequisites keep
expanding. 'Political Uncertainty' has always been a favorite of international financial
agencies to blame the developing countries for their failure.
Do lower trade barriers spur greater economic progress? The available studies find no
systematic relationship between a country's average level of tariff and non-tariff barriers
and its subsequent economic growth rate. Neither economic theory nor empirical

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evidence guarantees that deep trade liberalisation will deliver high economic growth.
Mattias Lundberg and Lyn Squire find similar trends.
They report that greater "openness is correlated negatively with growth among the
poorest 40 percent, but strongly and positively with growth among the middle 60 percent
and wealthiest 40 percent" of households. The IMF cites estimates that developing
countries could gain between $ 83 billion to $ 226 billion dollars per year if all barriers to
trade in merchandise were eliminated (IMF, 2001). Even reducing a single subsidy could
greatly help some countries. For example the, cotton subsidy under the 2002 US farm bill
costs Central and West African countries about $ 250 million annually in lost revenue
(Ingco & Nash, 2004, 9). Oxfam estimated that US dumping alone has caused poor
cotton-producing countries in Africa losses of almost $ 400 million (Oxfam, 2005c).
The situation is far worse for developing countries in bilateral and regional agreements
with developed countries. The African Growth and Opportunity Act provides access to
the US market if the African apparel manufactures use US produced fabric and yarns, so
limiting the potential economic spillovers in African countries.
Examples of East Asian tigers, China and now India are given and the advocates say
where would they be without international trade and foreign capital flows? Yes, this is
undeniable that these countries reaped enormous benefits from their progressive
integration in the world economy. But we need to look closely to know what prudent
policies produced these results. South Korea and Taiwan abided by few international
constraints and pay few of the costs of integration during their formative growth
experience in the 1960s and 1970s. It is also worth noting that some studies of
stabilisation and adjustment programmes (SAPs), which include many of the liberalising
policies that we are interested in, show that the performance of countries that have
undergone SAPs has been worse than those that have not undergone adjustment.
On the whole, the view that the market liberalising reforms advocated by the IFIs are
increasing growth rates, decreasing inequality, and ameliorating poverty is
unsubstantiated. Liberalisation may even be contributing to increasing inequality and
decreasing growth rates amongst the poorest segments of the world's population.
Economists argue that differences in growth rates between countries depend on may
factors (though the effects of these factors on growth rates can be quite complicated):
Education levels, initial incomes, climate, disease, proximity to markets, trade policy, and
the quality of national and international economic institutions are just some of the factors.
But high levels of education, land redistribution, and investment in agriculture may
increase growth rates. Policies to improve bureaucratic quality, reduce the risk of
expropriation, prevent government repudiation of contracts, reduce corruption, and
liberalise trade are correlated with higher income levels on average. Additional factors
which can effect growth include the availability of land and natural resources as well as
government policies regarding public consumption, property rights and distortions in
domestic and international markets.

In the financial arena, too, various studies have found that financial market liberalisation
does not increase growth and decrease inequality. They found that financial market
liberalisation creates instability and is not correlated with growth. There is plenty of
evidence to suggest that financial liberalisation is often followed by financial crash. Look
at Asian tigers -- Indonesia, Malaysia, Thailand -- and then Mexico and Turkey. All these
countries have shown that there is little evidence to suggest that high rate of economic
growth follow capital account liberalisation. But there is plenty of evidence that financial
liberalisation is followed by financial crisis.
Controlled depreciation of the domestic currency by the developing countries has caused
every growth boom during the last four decades. But financial openness is making
impossible to manage exchange rate. When some successful countries gave in to Western
pressure to liberalise capital flows rapidly they were awarded with the Asian financial
crisis. Developing countries are pushed to import legal codes and standards by
international agencies rather than improving their existing legal institutions.
According to Branko Milanovic, a leading economist in World Bank Research
Department, a unit of the bank dealing with poverty, income distribution and household
surveys, the growth of World GDP between 1961 and 1978 was an average of 2.7 per
cent per year. It declined to an average of 1.5 per cent per year between 1979 and 2000. It
is not entirely clear what kind of growth the IFIs are advocating if growth has been
decreasing in the decades when liberalisation has been increasing. Branko Milanovic
nicely illustrates these trends. He divides the world into four income groups and then sees
how countries move between the groups. The 'rich' group includes the traditionally rich
Western European and North American countries. The 'contenders' in a given year are
those whose incomes are no more than 1/3 below the poorest 'rich' country. The 'third
world' countries have incomes between 1/3 and 2/3 the income of the 'rich' and the rest
are classified as 'fourth world'. Milanovic then tracks the movement of countries between
groups over time. Most developing countries are doing worse now than they were in
1978. In percentage terms, 82 per cent of those that were rich in 1978 were still rich in
2000; 12 per cent of those that were rich in 1978 became contenders by 2000; 6 per cent
of the erstwhile rich joined the third world; 13 per cent of the contenders became rich, 6
per cent of them were still contenders, while 69 per cent of them joined the third world
and 13 per cent joined the fourth world.
Every year 9 million people are diagnosed with tuberculosis. Every day more than 13,400
people are infected with AIDs. Every 30 seconds malaria kills a child. In the area of
public health developing countries are bound to obey WTO rules even if this causes
thousands of deaths. In 1997 when South Africa passed legislation allowing imports of
patented AIDS drugs from cheaper sources the country came under severe pressure from
Westerns governments. More than 2.7 billion people of the approximately 6 billion
people on earth live below the two dollars a day international poverty line. Over a billion
people have less than one dollar a day. "Roughly one third of all human deaths, 18
million annually or 50,000 each day, are due to poverty-related causes" (Pogge, 2005, 2).

Normally there are two methods to measure poverty. First, we might use an assortment of
indicators such as education and caloric intake levels to measure poverty. The second is
use of a unitary measure of poverty. A unitary measure allows us to get a sense of how
well people are doing overall. According to the World Bank's $ 1 a day is poverty line.
The Bank relies on purchasing power parity (PPP) measures to convert country estimates
of income poverty into a common currency. This is problematic. In fact the bank itself
admits this much. "Poverty is multi-dimensional, and not all its aspects are determined by
economic performance." (World Bank, 2001, 27-28).
The main sources of PPP measures are the Penn World Tables (PWT) and the
International Comparison Project (ICP). These measures are based on surveys with
inadequate coverage. Only 63 countries participated in the 1985 ICP (Reddy & Pogge,
2006, 25). China has not participated at all in the ICP surveys and India has not
participated since 1985 (Wade, 2004, 572). This makes poverty calculations quite
unreliable. there are a great number of poor people living in these countries (Reddy &
Pogge, 2006).
After all, the world's 358 richest people have more money than the combined annual
incomes of countries with 45 per cent of the world's population. Calculation of income
inequality within a country and among countries is normally measured in three ways. The
first is by altering the distribution of goods within nations. One might call it intra-national
inequality. For example, the decreasing size of the middle class in the US is a
manifestation of this sort of inequality. The second is by altering the distribution of goods
between nations. For instance, if developed countries are getting richer while the
developing countries are getting poorer international inequality is increasing. The third is
by altering the distribution of goods between individuals. World inequality is inequality
between individuals independent of their country of origin. If the global rich are getting
richer and the global poor are getting poorer then world inequality is increasing. Those
who are concerned only about how individuals are faring independent of country of
origin should be most interested in trends in world inequality. Communitarians might
care about inequality between nations. It is not at all clear what kind of inequality is at
issue for those who argue that globalisation is increasing growth while reducing poverty.
There are many ways that world inequality can change. Intra-national inequality might be
increasing, but this might be compensated for by decreasing international inequality.
International inequality might be increasing, but this might be compensated for by
decreasing intra-national inequality. In either of these cases, the situation of the extremely
poor might not be improving. World inequality could decrease if the only change is that
the elite (either in the developed or in the developing world) are not getting richer. It is
important to look at the components of world inequality to get the larger picture.
International inequality is the largest contributor to world inequality (intra-national
inequality contributes less).
However, it is worth mentioning that the worsening exchange rate inequality does bode
poorly for poor countries. Because many debts are denominated in dollars, imports are
paid for in dollars, and participation in international affairs must be paid for in foreign

currency, the costs of worsening inequality in exchange rates can be high. Though the
bias of market exchange rates is to make inequality look worse than it actually is,
Dowrick and Akmal argue that population weighted international and world inequality
are getting worse using exchange rate conversion methods even when biases in exchange
rates are corrected (Dowrick & Akmal,2001). A keen reader can find further detail in
Milanovic's book, Worlds Apart: International and Global Inequality 1950-2000. It
provides a comprehensive and detailed overview of recent results and discussion of
methodological issues.
Market liberalising policies are not the only ones that may sometimes require trade-offs
between increasing growth, and reducing inequality and poverty. However, it should also
be clear that some kinds of public expenditure can reduce poverty and inequality, while
increasing growth rates. One policy, not mentioned above, that may be particularly useful
for reducing poverty without negatively impacting world growth rates is liberalising
movement of people. Dani Rodrik argues that "this would produce the largest possible
gains for the world economy and for poor countries in particular" (Rodrik, 208, 2005).
The possible gains from liberalising labour markets are much greater than from
liberalising markets in goods and capital. He speculates that 25 times as much growth
could come from liberalising movement of people as from liberalising goods and capital.
L A Winters estimates that developing countries could gain $ 300 billion per year or $ 60
per person in the developing countries by the liberalisation of people's movement
(Winters, 2000). Poor countries will benefit from greater remittances, technology, skill
transfer, and investment. Even better, if the poor were allowed to work in developed
countries, they will benefit directly from liberalization. We would not have to wait to see
whether the benefits of liberalization will eventually trickle down (Rodrik, 2005, 209).
In conclusion, the empirical evidence that market liberalising reforms improve the lot of
the worst off is not as clear as the International Monetary Fund and the World Bank
contend. Growth rates have been declining in the 30-year period since market
liberalisation became fashionable (Milanovic, 2005; Wade, 2004). The poverty statistics
are too poor to be of much use. Inequality under almost all (including the most relevant)
measures has been increasing (Reddy & Pogge, 2003). Some studies have even found
that liberalisation itself is correlated with increasing inequality and decreasing growth
rates (Cornia, 2004).
We cannot just have faith in the ability of markets to increase growth, decrease inequality,
and ameliorate world poverty. Thus, we need to examine particular policies the global
economic institutions might implement to see how they impact growth, inequality, and
poverty. For instance, we need to consider the effects of different policies on different
people. How do those suffering from diseases like AIDs fare under the World Trade
Organization's agreement on trade related intellectual property rights? Is there a more
equitable system of intellectual property rights we can implement? We also need to
consider the effects of different combinations of policies. What background conditions
must be met before we can conclude that education will both increase growth and help
the poor? When is land reform going to reduce inequality and increase growth rates?

Finally, we need to consider policies' different effects on the many things we care about.
Will opening borders increase inequality even as it decreases poverty and increases
growth rates? Do structural adjustment programmes increase growth rates but also hurt
the poorest of the poor? We need to carefully consider the best means to increasing
growth, and reducing inequality and poverty, if we are going to be successful in achieving
these goals. I have not argued for a particular means of increasing growth, decreasing
inequality, and ameliorating poverty here. However, we also need to get clearer about
what matters. Does it matter if opening borders increases inequality even when it reduces
poverty? What kinds of inequality matter? We should seriously consider promoting land
reform, agriculture, micro-credit, education, and health care services. Finally, we might
liberalise trade and investment in some respects, but we should consider liberalising
migration as well.

Multinational Corruption7

The article was published in 2007 in daily English newspaper The NEWS.

Not only are the rich countries and their agencies impotent, they commonly have been
and are accomplices in corruption abroad.
Corruption has become a major international concern. The topic of international
conferences, policy forums and ministerial speeches, it is also the subject of a recent
OECD Convention and the focus of an international non-governmental organisation,
Transparency International. Corruption is increasingly cited as a reason for withholding
foreign aid or debt relief. If a country's inability to pay interest on its loans is due to its
leaders siphoning off national earnings into their own bank accounts, the reasoning goes,
surely extending aid or canceling the debt will merely sanction further graft.
Most commentators on corruption and on the 'good governance' initiatives instigated to
combat it dwell on developing countries, not industrialised ones. Most scrutinise
politically-lax cultures in the South, not the North. Most call attention to the petty
corruption of low-paid civil servants, not to the grand corruption of wealthy
multinationals. Most focus on symptoms such as missing resources, not causes such as
deregulation of state enterprises. Most talk about bribe-takers, not bribe-givers.
Growing corruption throughout the world is largely the result of the rapid privatisation of
public enterprises. Multinationals, supported by Western governments and their agencies,
are engaging in corruption on a vast scale in North and South alike. Donor governments
and multilateral agencies such as the World Bank and International Monetary Fund
frequently put forward 'good governance' agendas to combat corruption, but their other
actions send different signals about where their priorities lie.
In many instances, privatisation has been accompanied by widespread corruption. Joseph
Stiglitz, ex-Chief Economist at the World Bank, admits that "it has proved difficult to
prevent corruption and other problems in privatizing monopolies. Advocates of
privatization may have overestimated the benefits of privatization and underestimated the
costs, particularly the political costs of the process itself and the impediments it has posed
to further reform."
The head of the World Bank's Asia-Pacific branch, Jean-Michel Severino, confessed that
infrastructure privatisations in the region became a 'horror story' in which 'there was a
high level of corruption'.The 'horrors' come about partly because of the inflexible and
hasty deadlines set by the IMF and World Bank. Public services are privatised without
enough time being allowed to set up workable frameworks for regulation. As the recent
External Evaluation of the Enhanced Structural Adjustment Facility (ESAF) noted with
some puzzlement
Corruption is a major cause and result of poverty around the world, at all levels of
society, from governments, civil society, judiciary functions, military and other services
and so on. The impact of corruption in poor countries on the poorer members of those
societies is even more tragic.

At a global level, as globalisation continues at rapid pace, with promises of prosperity,

the 'international' (Washington Consensus-influenced) economic system that has shaped
this globalisation in the past decades requires further scrutiny for it has also created
conditions whereby corruption can flourish and exacerbate the conditions of people
around the world who already have little say about their own destiny.
A hard thing to measure or compare though is the impact of corruption on poverty issues,
versus those inequalities that are structured into law, such as unequal trade agreements,
structural adjustment policies, and so-called 'free' trade agreements and so on. It is easier
to see corruption. It is harder to see these other more formal, even legal forms of
'corruption'. It is easy to assume that these are not even issues because they are part of the
laws and institutions that govern national and international societies and many of us will
be accustomed to it.
When asking why poor countries are poor, it is quite common to hear, especially in
wealthier countries that are perceived to have minimal corruption (at least domestically)
that other countries are poor because of corruption. Yet, corruption is not something
limited to third world despots. Rich countries and their multinationals too have been
involved in corrupt practices around the world.
Professor Robert Neild from Trinity College, Cambridge University writes in Public
Corruption; The Dark Side of Social Evolution, 'Rich countries and their agencies...
commonly have been and are accomplices in corruption abroad, encouraging it by their
actions rather than impeding it...." (p.209). Specific problems he highlights include:
The impact of Cold War corruption (supporting dictatorships, destabilising
democracies, funding opposition, etc);
Firms from rich countries bribing rulers and officials from developing countries
to gain export contracts, particularly in the arms trade and in construction (even
justifying it by suggesting bribery is 'customary' in those countries, so they need
to do it to, in order to compete);
The 'corruption-inducing effects of the purchase, by the rich countries and their
international corporations, of concessions in Third World countries to exploit
natural deposits of oil, copper, gold, diamonds and the like.' Payments made to
rulers often violate local (and Western) rules, keeping corrupt rulers in power,
who also embezzle a lot of money away.
The drug trade.
Neild suggests that international law and national laws in rich countries that prohibit
drugs may serve to "produce a scarcity value irresistible to producers, smugglers and
dealers." Governments and civil society in the third world are often 'undermined,
sometimes destroyed' by the violence and corruption that goes with the drug trade. "This
is probably the most important way in which the policies of rich countries foster

corruption and violence. Yet the effect on the Third World seems scarcely to enter
discussion of alternative drug policies in the rich countries." Legalising drugs, a system
of taxation and regulation, comparable to that applied to tobacco and alcohol might do
more to reduce corruption in the world than any other measure rich countries could take,
he suggests.
Dr Susan Hawley, writes in Exporting Corruption; Privatisation, Multinationals and
Bribery, that bribery may be pervasive, but it is difficult to detect. Many Western
companies do not dirty their own hands, but instead pay local agents, who get a 10 per
cent or so 'success fee' if a contract goes through and who have access to the necessary
'slush funds' to ensure that it does. Bribery is also increasingly subtle.... Until recently,
bribery was seen as a normal business practice. Many countries including France,
Germany and the UK treated bribes as legitimate business expenses which could be
claimed for tax deduction purposes.
Multinational Corporations and Corruption
Corruption scandals that sometimes make headline news in Western media can often be
worse in developing countries. This is especially the case when it is multinational
companies going into poorer countries to do business. The international business
environment, encouraged by a form of globalisation that is heavily influenced by the
wealthier and more powerful countries in the world makes it easier for multinationals to
make profit and even for a few countries to benefit. However, some policies behind
globalisation appear to encourage and exacerbate corruption. As accountability of
governments and companies have been reduced along the way.
For multinationals, bribery enables companies to gain contracts (particularly for public
works and military equipment) or concessions which they would not otherwise have won,
or to do so on more favourable terms. Every year, Western businesses pay huge amounts
of money in bribes to win friends, influence and contracts. These bribes are
conservatively estimated to run to US$80 billion a year -- roughly the amount that the
UN believes is needed to eradicate global poverty.
Such bribery may be pervasive, but it is difficult to detect. Many Western companies do
not dirty their own hands, but instead pay local agents, who get a 10 per cent or so
'success fee' if a contract goes through and who have access to the necessary 'slush funds'
to ensure that it does. Bribery is also increasingly subtle. It often takes the form of semilegal fees or 'commissions', and inflated or marked-up prices. In contracts guaranteed by
export credit agencies, such 'commissions' are included in the costs and thus in the total
contract value covered by the guarantee. "It is obvious," comments Transparency
International, "that this practice constitutes an indirect encouragement to bribe which, in
future, brings it close to complicity with a criminal offence". Until recently, bribery was
seen as a normal business practice. Many countries including France, Germany and the
UK treated bribes as legitimate business expenses which could be claimed for tax
deduction purposes.

Dr Hawley investigates for multinationals, bribery enables companies to gain contracts

(particularly for public works and military equipment) or concessions which they would
not otherwise have won, or to do so on more favourable terms. Every year, Western
businesses pay huge amounts of money in bribes to win friends, influence and contracts.
These bribes are conservatively estimated to run to US$80 billion a year -- roughly the
amount that the UN believes is needed to eradicate global poverty.
Dr Hawley also lists a number of impacts that multinationals' corrupt practices have on
the 'South' (another term for Third World, or developing countries), including:
They undermine development and exacerbate inequality and poverty.
They disadvantage smaller domestic firms.
They transfer money that could be put towards poverty eradication into the
hands of the rich.
They distort decision-making in favour of projects that benefit the few rather
than the many.
They also
Increase debt;
Benefit the company, not the country;
Bypass local democratic processes;
Damage the environment;
Circumvent legislation; and
Promote weapons sales.

Tackling corruption
What can be done to tackle this problem? Campaigners from around the world, but
particularly the South, have called for a more just, independent, accountable and

transparent process for managing relations between sovereign debtors and their public
and private creditors.
An independent process would have five goals:
To restore some justice to a system in which international creditors play the role
of plaintiff, judge and jury, in their own court of international finance.
To introduce discipline into sovereign lending and borrowing arrangements...
and thereby prevent future crises.
To counter corruption in borrowing and lending, by introducing accountability
through a free press and greater transparency to civil society in both the creditor
and debtor nations.
To strengthen local democratic institutions, by empowering them to challenge
and influence elites.
To encourage greater understanding and economic literacy among citizens, and
thereby empower them to question, challenge and hold their elites to account.
The Bretton Woods Project organisation notes that the World Bank, under pressure of
late, has suspended a number of loans due to concerns of corruption. These include loans
to Chad, Kenya, Congo, India, Bangladesh, Uzbekistan, Yemen, and Argentina. The Bank
has also started internal investigations of Bank corruption. However, "despite high-profile
moves by President Paul Wolfowitz, the root causes of corruption -- underpaid civil
servants, an acceptance of bribery by big business, and dirty money -- remain largely
The Bretton Woods Project adds that the "normalisation of petty corruption in developing
countries has in part been driven by"
IFI conditions
The aid industry for 'overpaying consultants' and turning a blind eye to
corruption in some regimes
The "World Bank's 'pressure to lend' culture where staff are rewarded for the
volume of the portfolio they manage"
The World Bank's slow pace in investigating and disbarring companies found
guilty of corrupt practices such as bribery, fraud or malpractice
Failing to increase transparency of some of its own procedures

The IFI's "central part of an international financial system which has both
actively and tacitly supported the global proliferation of dirty money flows"
including, for example, the financing of various despotic rulers that have siphoned
off a lot of money to personal offshore accounts.
To help address these problems, the Bretton Woods Project suggests a few steps:
Greater transparency of World Bank processes, allowing greater visibility for
elected officials and civil society in recipient countries;
Strengthening internal mechanisms within the Bank itself, to monitor integrity
of Bank functions, and allow truly independent audits of Bank operations;
Minimum standards in governance, transparency and human rights that must be
fulfilled before approving oil, gas and mining projects in institutionally weak
Not always tying loans with economic policy conditions in such a way that some
governments surrender their policy-making space.
But it is hard to see how the international economic agencies and their member
governments can introduce incentives that would cause corrupt rulers to attack
corruption... Not only are the rich countries and their agencies in this respect impotent,
they commonly have been and are accomplices in corruption abroad, encouraging it by
their action rather than impeding it.

War Profiteers8

The article was published in 2007 in daily English newspaper The NEWS.

A perspective in Global Economy

Corrupt governments are working in tandem with corporations in order to meet their
various political and economic agendas.
Bertrand Russell in Roads to Freedom writes If a man is offered a fact which goes
against his instincts, he will scrutinize it closely, and unless the evidence is
overwhelming, he will refuse to believe it. In recent years miltiry speanding has divert
valuable economic means in a dangrous direction which may satisfy the instincts of few
warmongers but a vast majority of the world is asking for overwhelming evidence.
Global military expenditure and arms trade form the largest spending in the world at over
1 trillion dollars in annual expenditure and has been rising in recent years, close to Cold
War levels. As world trade globalizes, so does the trade in arms. In order to make up for
lack of domestic sales, newer markets must be created. USA, Russia, France and Britain
do the largest businesses of arms trade in the world. Sometimes, these arms sales are
made secretly and sometimes knowingly to human rights violators, military dictatorships
and corrupt governments. And this does not promote democracy in those nations.

(1991 figures are unavailable.)

Summarizing some key details of the Stockholm International Peace Research Institute
(SPIRI)s 2006 Year Book on Armaments, Disarmament and International Security.

World military expenditure in 2005 is estimated to have reached $1,001 billion at

constant (2003) prices and exchange rates, or $1,118 billion in current dollars.
This corresponds to 2.5 per cent of world GDP or an average spending of $173
per capita.
World military expenditure in 2005 presents a real terms increase of 3.4 per cent
since 2004, and of 34 per cent over the 10-year period 19962005.
The USA, responsible for about 80 per cent of the increase in 2005, is the
principal determinant of the current world trend, and its military expenditure now
accounts for almost half of the world total.
SIPRI also comments on the increasing concentration of military expenditure, i.e. that a
small number of countries spend the largest sums:
The 15 countries with the highest spending account for 84 per cent of the total;
The USA is responsible for 48 per cent of the world total, distantly followed by
the UK, France, Japan and China with 45 per cent each.
Another organization, the Center for Arms Control and Non-Proliferation, provides
similar date (tabulated further below), showing the breakdown of spending by
A summary pie chart shows the following:

High and rising world market prices of minerals and fossil fuels is also a factor that has
aided the upward trend in military expenditure, says SIPRI. For example, Algeria,
Azerbaijan, Russia and Saudi Arabia have been able to increase spending because of
increased oil and gas revenues, while Chile and Perus increases are resource-driven,

because their military spending is linked by law to profits from the exploitation of key
natural resources.
Also, China and India, the worlds two emerging economic powers, are demonstrating a
sustained increase in their military expenditure and contribute to the growth in world
military spending. In absolute terms their current spending is only a fraction of the
USAs. Their increases are largely commensurate with their economic growth.
SIPRIs data also shows that while in raw dollar amounts some nations are increasing
spending at large amounts, their percentage increases may vary:

The United Nation which was created after World War II with leading efforts by the
United States and key allies and was set up to be committed to preserving peace through
international cooperation and collective security. And if we compare the military
spending with the entire budget of the United Nations. we will be surprised to know that
the United Nations and all its agencies and funds spend about $20 billion each year, the
UNs entire budget is just a tiny fraction of the worlds military expenditure,
approximately 2%. Yet for nearly two decades, the UN has faced a financial difficulties
and it has been forced to cut back on important programs in all areas. Many member
states have not paid their full dues and have cut their donations to the UNs voluntary
funds. As of October 31, 2006, members arrears to the Regular Budget topped $661
million, of which the United States alone owed $526 million (80% of the regular budget
It seems ironic that the world spends more on things to destroy each other (military) and
to destroy ourselves (drugs, alcohol and cigarettes) than on anything else.

U.S. Military Spending

The United States, being the most formidable military power, it is worth looking at their

Generally, the US military spending has been on the increase, of course since the 2001
September 11 terrorist attacks, but also before that:

This table further details the military expenditure each year, and is compared at constant
2007 prices:
$ Billions
At 2007 prices
Change from previous year (%)


$ Billions

At 2007 prices

Change from previous year (%)


For data up to 2005, Chris Hellman, The Runaway Military Budget: An Analysis, Friends
Committee on National Legislation, March 2006, no. 705, p. 3
For 2006, 41% of Your 2006 [US] Taxes go to War, Friends Committee on National
Legislation, February 15, 2007
For 2007 and 2008, Highlights of the Fiscal Year 2007 Pentagon Spending Request and
Highlights of the Fiscal Year 2008 Pentagon Spending Request, both from the Center for
Arms Control and Non Proliferation.
1998-2006 includes Department of Defense spending, Department of Energys nuclear
weapons program, the costs of the wars in Afghanistan and Iraq, and other items (i.e.
military spending by other agencies, foreign military financing and training, mandatory
contributions to military retirement and healthcare).
2007 and 2008 do not include other items.
Congress has already approved over $500 billion in supplemental funding for operations
in Iraq and Afghanistan. Fiscal Year 2008s budget request includes a supplemental $141.7
billion to cover Iraq and Afghanistan operations. 2007s was $93.4 billion. (See Center for
Arms Control and Non Proliferation source mentioned above.)
2007 constant prices calculated using Federal Reserve Bank of Minneapolis Consumer
Price Index Calculator
Compared to the rest of the world, these numbers are indeed staggering.

U.S. Military Spending Versus Rest of the World

While FY 2008 budget requests for US military spending are known, for most other
countries, the most recent data is from 2005 (at time of writing). Using US spending at
that time, we can compare US military spending with the rest of the world:

The US military spending was almost two-fifths of the total.

The US military spending was almost 7 times larger than the Chinese budget, the
second largest spender.
The US military budget was almost 29 times as large as the combined spending of
the six rogue states (Cuba, Iran, Libya, North Korea, Sudan and Syria) who
spent $14.65 billion.
It was more than the combined spending of the next 14 nations.
The United States and its close allies accounted for some two thirds to threequarters of all military spending, depending on who you count as close allies
(typically NATO countries, Australia, Canada, Israel, Japan and South Korea)
The six potential enemies, Russia, and China together spent $139 billion, 30%
of the U.S. military budget.
Tabulated data is as follows:

Military spending in 2005 ($ Billions, and percent of total)

Dollars (billions)
% of total

United States
China *
Russia *
United Kingdom
South Korea
North Korea*




Source: U.S. Military Spending vs. the World, Center for Arms Control and NonProliferation, February 5, 2007

Figures are for latest year available, usually 2005. Expenditures are used in a few cases
where official budgets are significantly lower than actual spending.
* 2004 Figure.
Source uses FY 2008 for US figure (and includes Iraq and Afghan spending). I have used
2005 to try and keep in line with other countries listed (but I have NOT included the Iraq

and Afghan operations cost which would be another $75 billion. Other items as described
above are not included either. If they are included, the gulf between US spending and
others might be even wider). Due to rounding, some percentages may appear as zero.
Generally, compared to Cold War levels, the amount of military spending and expenditure
in most nations has been reduced. For example, global military spending declined from
$1.2 trillion in 1985 to $809 billion in 1998, though in 2005 has risen to almost one
trillion. The United States spending, up to 2007 requests was reduced compared to the
Cold War era, though still close to Cold War levels.
Supporters of Americas high military expenditure often argue that using raw dollars is
not a fair measure, but that instead it should be per capita or as percentage of Gross
Domestic Product (GDP), and even then the spending numbers miss out the fact that US
provides global stability with its high spending and allows other nations to avoid such
high spending. In regards to the high spending allowing other nations to spend less, that
is often part of a supportive theory of the global hegemony being good for the world.
Granted, other nations in such a position would likely want to be able to dominate as
much of the world as possible, as past empires have throughout history.
However, whether this global hegemony and stability actually means positive stability,
peace and prosperity for the entire world (or most of it) is subjective. That is, certainly
the hegemony at the time, and its allies would benefit from the stability, relative peace
and prosperity for themselves, but often ignored in this is whether the policies pursued
for their advantages breeds contempt elsewhere (in the modern era that may equate to
anti-Americanism, resorting to terrorism and other forms of hatred.) unfortunately
more powerful countries have also pursued policies that have contributed to more
poverty, and at times even overthrown fledgling democracies in favor of dictatorships or
more malleable democracies.
So the global good hegemony theory may help justify high spending and even stability
for a number of other countries, but it does not necessarily apply to the whole world. To
be fair, this criticism can also be a bit simplistic especially if an empire finds itself against
a competitor with similar ambitions, that risks polarizing the world, and answers are
likely difficult to find.
In this new era, traditional military threats to the USA are fairly remote. All of their
enemies, former enemies and even allies do not pose a military threat to the United
States. For a while now, critics of large military spending have pointed out that most
likely forms of threat to the United States would be through terrorist actions, rather than
conventional warfare, and that the spending is still geared towards Cold War-type
scenarios and other such conventional confrontations.
Many studies and polls show that military spending is one of the last things on the minds
of American people. But it is not just the U.S. military spending. In fact, as Jan Oberg
argues western militarism often overlaps with civilian functions affecting attitudes to
militarism in general.

Arms Sales By Supplier Nations

Arms sales (agreements) ranked by Supplier, 1998-2005 (in constant 2005 million US
Dollars and percentage of world sales).
Percentage of total
Total Dollars
United States

out of

out of 41,600
out of 30,000
out of 17,000
United Kingdom
out of 14,900
out of 9,100
out of 5,600
Other European
out of 33,800
out of 17,300


Source: Conventional Arms Transfers to Developing Nations, 1998-2005, Report for

Congress, U.S. Congressional Research Service, Library of Congress, October 23, 2006.
(Dollar values are constant 2005 dollars)
Each country shown as follows:

developing countries
industrialized countries

Permanent UN Security Council members USA, UK, France, Russia, and China
dominate the world trade in arms and they are top five countries profiting from the arms
trade. While international attention is focused on the need to control weapons of mass
destruction, the trade in conventional weapons continues to operate in a legal and moral

Arms Sales Trends 1998-2005

Arms Transfer Agreements Worldwide, 1998-2005, Developed and Developing Worlds
Compared (in constant 2005 million US Dollars and percentage of total sales in that

Total Dollars

Percentage of total

Arms Transfer Agreements Worldwide, 1998-2005, Developed and Developing Worlds

Compared (in constant 2005 million US Dollars and percentage of total sales in that

Total Dollars
out of $35,861
out of $41,823
out of $36,320
out of $34,843
out of $31,657
out of $29,250
out of $40,207
out of $44,158

Percentage of total

Source: Conventional Arms Transfers to Developing Nations, 1998-2005, Report for

Congress, U.S. Congressional Research Service, Library of Congress, October 23, 2006.
(Dollar values are constant 2005 dollars)
Each year shown as follows:

developing countries
industrialized countries

Here we can see that Developing nations are top recipients. And these nations continue to
be the primary focus of foreign arms sales activity by weapons suppliers with roughly
two thirds, or $30.2 billion dollars, in arms transfer agreements in 2005 alone (the highest
for the entire 1998-2005 period).
The top ten developing nation recipients of arms sales accounted for just over two-thirds
of the total developing nations arms market, and there is continued concentration of
major arms purchases by developing nations among a few countries. These countries
were mostly Asian or from the Near East (or Middle East).
This is a true picture which clearly shows that to satisfy the destructive instincts of few
warmongers and on the name of R&D, actual words for military purpose should be
DR&D, Destructive Research and Development, a big portion of the worlds GDP, is
thrown in these destructive activities. And with the arms trade, corrupt governments and
corporations are cooperating to meet their different political and economic agendas.



The article was published in the magazine Money Plus of daily English newspaper The NATION.

A review in the context of Global Financial Crisis

Much have been written and debated that capitalism and democracy both work together
and for the existence of capitalism, democracy must prevails in the society. But current
global financial crisis tells us a different story. Now this is an uncomfortable truth that
democracy and free markets are incompatible. The main point of democratic government
is that it uses the legitimacy of democratic mandate to diffuse power throughout society
rather than allow it to accumulateas any player of monopoly understandsin just a
few hands. It forcefully uses the political power of the majority to offset what would
otherwise be the overwhelming economic power of the dominant market players.
The dominance is reflected those who believe that governments should be kept away
from the levers of power and a very tiny minority of greedy capitalist who control and
benefit most from the economic progress and considered themselves the only people
competent to direct it.
The global economic crises started in the middle of 2007. Financial Tragedy was started
with the collapse of the US sub-prime mortgage, other industrialized countries have
ripple effect around the world and complex financial products added fuel in this crisis.
World stock markets and financial institutions are suffering and being bought out. Life of
every common person is being affected either living in west or in the east. Many people
have this view that responsible are being bailed out. In the mean while poorer and smaller
businesses people rarely have this option for bail out when they find themselves in crisis.
It is important to notice during Asian financial crisis in 1990s when Asian Nations were
affected by short selling, hedge funds and other financial insolvent institutions in
currency speculation. Currencies were being attacked through short selling and the rates
of local currencies were brought far below than their real economic values. That time
their complaints were not heard by the western governments and their created
International Financial Institutions rather they were blamed it on their financial
Controversial and unpopular bailout package was passed to support the US financial
system. US public seen it as a bailout for the culprits and a common person was left to
pay for their folly.
Joseph Stiglitz a well known economist narrates bailout package in these words. It is a
disappointment but no surprise that the administration came up with a bill that is again
based on trickle down economies. You throw enough money at Wall Street and some of it
will trickle down to the rest of economy. It is like a patient suffering from a massive
blood transfusion while there is internal bleeding.
He further added Americans have lost faith in its economic philosophy a new corporate
welfarism masquerading behind free-market ideology. Wall street has polluted our
economy with its toxic mortgages it should pay now for its cleanup.

The political philosopher John Gray a former professor at the London School of
Economics expressed his views in these words, The era of American global leadership,
reaching back to the Second World War is over. The American free-market creed has
self-destructed while courtiers that retained overall control of markets have been
Almost half or more of population of the world is facing daily crisis of poverty, financial,
educational and inequality. International media hardly pay attention to these problems but
this financial crisis is fully highlighted which predominantly affects the wealthy class.
Global food crisis never get such coverage in the media of developed countries.
Following diagram shows a harsh reality that worlds poorest consume only 1.5% of the
total production of the world.

The gap between rich and poor is widening day by day and modern researches show that
over the last thirty years, inequalities among nations and within nations has increased
following diagram depict this gap.

Developing countries have seen these moves that how military and Banks get money
easily. World military spending of $ 1.473 Trillion is going in few accounts those belong
to Arms Factories and $700 billion bailout in US and billions by other countries have
solid reasons but crippling third world debt has no solid reasons to be bailed out. Debt
write off plan was announced a $40 billion by developed countries but hardly $18 billion
is written off. Third world countries are always blamed by their inefficient people and
economic mismanagement but no body points out corrupt dictators(either from military
or selected /elected by so called democratic system) had come to power with the support
of western governments and their IFIs; IMF and World bank.

Poverty is increasing even in the developed countries, rich are getting richer and poor are
crossing even minimum $1 definition of poverty.

Many economist and political thinkers are raising this point that this financial crisis could
have been averted but to suggest would be blamed with the titles of socialists and anticapitalists. Some authentic voices are pointing that the most extreme form of capitalism
can also lead to the bigger bubbles and the bigger busts.
It has been observed that American based Global financial system failed in its
responsibilities while managing risk and allocating capital. And many of the failed
elements of the US financial system were imposed to the entire world by its backed IFIs.
Thus triumph of global free market over the last three decades has been a political
John Maynard Keynes, the father of neoliberal economics suggested interventionist form
of government to mitigate against the worst effects of cycles of recessions. After World
War II until 1970s, his ideas were followed globally but the Ronald Regan in US and
Margaret Thatcher in England changed economic rules for world and again economic
liberalism was imposed through IMF and Word Bank which is now collapsed after
serving the Economic Elites of the world for three decades.
Now again world is looking for new system to run the economy of the world. Fascinating
economic theories invented in top universities by genius brains are failed to serve the
humanity or even to the people of the west.
Neoliberal fundamental problem one-size-fits-all is not working but still these current
economic ideologies are influential and so vocal which will definitely lead the world to

another financial crisis after some years. Now this is time to change the fundamentals of
world economy. West should give a chance to Islamic Financial System to serve the
world. But this chance should be in a complete form.

Architectures of New Global Financial System10

It is now proven the legacy created by Alan Greenspan former head of Federal Reserve of
USA and a key person of Global Financial System over the last two decades is now
collapsed. But how this is possible for west to accept the failure of Capitalism. At one
side they are making to hide this financial disaster that created huge unemployment, high
inflation and economic slow down. This all exposed a flawed economic system. But west
is still insisted that Capitalism can run the economy of this world and now they are busy
to architect a new Global Financial System. Global policy-givers have already begun to
formulate the framework in November 2008 at the summit of G20 and now this is at its
final stage and by March 31, 2009 these rules will be implemented. These are key
features of this forthcoming system.
An interventionist regulatory framework will be established which will perform these


Strengthening transparency and accountability which will enhance disclosure on

complex financial products and align incentives to avoid excessive risk-taking,
further guidance for liquid securities will be given

Enhancing sound regulation those will strength regularity regimes which will
review pro-cyclicality including the ways that valuation, leverage bank capital,
executive compensation and loss provisioning exacerbate cyclicality. Minimizing
conflicts between rating agencies and enhancing international standards,
implementing central counterparty services quickly and efficiently and
maintaining adequate capital. Re-examining bank risk management is very
essential, particularly liquidity and counterparty risks, stress testing, incentive
alignment and development of structured products.

Prop up integrity in the financial markets that will stimulate regional/international

regulatory cooperation. Endorse information sharing on threats to market stability,
ensure legal provisions to address threats. Further it will review business conduct
rules to protect markets and investors against market manipulation and fraud

Reinforcing international cooperation by this way make global regulations which

will set up decision-making colleges for all major cross-border financial
institutions to strengthen supervision. Further strengthen the crisis management
measures and conduct recreation exercises

The article was published in the magazine Money Plus of daily English newspaper The NATION.

Reforming international financial institutions which will advance the reform of

Bretton Woods institutions to reflect changing economic weight. In financial
stability forum there will be addition of emerging economies which will
strengthen IMF and FSF collaboration on surveillance and standard setting.
Adequate resources of development banks, restoring access to credit and
resuming private capital flows to emerging economies must be reviewed.

The next point is back to basics in banking. It has been observed in the years leading up
to the crisis financial institutions moved away from their roots and worked as mediator by
which they provide corporate finance, advisory, brokerage and asset management
services to their customers. And in post-crisis scenario now they will to orient their
strategies towards their core competencies that prioritize client business over ring-fenced
propriety trading activities.
On the equity side banks will continue to focus on closing the gap between write-downs
and raised capital. Towards the asset side banks will mange to increase the portion of
short-term instruments, and on the liability side they will manage to reduce their liance
on wholesale funding by attracting deposits. If we look at the overall global capital raised
since the beginning of the crisis remains less than total write-down which is shown in the

To avoid liquidity crisis banks will be forced to take following measures:

An improvement in liquidity rations by raising cash and other short-term

Segregation of liquidity assets by enhancing liquidity portfolios which will be
matched short-term liquidity gaps.

A tougher stress tests will be conducted about the survival poof a bank through
mock liquidity drills
Early warning will be issued to develop a tight monitoring like credit default swap
(CDS) spread and by lowering rating
Escalation procedure will be developed for unforeseen events like extensions of
deposit and sponge maturities

In the Pre-crisis scenario five independent global investment banks like Bear Stearns,
Lehman Brothers, Merrill Lynch, Morgan Stanley and Goldman Sachs relied heavily on
(repos) repurchase agreement which is a form of short-term secured lending to finance
longer term assets details are shown in the figure.

Facing losses of nearly US$ 1 trillion by the end of 2008, global commercial and local
banks are revising their vision. Now they are focusing on their core competitive
advantage. In this regard at least five most important modules are likely to emerge that
sway one or more core competencies and decrease the amount of overlie in global
1. Scale globals will expected to be part of a small, super class of global liquidity
providers. They will use their deposit-funded, fortress-like balance sheets, global
footprint and trading communications to maintain or become major liquidity providers
across markets and asset classes. Many of them will be universal banks, and will grow
retail deposits and high net worth accounts to stabilize their funding sources, but will
reduce the amount of ring-fenced proprietary trading.

2. Focused regionals will likely start again to regional franchises. They will noticeably
reduce their capital assurance and balance sheets, will pick businesses where they
identify a regional advantage, and will take out corporate and commercial cross-sell
synergies to control mid-sized corporate and government advisory and financing consent.
They will build secondary trading operations to support their advisory and primary
issuance businesses and support small international teams that can help consortium issues
globally. As regional specialists, they may connect in a limited amount of proprietary
trading where they have an informational advantage.
3. Private banks will recommit to their retail, small business and high net worth client
franchises. Like scale globals, they will stress deposit funding, but like focused regionals,
they will considerably de-risk their trading businesses and seek to remove cross-sell
synergies for other banking products. They will maintain some presence in secondary
markets to smooth the progress of client transactions.
4. Merchant banks may come forward and gain share in advisory and corporate finance
as a greater number of institutions focus on domestic and retail markets and the scale
globals look to serve only the largest international clients.
5. Alpha risk takers, such as hedge funds and private equity firms, may more and more
act as market makers on instruments where spreads have widened or arbitrage
opportunities are present. Hedge funds with trading infrastructure are likely to move into
select high-margin sell-side businesses (e.g. fixed income, credit, corporate finance).
Private equity firms with established track records of aligning the interests of general and
limited partners will be best located to attract fresh capital to invest in illiquid markets.

Potential near-term losers and winners




Banks with significant

exposure to toxic assets.
Re-regulated utility
banks that did not
streamline costs to adapt to
a new, low growth

Deposit-rich universal banks

that can extract group
Regional banks that can
quickly refocus on their core
value proposition.
Boutique investment banks
and merchant banks that
gain share from former
global bulge bracket
Non-banks that can attract
principal investing and
proprietary trading talent

investment firms

Highly-levered hedge
funds with monocline
Hedge funds that have
failed to deliver expected
Open-ended fund
2006-2007 vintage PE
Less established mid-tier
private equity and hedge
funds being punished by
flight to quality

Insurance Provider

Those exposed to
deteriorating credit
markets, particularly MBS
and CRE loans.
Those exposed to equity
market declines.
Those with significant
securities lending
operations or who are
otherwise vulnerable to
liquidity constraints.
P&C providers facing large
professional liability

Top performing funds with

proven track records
profiting from flight to
Funds with longer lock-up
periods or closed-end fund
Scalable beta indexation
Emerging new beta
Beneficiaries of government
stimulus packages (e.g.
PE funds with strong
operational value creation
Unconstrained investors,
such as sovereign funds and
family offices
Capital-rich insurers that
acquire businesses with a
strategic fit (domestic scale,
regional expansion,
Innovators of new
retirement products

Stakeholder Loser Winner

Above analysis points to a new set of near-term winners and losers. The former will
primarily be those who entered the crisis with low financial influence, slackening their
transition to a deleveraged world, have supple liquidity arrangements and can capitalize
on consolidation opportunities that give them scale and enlarge their reach
The latter are likely to be those that had high experience to acclaim, counterparty, market
and liquidity risk, or who were laden with lessen assets, or who were required to liquidate
assets at multi-year lows. Winners will emerge from all sectors, as will losers.

Going ahead, winners will be distinct more by their business strategies than by their
responses to the financial crisis. Therefore, a vigorous long-term analysis is required to
evaluate the driving forces that are certain to shape the future of the financial system.

Darwinism Finance to Islamic Finance11

We were taught in our classes of Management Sciences that ethics in business is a key to
your success, but in practical world for the last many years I am observing the opposite of
this. This is a dichotomy of entrepreneurship that they expect all sorts of ethics from their
subordinates but this rule does not apply on them.
Darwinism Finance may seem a strange word in Financial World but recent Global
Financial Crisis portrays the suitability of this new term. The basic concept is fittest
survival; strong overcoming the weak. Darwinist concept is justified by the survival of
the strongest financial institutions in the market, and we have seen examples in recent
months. Societies under the sway of a Darwinist state of mind are constantly dominated
by mass slaughter, murder, terror and disorder, insecurity and tension. Under the
consequence of Darwinism, eradicate the weak has been seen as essential in order to
maintain the equilibrium in nature, which is why communist, fascist and now capitalists
societies have had no doubts about mass murder. Social Darwinism constituted the
utmost intellectual groundwork for communists such as Marx, Lenin and Mao, for
fascists Mussolini and Hitler and for capitalism Feidrich Hayek, Milton Friedman,
Francis Fukuyama and the last two decades were dominated by Alan Greenspan.
No one can deny the moral corruption which is an integral part of todays Corporate
Culture has now fully exposed. In my point of view now the world is facing two types of
crisis, one is Global Financial Crisis and another is Global Spiritual Crisis. Because when
societies have only concerns with their material needs and spiritual needs are forgotten
they definitely visage such situations.
Top academia and dominant financial circles of the world like Harvard and World
Economic Forum are setting new direction to run the financial matters but indirectly they
are also trying to bring some ethics in this new direction. Now they look ready to listen
and give some space to Islamic Finance. Now Islamic Finance Industry is getting more
attention into ever-deepening gloom of global financial industry.
For the past four decades Islamic financial institutions have proved themselves on solid
grounds and this system is now a full fledged realities rather then a mere concepts.
Ethical and risk-sharing approach of Islamic Finance is attracting not only 1.6 billions
Muslims of the world but a lot of others who are discovering Islamic as a complete
In 2008 Top Islamic Financial Institutions (TIFI) have shown healthy size and strong
growth of sharia-complaint assets (SCAs), the number of firms reporting shariacomplaint assets rose by 57 to 280 this year and the number of registered institutions are
reaching 614 this year compared with 524 last year. The growth of new Islamic

The article was published in the magazine Money Plus of daily English newspaper The NATION.

investment bank such as Noor Islamic Bank in Dubai and Al Hilal Bank in Abu Dhabi are
providing huge capital basis. Gulf and London are key locations of Islamic Finance.

Growth of Islamic Banking

The rise in SCAs demand in the last few years is not contained within the Muslim
countries, but other institutions like European Finance House, Absa Islamic Banking (a
subsidiary of Barclays), Gatehouse Bank, Europe Arab Bank, European Islamic
Investment Bank and HSBC Amanah (Arabic meaning deposit in trust) the Islamic
subsidiary of global giant HSBC has shown a significant rise of 56.2% in SCAs.

Example of New Islamic Banks

The penetration of Islamic Banking is growing on the back of a number of institutions in

traditional markets.
Selected New Islamic Banks (excluding banks with Islamic Windows)

Muhammad Amin, UK head of Islamic finance at PricewaterhouseCoopers, says I am

aware of several UK companies, which would otherwise borrow conventionally, who are
talking to Islamic banks regarding funding. The credit crunch has had much less impact
on Islamic banks ability to lend compared with conventional banks.
Douglas Johnson, CEO of New York-based Calyx Financial The rise of Islamic banking
may indeed be one of the most important developments in global financial services this
decade. Islamic financial institutions help to integrate and expand worldwide economic
development, which is never a zero-sum game.
In 2008 Top 500 market of Islamic institutions contributed $639.1 bn. Institutions from
Gulf Co-operation Council (GCC) Bahrain, Kuwait, Oman, Saudi Arabia and the
United Arab Emirates grew by 47.5% to reach $262.7 bn. And the Middle East and North
Africa (MENA) rising by 40.4% to reach US $ 248.3 bn. This is 80% of the total Islamic
Top 500 market. Malaysian market grew by 32.3% to reach US $ 67.1 bn, and The

Europe/Australia/ America expanded by 60.6% to reach 5.4% of the total market, here
HSBC Amanah has more contribution.
Islamic Economists are expecting Sharia-compliant assts, SCAs to grow with the same
pace of 30% but even if we make this 25% for 2009 the sum would be $800 bn and
$1000 bn in 2010.
Loyalty must be earned not bought, this is essence of Islamic finance, and by creating
loyality of customers one gets the turust and Islamic Finace is getting complete turut of
customers. Trust is valued by customers in three ways:

the faithfulness of trnascation (providing guarantey of a transcation)

the quality of the transcation (a transcation must be satisfactory as per Muslim
the execution of a transcation at a competitive cost (normaly Muslim customers
compare the results with conventionally banks)

Innovation experiementation, branh opening, lifestyle product and services tailored to

specific market segments are key for their growth. Exaples of few are SME financing,
services specific for women, Visa credit, debit cards, mobile banking and 24/7 banches.

Sukuk started as a recognized Islamic financial instrument about nine years ago. The
$100m Bahrain sovereign issue in 2001, and two Malaysian international issues, the
$600m sovereign benchmark and Guthrie $150 m corporate issues in 2001-2002, led the
global sukuk market development. As shown below, total issues through June 2008,
including Malaysian domestic exceeded $111 billion.

Islamic mutual funds at present represent one of the best ever growing sectors within the
Islamic financial industry. As Sharia supervision is an essential part of the industry, its
place in relation to Islamic mutual funds is undoubtedly no less important. Predominantly
now, with the opening of the retail markets to middle class Muslim investors, Islamic
mutual funds discover themselves if not in direct competition, then at least subject to
direct contrast with the host of conservative mutual funds accessible to consumers. Today,
funds offer all modes of services to investors, from fundamental office space on their
websites, to real time performance updates, to standard reports, to the ability to customize
a portfolio by using a pin number and selecting new fund options online or over an
automated phone system! In short, the mutual fund industry has progressed from its early
stages as almost a congested sort of country club process that catered to financial elite.

Number of Islamic Mutual Funds

At the end we can safley say that Islamic Finance has ability and resource to fill the gap
which is created by the western capitalist system, which is based on fittest survival.
Islamic Financial System gives equal rights to the poor to survive.

Now faith is driving finance12

How Islamic Fund Industry is rising
The modern Islamic fund management industry was born in the 1970s, when a new class
of Arab investors, rich from oil profits and celebrating the 15th century of the Islamic
calendar (Hijra) in 1976, sought a culturally-aware alternative to the "profit at all costs"
mentality of western investing, particularly in interest-dealings. The industry has been
growing ever since: Islamic banking is active in 75 countries and is growing at 15%
globally, with an estimated $1 trillion waiting to be managed.
The primary characteristic that distinguishes Islamic fund management from
conventional investing is its compliance with Shariah law. Fund managers who are
Shariah compliant must adhere to moral economic activity and invest only in companies
that have an ethical purpose. In addition, the investors cannot deal with conventional
banks that trade in fixed rate interest, or Riba, but instead would depend on Ijara, an
Islamic method of financing. Investments must also be screened for companies that trade
items restricted in Islamic laws, such as alcohol, tobacco, pork, gambling or pornography.
While limiting investment strategy might seem a hindrance, there are advantages to this
"ethical" investing. For instance, Islamic funds were little affected by the scandals
afflicting companies such as Enron and WorldCom several years ago, as these companies'
highly leveraged balance sheets restricted Shariah funds from buying them. In fact, some
conventional managers have adopted Shariah law for strategic purposes.
Today, there are over 250 Islamic financial institutions with assets around $230 billion.
However, the vast wealth of Islamic funds under management is not well-diversified;
Saudi Arabia controls 70% of all assets under management. The primary fund
management companies that cater to these investors are Citibank (Saudi American Bank),
HSBC (Saudi British Bank/Al Amanah), Al Rahji and Al Ahli. Outside the Muslim world,
London is the world's hub of Islamic banking activity; however, its banks offer few retail
products to the Muslim community.


The article was published in the magazine Money Plus of daily English newspaper The NATION.

In Southeast Asia, Malaysia is the aggressive force, holding 9% of Muslim finances.

Reciprocally, Islamic banking comprises 10% of Malaysian finances. With a dominant
force like Saudi Arabia in the mix, Malaysia's goal of being the number one player in the
Islamic fund industry remains a daunting challenge. However, with industry liberalisation
following the 9-11 attacks, its efforts to woo rich Saudis have given it a decisive regional
One of the key factors towards propelling Islamic investment management into the
mainstream is to acquire non-Muslim funds and clients, a trend which has already
materialised in Malaysia: 70% of Malaysia's Islamic banking customers are Chinese.
However, this trend may owe more to the distribution of wealth in Malaysia than to
demographic preferences. Singapore also intends to throw its hat into the ring, according
to the MAS' new chairman, Goh Chok Tong (Singapore's ex Prime Minister), who plans
to attract more Islamic businesses to the country. In addition, OCBC, DBS and UOB Singapore's three principal banks - which manage Islamic funds, are exploring
opportunities in Malaysia and, to a lesser extent, the Middle East.

The world of Islamic finance extends far beyond basic fund management, particularly in
Sukuk (Islamic bonds) and hedge funds. In fact, the first Shariah-compliant hedge fund the Shariah Equity Opportunity Fund - was launched on October 10 in the Gulf, although
the Shariah restrictions reduce its risk and speculative structure. Given the recent surges
in oil prices, private wealth in the Middle East is expanding at unprecedented rates, and
currently stands at about $1.5 trillion, much of which is more inclined to invest
domestically, as long as there is supporting infrastructure. To the victor who can
capitalise on these investment opportunities, the spoils will undoubtedly be tremendous.
In Pakistan Islamic Income / Money Market funds, Meezan Cash Fund (MCF) recorded
the largest increase in fund size, of 24.28% from PRs1.14bn in August09 to PRs1.42bn
in September09. Within the same category of funds, KASB Islamic Income Fund (KIIF)
provided the highest monthly return of 15.86% while United Islamic Income Fund (UIIF)
provided the highest annualized return of 12.07% for FY10.
For Islamic Equity Funds, Meezan Islamic Income Fund (MIIF) recorded the largest
increase in both, its fund size and annualized return. While the fund size increased by
9.49%, the annualized return was 28.12%. UTP-Islamic Fund (UTPISFs) monthly return

performance was highest amongst its peers at 6.86%. While Alfalah GHP Islamic Fund
(AFISF) displayed the highest increase in its fund size within the Islamic Asset
Allocation Funds Category by increasing from PRs0.40bn to PRs0.42bn on M-o-M basis,
United Comp. Isl. Fund (UCIF) outperformed its peers in both, the monthly returns and
annualized return with returns of 5.00% and 19.79% respectively.

Impact of Terrorism on Worlds Economy13

Terrorism has shaken the world economy badly. Now its over a decade we have seen
terrorism in diverse forms like state terrorism (American so-called war on terrorism) and
Economic terrorism. IMF defines Financial terrorism in this way Financial institutions
could be involved in financial crime as victim, as perpetrator, or as instrumentality:
financial institutions can be subject to different types of fraud or abuse; they can directly
commit financial crimes; or they can be used by third parties to commit crime. There
are109 available different definitions of terrorism, which are obtained in a survey of
leading academics in the field. In all these definitions the following words appear most
often: violence and force (83:5%); political (65%); fear, emphasis on terror (51%); threats
(47%); psychological effects and anticipated reactions (41:5%); discrepancy between the
targets and the victims (37:5%); intentional, planned, systematic organized action (32%);
methods of combat, strategy, tactics (30:5%). Anyhow there is no exact definition of
terrorism. And if in the one perspective a country or a group is labeled of terrorists, from
another perspective they are given the labels of heroes. This complex phenomenon is yet
to be decided which will take a long time. Here I am only concerned with the impact of
terrorism on the world economy.
In recent years, terrorism has shown new prototypes, shifting increasingly from military
targets to civilian targets, including individuals and business activities. Terrorist attacks
pretentious both the national and the global economy. The economic cost can be largely
broken down into short-term direct effects; medium-term confidence effects and longerterm productivity effects.
The direct economic costs of terrorism, including the destruction of life and property,
responses to the emergency, restoration of the systems and the infrastructure affected, and
the provision of temporary living assistance, are most pronounced in the immediate
aftermath of the attacks and thus matter more in the short run. Direct economic costs are
likely to be proportionate to the intensity of the attacks and the size and the
characteristics of the economy affected. While the 11 September attacks on the United
States caused major activity disruption, the direct economic damage was relatively small
in relation to the size of the economy. The direct costs resulting from the terrorist attacks
were estimated by the Organization for Economic Co-operation and Development at
$27.2 billion ($14 billion for the private sector, $1.5 billion for the state and local
government enterprises, $0.7 billion for the US federal government, and $11 billion for
rescue and clean-up operations), which represented only about 1/4 percent of the US
annual GDP.
The indirect costs of terrorism can be important and have the potential to influence the
economy in the medium term by discouragement consumer and investor confidence. A
deterioration of confidence associated with an attack can reduce the incentive to spend as

The article was published in 2006 in the magazine Money Plus of daily English newspaper The

opposed to save, a process that can spread through the economy and the rest of the world
through usual business cycle and trade channels. Likewise, falling investor selfconfidence may trigger a generalized drop in asset prices and a flight to quality that
increases the borrowing costs for riskier borrowers. The size and allocation of the effects
over countries, sectors, and time would depend on a range of factors, including the nature
of the attacks, the multi-layered effects, the type of policies adopted in response to the
attacks, and the resilience of the markets

Here I will continue this topic under different segment of the economy.

1- Financial markets
Financial markets have been directly and indirectly the wounded of terrorist attacks.
Striking at the core of the world's main financial center, the terrorist attacks of 11
September aimed at undermining the stability of international financial system. In the
aftermath of the attacks, the financial markets were not only confronted with major
activity disruptions caused by the massive damage to property and communication
systems, but also with soaring levels of uncertainty and market volatility.
The bang on financial markets is usually widely discussed in the media. Stock prices are
a potentially informative measure of the economic damage of terrorism. Stock prices
reflect predictable future gains of a company, as well as the likelihood that these expected
gains materialize. Terrorist attacks influence both:

Expected profits are lower if security measures increase the costs of

production and doing business, and if consumers fear reduces demand, like in
the airline industry.
The risk premium is higher when terrorism leads to increased uncertainty
about a firms prospects on the market. Empirically, the difficulty is in
disentangling investors decentralized evaluation of a firms costs from
terrorism, as reflected in the stock price, from a host of other factors.

When look for a contra factual market capitalization, one has; for example, to take into
contemplation that stock prices already reflect expected terrorist attacks before any event
actually occurs. Previous research, therefore, has determined on single unforeseen events
or intensifications of terrorist activities. This can be taken to be a natural experiment to
estimate the cost of the terrorist conflict in terms of its effect on the stock value of a
sample of Basque and non-Basque firms. If the terrorist conflict was perceived to have a
negative effect on the Basque economy, stocks of firms with a significant part of their
business activity in the Basque country should exhibit a positive relative performance
when the truce began and a negative relative performance when the truce ended. Basque
stocks did indeed outperform non-Basque stocks as the truce became credible.
In a extensive event study for 14 terrorist/military attacks, returns on the US capital
market are analyzed. Empirically, deviations of the Dow Jones Industrial stock index
returns from past average returns (30 to 11 trading days before the event) are studied for
different time frames. Military attacks in the past, like the invasion of France (May 12,
1940), or the one in North Korea (June 25, 1950), led to substantial negative cumulative
abnormal returns when measured over 11 trading days. In contrast, there are no abnormal
returns even on the actual day of the event of terrorist bombing attacks on Pan Am
(December 21, 1988), the World Trade Center (February 26, 1993), Oklahoma City
(April 19, 1995) or the US Embassy in Kenya (August 7, 1998). The single recent
terrorist event, that even after six trading days showed statistically significantly negative
swelling abnormal returns, was September 11, 2001. It is, however, difficult to relate the
size and duration of abnormal returns to fundamental economic costs. Stock market
fluctuations are likely to be larger than the underlying changes in fundamental values,

because investors also buy and sell based on expectations about others behavior. Some
multiplier of terrorist attacks on firm values lies in the capital market itself. As far as
events affect the technological performance of capital markets, for example, by episodic
interbank payments, liquidity shortages can lead to reduced system stability, even with
the danger of consumer panic. Recent experience with the mature US banking system,
however, shows that a sufficient provision of liquidity by the central bank can prevent
such potential injure. After September 11, 2001, the Federal Reserve at one point injected
more than $ 100 billion in additional liquidity.
2- Investment
The effect of terrorism on collective consumption and savings is important as it influence
the investment level and, hence, economic growth. In addition, one can conjecture that
political violence not only affects the level of investments but also the composition of
investments. Investments in non-traded capital goods, or non-residential construction, are
mainly risky in an environment of political instability. Such investments may, therefore,
be abridged more than investments in machinery and equipment if political violence
increases. To analyze the impact on the composition of investments, two investment
equations, one for non-traded capital goods and one for machinery and equipment, are
estimated. As an increase in investment in one group has a positive effect on investments
in the other category, the dynamic effect between these two categories is important in
calculating the total effect. In an alternative approach, lower consumption growth and
higher volatility in consumption due to terrorist attacks could be directly translated in a
fraction of the level of initial consumption that households would be willing to give up in
order to get a peaceful lane.
3- Foreign direct investment (FDI).
Terrorism affects the portion decision of firms investing money in real foreign assets.
Terrorists can fairly easily attack and damage foreign owned firms, gravely troublesome
their activities. As the foreigners have a large choice of countries to invest in, even quite
mild terrorist activities tend to significantly decrease the inflow of capital to a terrorstricken country. This has been well documented in the case of Spain and Greece, again
using VAR methodology and quarterly terrorism data. In Spain, terrorism is estimated to
have reduced annual FDI inflow by 13.5% on average for the period 1975- 1991. This
translates into a decline in real FDI of almost 500 million dollars. In a similar period of
time (1976-1991), Greece was plagued by two major terrorist organizations, the
November and the Revolutionary Popular Struggle. Both are extreme left-wing
movements. The reduction of FDI was estimated to be, on average, 11.9% annually. This
translates into a loss amounting to almost 400 million dollars. As FDI is an important
source of savings, investment and economic growth are negatively affected. Moreover,
the transfer of technological know-how into the country is reduced, again putting a
damper on growth. Thus, the economic costs are considerable.
4- Tourism. Tourists have become a recurrent target of terrorist activities in recent years,
generating enormous resonance in the media. Examples are the Luxor massacre in 1997,
in which members of an Egyptian Islamic group shot dead 58 foreign tourists visiting the
temple of Queen Hatshepsut in the Valley of the Queens, and the bombing of a disco in

It is argued that tighter security events for military and government facilities made
tourists relatively more attractive for terrorist attacks.
Bali in 2002, costing the lives of almost 200 tourists. There is a simple underlying
principle for these attacks. Individuals planning their holidays are less likely to choose a
purpose with a higher threat of terrorist attacks. Host countries providing tourism
services, which can be easily substituted are, therefore, negatively affected by terrorist
attacks to a substantial extent. The expected reactions from consumers make the
bombing, shooting and kidnapping of tourists attractive strategies for terrorists who want
to inflict economic damage, when pursuing their political goals. There is a fast rising
literature evaluating the effects of terrorism on tourism, focusing on the number of
tourists and lost revenues in the industry. Special notice is given to substitution issues and
the temporal structure of the effects. In an early, influential paper, by Enders and Sandler
study the relationship between international terrorism and tourism in Spain. They use
monthly data on terrorist incidents and combine it with the number of foreign visitors in
Spain between 1970 and 1988, applying VAR methodology. It is estimated that a typical
terrorist act in Spain scares away over 140,000 tourists, when all the monthly impacts are
combined. In 1988, 5.392 million foreigners visited Spain and 18 international terrorist
incidents took place. Hence without these incidents, 1.5 times as many tourists would
have visited Spain in 1988. Careful econometric analyses reveal similar repercussions
from terrorism on other tourist destinations. In a time-series analysis based on quarterly
terrorism data and the ARIMA technique, to quantify the present value of loss in tourism
revenues for a sample of European countries. According to their calculations, Austria,
Italy and Greece lost $4.538 billion, $1.159 billion and $0.77 billion respectively between
1974 and 1988 (in 1988 terms, using a real interest rate of 5%). For comparative
purposes, total revenues in these countries in 1988 amounted to $11.149 billion, $19.311
billion and $3.29 billion respectively. For the same period, continental Europe as a whole
lost $16.145 billion due to terrorism (total tourist revenues in 1988 were $74.401 billion).
5- Savings and consumption. Apart from foreign direct investment, the investment rate
is mainly constrained by the domestic savings rate. Consumption and, hence, savings
rates may be affected by terrorist activity in different ways. On the one hand, political
violence might increase perceived risks associated with savings, either because legal
claims on assets are compromised or because individuals are prevented from spending the
money their savings have earned. On the other hand, terrorism may induce individuals to
place their money in safe havens rather than buy, for example, durable consumer goods.
The two effects point in opposite directions; how consumption is affected by terrorism is,
therefore, ultimately an empirical question. However, the empirical evidence is also

6- Foreign trade.
Terrorist activities can affect foreign trade in more than a few ways. First, the costs of
doing business are raised by a general increase in diffidence as a result of terrorism.
Second, amplified security measures in response to a terrorist campaign increase

transaction costs. Third, there is the risk of a direct destruction of traded goods. The
repeated attacks on oil pipelines in Iraq after the fall of Saddam Hussein, which
temporarily paralyzed oil exports, are a recent example of the latter risk. Another
example is the attack launched on the French supertanker Limburg off Yemens coast in
October 2002. In many countries one of the largest export industries is the tourism
industry. As already discussed, this industry is directly affected by terrorism. Countries
targeted by terrorism trade significantly less with each other than countries not affected
by terrorism. Moreover, the effect is economically large: a doubling of the number of
terrorist incidents reduces the bilateral trade flows by 4%.
7- Urban economy. Terrorism may sway the relative advantage of living in a city
compared to living in the countryside, and may thus have an effect on urbanization: cities
can take advantage of the positive economies of scale of protecting their population. At
the same time, the high population density makes cities an attractive target for terrorists.
Finally, violence and terrorism raise transport costs. Transport costs can be substituted by
closer physical vicinity. The last two influences are most relevant for modern terrorism,
but they point in opposite directions. Similarly, cross-country proof suggests that the
overall impact of terrorism on urbanization is likely to be small. While there is a positive
relationship between terrorism and the extent of urbanization.
Various studies have estimated the economic effects of the terrorist attacks on September
11, 2001. The direct costs consist of the annihilation of infrastructure and human capital.
The collapse of the twin towers destroyed 13 million square feet of real estate, and 30%
of superior office space in downtown New York. But this accounts for only 4% of the
total office space situated in Manhattan. One estimate of the real and human capital costs
ranges from 25 to 60 billion dollars. Another study estimates the human capital loss to be
40 billion dollars, and the property loss to be between 10 and 13 billion dollars. Yet
another estimate of the total direct loss is 21.4 billion dollars. Looking at the extent of 12
Destruction relative to the overall US productive capacity indicates that the damage was
minor. The estimates of between 10 and 60 billion dollars worth of damage resulting from
the attacks of September 11, 2001 is relatively small compared to the American GNP of
10 trillion dollars. However, the indirect costs may be considerable. They consist of the
induced cost of doing business, for instance longer waitings at airports, higher friction
and transactions costs in international trade, as well as the cost of the military and civilian
possessions used to fight terrorism. To achieve a momentous reduction in the probability
of falling quarry to a terrorist attack is certainly expensive. The part of the economic
potential that can be used for consumption today and in the future is considerably
reduced. But it is impossible to attach any serious figure to these factors. This is
predominantly so if the effects outside the United States are also taken into account.
Based on a quantifiable general equilibrium model, it has been estimated that the indirect
cost of increased economic friction in international trade is larger for other regions of the
world than for North America.
8- National income and growth. Estimating the overall effect of terrorism on the
economy is faced with the problem of how the economy would have developed if there
had been less terrorism or no terrorism at all. To construct a counterfactual is not easy. An
interesting attempt has been made for the Basque country, with a synthetic control

region made up of other Spanish regions, but in many ways resembling the relevant
economic characteristics of the Basque country before the onset of political terrorism by
the ETA in the 1970s. The subsequent economic development of this counterfactual
synthetic region is compared to the actual experience. The effect of general political
instability (or stable political institutions, alternatively) on the growth of national income
has been analyzed. The studies also address the problem of reverse causality: as argued
that political instability may not only be a cause but also an effect of economic
fluctuations. The same might be true in the case of terrorism. A notable study analyzing
the effect of income and education on terrorism is a paper by Krueger and Maleckova
It is estimated that, after the outbreak of terrorism, the per capita GDP in the Basque
country fell by about 10 percentage points relative to the control region. This gap tends to
widen when terrorist activities are on the increase. If the terrorist activities by the ETA
had a negative economic effect on other Spanish regions (included in the synthetic
control), the GNP gap estimated for the Basque country is a lower bound. In contrast, if
the terrorist activities unfocused investment from the Basque country to other Spanish
regions, the magnitude of the gap is artificially increased.
Bloomberg uses a panel set with annual comments for 177 countries from 1968 to 2000.
It controls for the interactions between terrorism and other forms of internal and external
conflict and is therefore able to make a distinction between similar types of political
disruptions. On average, terrorism (captured by the ITERATE data) is found to depress
economic growth in a noticeable, and statistically significant, way. However, this effect is
considerably smaller and less persistent than that exerted by external wars and internal
conflicts. Spending is diverted from investment to public expenditures. Fascinatingly
enough, the negative association between terrorism and economic growth is small and
statistically insignificant for advanced (OECD) economies, which are most affected by
terrorism. The depressing effect of terrorism on economic growth appears to be most
significant for developing countries. Overall, the relationship between terrorism and
economic growth can mainly be attributed to country fixed effects.
These belongings of terrorist actions on the a variety of sectors and the overall economy
do not capture the total costs of terrorism. Non-market values are, by definition, excluded
from these measures. The fear of individuals and the grief of the victims and the bereaved
are disregarded. It follows that the damage perpetrated by terrorism may be significantly
underestimated. If policy makers take the estimates discussed above seriously, they
would allocate too little money to dealing with terrorism and rather use the funds and
their energy for pursuing other goals.

Pakistan's Debt Crisis14

Gone are the days when one was forcefully advised, "neither a borrower nor a lender be".
Ongoing is the age when either a borrower or a lender one has to be. This is
more particularly true about nations which today are identified either as
borrower or lender, there being no third species. Moreover, there are
international credit giving agencies which lend out of the pooled funds
subscribed by different nations as per arrangement.
High and rising external debt burden constitutes a serious constraint for development; a
major impediment to macroeconomic stability and hence, to growth and poverty
reduction; a discouragement to foreign investment because it creates a high risk
environment and exchange rate depreciation; and a discouragement for government to
carry out structural reforms in the various sectors of the economy. Empirical evidence
suggests that external debt slows growth only if it crosses the threshold level of 50
percent of GDP or in net present value terms, 20-25 percent of GDP. Pakistan has
experienced serious debt problems in the recent past and accordingly witnessed
deterioration in the macroeconomic environment, leading to deceleration in investment
rate and economic growth and the associated rise in the incidence of poverty.
Pakistan foreign debt is reported $43.23 billion (31 December 2008 est.) which is now
crossed $ 50 billion appox. Borrowing from within and outside the country is a normal
part of economic activity. Developing countries, like Pakistan, would need to borrow to
finance their development; however, they need to enhance their debt carrying capacity as
well. In other words, the borrower must continue to service its external debt obligations
in an orderly and stable macroeconomic framework. Furthermore, the borrowed resources
must be utilized effectively and productively so that it generates economic activity.
Prudent debt management is therefore, essential for preventing debt crisis. Fiscal
indiscipline is the root cause of rising debt burden leading to macroeconomic imbalances.
A large fiscal deficit worsens current account deficit by strengthening aggregate demand
which, in turn, is translated into higher imports. Fiscal discipline is therefore, vital for
preventing debt crisis and maintaining macroeconomic stability a critical element for
promoting growth and poverty reduction.
Historical Perspective
The debt problem faced by Pakistan today is the result of poor economic management
and deteriorating governance over the last two decades. In the 1980s, large aid flows, as a
consequence of Pakistan's role in the war in Afghanistan against the Soviet Union,
allowed the Government to postpone much-needed macroeconomic reforms. During the
1980s the fiscal deficit averaged over 7 percent of gross domestic product (GDP), and
current account deficit averaged almost 4 percent. In addition, the nationalized
commercial banks and state-owned development finance institutions were used as

The article was published in the magazine Money Plus of daily English newspaper The NATION.

instruments of patronage to provide cheap credit to favored entrepreneurs and politicians.

Tariffs were kept at a high level and exports of agricultural raw materials were heavily
taxed, thus ensuring excessive profits for those able to get investment licenses. Inefficient
industries flourished; corruption was institutionalized; the financial sector was weakened;
and loss-making public enterprises, as well as public debt, expanded.

With the withdrawal of Soviet Union from Afghanistan in the late 1980s, foreign aid
flows to Pakistan declined sharply, precipitating the first of several economic crises
during this period. Between 1988 and 1998, Pakistan negotiated three programs with the
International Monetary Fund, but because of frequent changes of government and lack of
political will these were never fully implemented. The fiscal deficit continued to average
over 7 percent of GDP, and the average current account deficit increased to almost 5
percent. Public debt expanded rapidly, and debt servicing even more so because of the
increasing use of expensive short-term debt to finance the external deficit, and high cost
national saving schemes to finance the domestic deficit. The impact of the 1998
economic sanctions, in the aftermath of the nuclear tests, resulted in the collapse of the
exchange rate and the beginning of a full-blown economic crisis. In 1998, total debt (both
domestic and external) exceeded the GDP, total debt servicing accounted for 67 percent
of all Government revenues, and external debt servicing accounted for 55 percent of
export earnings, i.e., Pakistan's debt indicators were worse than most heavily indebted
poor countries. The situation has improved somewhat since 1998, and in 2001 the ratio of
total debt servicing to Government revenues had declined to 57 percent and external debt
servicing to exports to 37 percent.
External debt and liabilities (EDL) at the end of March FY08 stood at US$ 45.9 billion.
This represents an increase of US$ 5.4 billion, indicating a 13.3 percent increase over the

stock at the end of FY07. Borrowing from multilateral and bilateral lenders accounts for
80 percent of outstanding debt, and are mostly in the form of medium and long-term debt.
The share of short-term debt, on the other hand, is extremely low at 1.3 percent. Pakistan
took advantage of an earlier Paris Club rescheduling to re-profile its debt at a more
favorable term.

It is important to note that from a policy perspective, a critical appraisal of the external
debt and liabilities should not be entirely focused on the variation in the absolute stock
but, instead, it should focus on the incidence of the debt burden. The external debt and
liabilities (EDL) declined from 51.7 percent of GDP at the end of FY00 to 26.9 percent of
GDP by end-March 2008. Similarly, the EDL were 297.2 percent of foreign exchange
earnings but declined to 127.1 percent during the same period. The EDL were 19.3 times
of foreign exchange reserves at the end of FY00 but declined to 3.4 times by end March
2008. Interest payments on external debt were 11.9 percent of current account receipts
but declined to 2.5 percent during the same period. The maturity profile also showed an
improvement over the last eight years as short-term debt was 3.2 percent of EDL but
declined to 1.3 percent during the period under review.

Outstanding External Debt and Liabilities

Pakistans external debt and liabilities (EDL) is comprised of all Government debt
denominated in foreign currency, loans contracted by enterprises with Government
ownership of more than 50.0%, as well as the external debt of the private sector which is
registered with the State Bank of Pakistan (SBP) and finally benefits from a foreign
exchange convertibility guarantee from the SBP. Pakistans total stock of external debt
and foreign exchange liabilities grew at a compound average rate of just 1.2 percent per
annum during 2001-07 rising from $ 37.2 billion in 2001 to $ 40.5 billion by end June
2007. However, in the first nine months of fiscal year 2007-08, the stock of external debt
and liabilities grew by 13.3 percent.

Impact of Exchange Rate Fluctuations

Pakistans external debt is contracted and thus denominated in multiple currencies but for
accounting purposes, it is reported in equivalent US dollar. Thus shifts in cross exchange
rates among various currencies, especially against dollar are translated into changes in the
dollar value of the outstanding stock of external debt. The change in the outstanding stock
of the external debt is normally explained through new disbursements adjusted for
amortization plus revaluation impact of non-US dollar debt. During July-March 2007-08,
total disbursements amounted to $ 2.065 billion and repayment of principal was
amounting to $ 878 million. The net impact of these two factors increased the stock of
public and publicly guaranteed debt (PPG) by $ 1.187 billion.

The rest of the net addition of $ 4.163 billion in the total addition in the external debt
stock of $ 5.4 billion was the result of depreciation of US $ against hard currencies like
Japanese yen (JPY), Euro, SDR and others. Pakistan benefited from the exchange rate
fluctuations for many years in the past, particularly when major currencies were
depreciating against the dollar. Unfortunately, in the current fiscal year, Pakistan was on
the receiving end of the valuation impact. For the period July-March 2007-08, the
exchange rate applied was of end-June 2007 and end-March 2008. During reporting
period July- March 2007-08, US dollar depreciated against Japanese yen, Euro and SDR
by 18.7 percent, 14.9 percent and 8.2 percent, respectively. Thus the exchange rate
movements during the period have caused changes in the reported US dollar equivalent
amount of $ 4.2 billion while net new disbursement impact was just $1.2 billion. The
outstanding stock in yen alone witnessed a rise of $2.2 billion because of massive
appreciation of yen against US dollar. The exchange rate variation in Euro cost an
additional $915 million to the external debt.

Composition of External Debt and Liabilities Public and Publicly Guaranteed Debt
The contribution of Paris Club debt stock in total public and publicly guaranteed debt was
declining since FY04, when its share in the EDL stood at 45.4 percent and by end-March
2008, its share has declined to 35.9 percent. Between FY06 and FY07, the stock of Paris
club debt fell by another $ 100 million, but in the first nine months (July-March) of the
current fiscal year saw a huge increase of US$ 1.8 billion dollars in its outstanding stock.
Since a large chunk of Paris Club debt is denominated in Euro and Japanese yen, the
recent weaknesses of the US dollar against these currencies had a significant impact in
raising debt to the tune of $1.8 billion. This increase can be attributed to the exchange
rate depreciation of the U.S dollar in terms of other major currencies over the course of
the year.

This re-evaluation impact has adversely affected Pakistans Paris club debt stock. The
US$ 182 million rise in the stock of other bilateral debt was principally due to higher
receipts from China. The major projects for which these loans were acquired include: the
Gwadar deep water port project (US$ 36.8 million) and the acquisition of railway
locomotives (US$ 23.95 million).
As of end-March 2008, medium and long-term public and publicly guaranteed debt
amounted to US$ 40.08 billion, of which almost 53.7 percent or US$ 21.5 billion is owed
to multilateral creditors and 36.3 percent, or US$ 14.5 billion, is owed to Paris Club
official creditors. Medium and long-term public and publicly guaranteed debt also
included US$ 1.2 billion owed to official creditors that are not represented in the Paris
Club, as well as US$ 2.7 billion of international bonds and US$ 124.0 million of
commercial bank loans. Public and publicly guaranteed short-term debt amounting to
US$ 614.0 million was owed to the Islamic Development Bank.
Multilateral Debt
The borrowing from multilateral agencies, mainly from the World Bank and the Asian
Development Bank (ADB) has outpaced the borrowing from the Paris Club since 19992000. Its share in total public and publicly guaranteed debt has increased from 37.5
percent in FY 1999-00 to 52.9 percent in Jul-March FY 2007-08. The stock of debt from
multilateral agencies amounted to $21.4 billion by end-March 2008. A detailed analysis
of recent developments in commitments and disbursement in respect of bilateral and
multilateral external assistance is given in the subsequent section.
Short-term-IDB Loan
After declining substantially during 2003-04, the stock of IDB loans rose during 2004-05
but again started to decline. The short-term IDB loans are obtained largely for financing
oil and fertilizer imports and the rise is a consequence of the termination of the Saudi Oil
Facility (a grant that covered a major share of oil imports) in 2003-04, which coincided
with the extraordinary rise in crude oil prices in the international market. Resultantly, the
stock of short-term debt rose from $ 22 million in 2003-04 to $ 271 million in 2004- 05
but declined drastically to $ 25 million by the end of FY 2006-07. However, by endMarch FY08, it has shot up to $ 614 million.

49.8% of GDP (2008 est.)

A Rescue Plan for a Depressed Economy15

The forecast for 2009 is clearly economic challenge, but the collective media
assessment of 2008 is clearly economic crisis the past few months have been
extremely difficult for the global economy. The credit crunch actually started in 2007
and the downturn has been apparent in many sectors and countries. From the last 12
months to August 2008, many headlines would have been very different. A year that
ended with oil priced at US$37-40 a barrel also saw record highs of US$135-140. A year
that saw sterling fall to record lows started with discussions about the flight from the
dollar. A year that saw grandiose statements about the reversal of globalization and the
final emergence of the emerging economies ended with the worst fall of Chinese stock
market seeing the new Russian economic powerhouses grinding to a halt under the
weight of debt. Volatility and rapid change make the task of management even harder.

Key questions for management

How can I address my immediate financial issues faster and better than my
How can I protect what I have... so my business is stronger?
How can I get the most from current assets... and out perform the sector?
How can I reshape my business to fit the new reality to become faster and leaner?
How can I exploit the new market to find growth where others may have taken
their eye off the ball?
How can I sustain my business going forward so that I am the best prepared to
cope with change?

No longer fuelled by cheap and large loans, property prices have fallen and many
business models have come under great stress. Consumer spending falls and so do the
prospects for employment and export-led economies. Without disputing the poor state of
the economy or minimizing the real depression that many individuals are experiencing,
The Times of London reported the top investment fund in the UK saw returns of 80%.
Some complexity is best not avoided. There is opportunity in the adversity of the worst of
markets. Here are some key questions those are being discussed in every local or
Multinational Organization.

A number of factors are impacting business around the world:


Financing costs have increased as banks tighten their lending standards.

Slowing economic growth: the IMF expects the world economy to grow on
average by only 0.5% in 2009, revising its forecast down significantly. Developed

The article was published in the magazine Money Plus of daily English newspaper The NATION.

economies are expected to contract to an average of -2% in 2009 the first such
fall since the 1940s. Growth in emerging economies will slow to an average of
3.3% in 2009.

Rising unemployment and falling consumer confidence are impacting revenue


Falling profits: analysts are lowering corporate forecasts as the recession bites.

Government intervention and potential regulation is changing the operation of the

market. Equally, market volatility has increased significantly, making planning

Risk spreads on corporate bonds have soared to record levels and ratings agencies
have downgraded many corporates, greatly increasing financing costs for firms
seeking credit.

Many currencies have suffered volatility as global investors continue to assess

strength of economies thus undermining financial arbitrage strategies.

Commodities and energy: the slowdown in global demand has led to a fall in
commodity prices to six-year lows. Oil has fallen over US$100 a barrel based on
the gloomy economic outlook and falling demand.

As a consequence, we are seeing an increase in stressed companies across the

world. A record number of companies are expected to go bankrupt in 2009 with
200,000 insolvencies predicted in Europe alone according to worlds largest
credit insurer Euler Hermes. In the US there is likely to be an explosion of failed
businesses as an estimated 62,000 firms go under this year compared with 42,000
in 2008. More companies are likely to breach their loan covenants in 2009 as the
slowdown intensifies, prompting a surge in company restructuring and failures.

Now many companies are facing a future of great uncertainty. Time is limited and
Management is stressed. Change in the market has impacted their performance and that
of their suppliers and customers. It is critical that management ensures that they are going
in the right direction. How badly has the company been hit, how fundamentally has their
world been changed? It is critical that management ensures that they are going in the
right direction. The search for understanding must be deep, broad and focused. Deep
as management seeks to it is critical that management ensures that they are going in the
right direction. In surrounding firms look at the impact on customers, suppliers and
critically competitors. In the primary matter short-term goal in a credit crisis must be
Stress pendulum that focuses especially on the issue of cash. The primary but not the only
driver of management actions is the amount of cash that the company has and is

generating. If you are burning cash during a credit crisis, your priorities are clear. If you
are generating cash through operations, the opportunities are many. It is equally important
to recognize that this model can be applied within many larger companies which may
have business units at very different places on the spectrum. Our belief is that one size
does not always fit all and frequently does not fit any. Management should seek to drive
programs of action related to where they sit on this spectrum.
Working capital is the lifeblood of a company, and the ability to manage it becomes even
more important in a downturn due to falling revenue and restricted access to new funds.
Indeed the years of high liquidity and cheap credit initially encouraged and have now
left many businesses in a highly leveraged state.
Companies need to be protected their positions by identifying and resolving serious
issues quickly to protect against value erosion, or to be well placed to take advantage of
opportunities. A holistic review of a companys ability to access liquidity, manage and
release cash and control costs is essential to managing overall risk from changes in
market forces.
There are six key areas that companies examine to reduce expenses and support revenue
growth without sacrificing corporate strategy. These are customer portfolio, contracts,
finance operations, supply chain, information technology and real estate.

Customer portfolio represents more than just the people and companies to whom
you sell. To a large extent it also represents your profitability. Invest in customer
portfolio management.

Establish and implement a process of regular assessment and monitoring of

contractual partnerships.

Organizations look to the finance function in times of downturn to provide

business insight and lead the way with sound financial management. The finance
function needs to be agile enough to respond effectively and drive the changing
business agenda.

A large portion of a companys expenses may flow through its supply chain so it
is no surprise that a close examination can yield saving opportunities. But supply
chain also presents an opportunity to increase revenue by selling into markets that
may not be as affected by the downturn.

Information technology is another significant budget area for a company. As

leading companies look for increased value and cost improvements there is an
interest in understanding where IT investments are occurring, the value derived
and the alignment with strategic objectives.

For many companies, more capital is tied up in real estate than in most other
assets. Opportunities for disposal may be limited but should be explored.

Key questions to generate Cash

1. What steps are being taken to manage cash more tightly and improve cash flow
forecasting? What are the potential sources for improving liquidity?
2. Are there plans in place to divest non-core businesses to increase liquidity and satisfy
lenders? Is the company prepared for potential bid approaches?
3. Is there a disciplined working capital management program in place?
4. What are the objectives of cost reduction efforts? Is a cost reduction or management
program needed and in place?
5. Who is at risk in the customer or supply chain? Key questions Cash preservation
and generation.
It has been observed that good risk management systems should have helped mitigate the
crisis. Research in many areas has found that many companies had inadequate risk
management systems, they either didnt do risk management or did it inadequately in
scope or frequency. Had these gaps been addressed, the risks would have been mitigated
and the surprise minimized. Too often, however, risk management appears to have
become an act of management compliance rather than the exercise of leadership
judgment the wrong people looking for the wrong things at the wrong time.
The present crisis is the time for companies to form a strategic view of the risks that they
are facing and build up the necessary action plans required should the event they fear
actually happen. The situation is rapidly varying and can get worse. A number of the
highest profile casualties of the current crisis, confidently and honestly predicted that
they were through the worst only weeks before their worlds caved in. Risk management
needs to be taken back from the compliance function into the boardroom.
Management needs to be attentive and lively, prepared to define their risk craving and
lenience, and keep an eye on it. Keeping a company strong is not just about the bottom
line, a companys value is now defined by a wider picture where both good governance,
transparent reporting and communication form an important part of investor decision
making processes. Once lost, a companys standing can be hard, and sometimes
impossible, to recover. Investors have told us that in the event of a reputational problem,
they expect quick, clear communication which addresses the issues and outlines the
remedial action taken

How to protect your assets

What is required in many companies is a new approach to assessing the possible risks
that now present themselves. This will make certain that processes are in place to ensign
issues early and at the same time, and identify opportunities for getting ready for the
rebound whether they are strategic growth or operational cost reduction related.
1. When was your last risk assessment conducted and has this been updated to take into
account current economic circumstances?
2. Have you determined your risk tolerance? Do you have a thorough understanding of
your degree of flexibility and critical assets to protect?
3. Has due diligence been re-visited for key suppliers and major contracts? Whats your
plan b if a supplier or major contractor goes into administration?
4. What controls are in place to improve early warning?
5. What scenario planning have you conducted? What balance is there in your risk
assessment? Does your organization have plans B and C in line with the above scenarios?
6. At what point will you move from short term firefighting/ cost cutting mode towards a
strategic midand longer-term modelling?

A time to perform, an improvement in your performance

Management should always be seeking to maximize the effectiveness of their operations
but in times of broad economic growth and profitability, this goal can sometimes be
downplayed against other worthy goals of achieving market and reputation share,
strengthening client relationships or long term strategic positioning. In the current market
conditions, however, improving performance effectiveness becomes critical to business
survival. Whilst the first response to a more difficult market is to seek to improve
efficiency and by reducing costs, slowing recruitment, reducing inventory the risk of
reduced effectiveness is real. Cost cutting though difficult to achieve in reality is
frequently at best a short term solution. Leading companies, who want to win in the
market longer term, cannot lose sight of the effectiveness agenda however hard the
conditions get. In addition therefore to reducing resources used they must move to
reexamine the processes they adopt.

A time for change reshaping your business

The impact of the market changes has clearly been significant many businesses have
been damaged and some business models have been radically changed.
Management must take action to change their operations and assets to reflect their new
world and prospects. Whilst current economic conditions change, many long term trends

do not change at all. Business models have been undergoing a deep-seated restructuring
as long-term trends challenge models that have been the norm for many years.
Companies are being forced to review their methods of organization due to a range of
macro influences:

Diversification, globalization and (de)regulation are challenging the current

organization model.

Business models need to be increasingly flexible to facilitate adaptation to

changing market dynamics across both geographic and product divisions.

Niche specialists are increasingly prevalent in specific business divisions such as

logistics, HR, IT and back office functions. These specialist players compete with
vertically integrated businesses operating across all operating divisions, bringing
their viability into question.
Innovations in information technology are facilitating the emergence of new
players, new organizational models and increased competition. Even in favorable
market conditions, business remodeling requires careful planning. With growing
economic uncertainty, structural adjustments require an even higher level of due
diligence and analysis. But the demand is, if anything accelerated rather than
changed as a robust and flexible model is critical to achieving the same results in
less favorable conditions.

In response to the economic crisis, companies may be tempted to put aside long term
strategic plans and opt for what seem to be quick fix solutions, in an attempt to deal with
burning issues. Businesses that emerge strengthened from the current crisis will be those
that reshape intelligently, not those tempted to move quickly to extract additional value.
They will be able to benefit from increased flexibility, which is key in these uncertain
times. However, the advantages extend beyond this and represent the necessary
adjustments to stay ahead and respond to the long term, underlying change in the
business operating environment. In the current environment, companies need to see a
discernible short-term impact of their decisions although business reshaping can and
must deliver quick fix solutions. Robust implementation processes however are critical to
ensure that companies adopt sustainable models and do not increase their level of risk or
impair performance. It is anticipated that the current uncertainty would lead to
management delaying programs of re-shaping. Far from being frozen into inactivity,
however, companies seem to be using current conditions to accelerate.
It is clear that in 2009 there will be unparalleled opportunities to acquire assets at very
modest valuations. Any company with access to capital will be in a very strong position
to make value enhancing acquisitions. The main question will be one of timing. Given the
unprecedented nature of the current economic situation, predictions on when the
economic spiral will reach a bottom are meaningless. The key attribute to taking
advantage of attractive opportunities will be flexibility and preparation.

Many executives react instinctively during economic slowdowns by cutting discretionary

spending across the organization. They often fail to distinguish between short-term
operational and the long-term strategic programs which are still vital to build capabilities
for long-term competitive advantage and future growth. Here we focus on three key
themes for a sustainable future maintaining a sustainable business model; capitalizing
on growth opportunities in emerging markets and taking advantage of opportunistic deals.

A sustainable business model

In research this has been experienced has identified the characteristics that determine
those businesses that are best positioned for growth coming out of a market downturn.
There are four key areas of focus;
The business model
Clear strategic decision-making
Customer loyalty
Capitalizing on opportunities in emerging markets

The business model

A successful model will be flexible and scalable (across people, process and technology)
to take advantage of opportunities that emerge. It can adapt to changes in volume rapidly
without being dependent on large scale recruitment, training and capital investment.
As organizations find their path through the current economic downturn, many executives
tend to focus on staff efficiency and headcount. In a survey, 60% reported that they were
currently or planning to implement headcount reduction strategies and 42% reported
benefits from rationalization programs within their companies.
The war for talent doesnt stop during a downturn it is exacerbated. Forward-thinking
organizations can use more innovative talent-management approaches to gain a
competitive advantage that can help them ride out the downturn and create a strong
platform for recovery and growth. People remain a key priority. Treating them in a fair
and transparent way during volatile times becomes even more important to their future
loyalty. Holding on to high quality talent and capitalizing on the growing pool is often the
real source of competitive advantage and sends a clear message to the market that this
company is resilient.
Corporate alliances, which are growing and account for about a third of revenues at many
companies, need even more care and handling during a recessionary business climate.
The interdependence between companies that may be competitors with different
operating styles and cultures becomes even more acute as the immediate market pressures
take hold. Product development, technology and innovation budgets are likely to have
been reduced under the cost reduction banner.
Experience from previous downturns has been that those who stick with a focused
investment program have emerged stronger than their peers. This requires a clear

understanding of where the opportunities are and in particular a heightened understanding

of where the competitors are weakened through the downturn.

Clear strategic decision making

Organizations that are successful in a downturn have absolute clarity of their proposition,
strategic direction and brand positioning combined with responsive decision making.
They leverage existing management information more smartly to take advantage of
market changes and quickly exclude those opportunities that do not fit with the strategic

Investing in customer loyalty

Responding to and staying close to your customers has never been more important for
businesses than during times of economic instability. Research shows that recessionary
periods provide a good opportunity to retain and develop customer loyalty through
investing in and developing effective customer relationships as a vehicle for future
growth. It follows on that by aligning pricing strategy and products/services to reflect the
changing circumstances of customers, companies can more readily deliver a strong
growth value proposition. Identifying pricing, channel and value opportunities across
brands and markets, developing pricing strategies optimizes shareholder value and return
on brand equity.

Capitalizing on opportunities in emerging markets

While most emerging markets are likely to experience slower growth in 2009, many of
them are still expected to grow by 5% a stark contrast to most developed countries.
Businesses will be keen to find opportunities offering greater exposure to these markets,
particularly as valuations are likely to be considerably below recent levels.

A time for action

In times of great uncertainty and stress, there is a temptation to wait and see. Maybe
tomorrow there will be more clarity as to risks, maybe things will have improved and
tough decisions can be delayed. And a survey shows some evidence of that the almost
30% of respondents who have not increased their focus on their customers, the 16% who
have not begun to think about cost savings or the 40% who are taking increased time to
action their plans concerning reshaping their business.
At the other end of the spectrum there are those who have panicked into a burst of
activity any activity. It has, fortunately, been some time since we experienced a deep
recession and perhaps some managers have not experienced market conditions that are
this difficult. But our survey also saw a number of respondents who seemed to be
answering all of the above to every list of possible actions. There is certainly no doubt
that many executives are working increasingly hard, but wasted effort is more the
consequence of clouded thinking than a solution to economic hardship.
From our perspective, we believe it is necessary to recognize that the crunch has
happened, and that its consequences will continue to emerge. Past actions can be
regretted but they cannot be reversed. The future, however, can be different and that is
where management must focus:

To quickly focus on cash and your exposure to the downturn. The greater your
liquidity, the greater your options and your prospects of success. Understand the
impact on your clients and your suppliers. Seek to understand the impact on your

To seek to know your situation and your options. Now is the time to be serious
about risk management not as procedural compliance but as the process for
evaluating future actions and consequences.

To focus on the performance of your team and your assets. When markets are
tough and resources are scarce, this is the time to be ensuring that you are making
both efficiency and effectiveness gains. Performance is relative for even the
most distressed of companies.

To focus on driving the changes in the organization to match the changed

environment that we have entered and to deliver the performance that will shape
the market of the future.

To be bold about the opportunities that does exist to fundamentally change the
competitive position of your organization to not just survive the economic
downturn but to thrive and build a position to rebound when conditions change.

Evil Genius of Financial Capitalism16

The world is desperately looking for a strong financial system which can fulfill the
requirements to run global economy. The Group of Twenty (G-20) met in London 2 April
2009 to discuss and possibly give direction to the global financial system. The important
question is that possible to save this system even if they wanted to. The total value of
global financial assets is several times the size of global gross domestic product (GDP)
and almost four times the overall GDP of the European Union and even more of the
United States. Here it very important to understand why the world is facing this problem
what is a root cause of this financial crisis.




The article was published in the magazine Money Plus of daily English newspaper The NATION.
Courtesy: Google images

Financialisation of worlds economy has become a big threat to real economy. And now
the task should be to understand this definancialise the economy of the world so the
real economy can bring security, stability, prosperity, sustainability and vitality in this
In 1980s when Capitalism was emerged as single dominant economic system after
defeating the Communism, the extremely complex financial instruments made a new way
in the form of Financial Capitalism. To run this complex financial system evil genius
people of finance were hired, who created some of the most complicated financial
instruments, which are even now unthinkable over the vast majority of this world. Even
now these evil genius are busy to develop new financial derivatives (I call them financial
parasites) so that suck the scanty savings of modest households. These households were
offered credit for goods and the owing of all luxuries they may not need them.
The aim has been to create as many credit holders in many forms like credit-card holders,
mortgage-holders, auto-loan holders etc. the aim was to bundle their saving of hard
earned money into investment instruments. If we look at this consumption-led growth
which has brought the world economy into this phase of depression, the evil was hidden
The majority of the people either belong to developed countries or developing countries
do not need these luxuries like lavish houses, cell phones, expensive clothing, expensive
cars and all sorts of these things which many of us have on the expense of our lives. But
unfortunately these luxuries are made necessities which is another kind of evil genius by
the marketing people.
When hard earned money of people is consumed in one of these luxuries infect, here
people bundled themselves into investment instruments. And now investors has no
concern either people can repay their credit money, the collected money is bundled into
complex sequence of products.
Investors earn trillion-dollars profits by investing this money through investment banks
and hedge funds; this is a major reason of financial crisis. In the United States which is
hub of this crisis, averages of 10,000 homeowners have been loosing their homes every
day. According to estimation 10- to-12 million households in the US will not be able to
pay their mortgage over the next four years. The International Labor Organization (ILO)
calculates that 50 million could lose their jobs as the recession deepens, as 50 million are
already globally unemployed.
This portrays a very bad picture and a form of financial brutality. At the same time is a
lesson for developing countries and those who are less affected by this crisis like Pakistan
that do not be a keen follower of Western Financial System. This system is flayed and

could not deliver even to those people who developed this system in centuries then how
this could be possible to deliver poor or developing nations. This system can server only
few people or few families. The concentration of wealth in few hands is a spirit of
Here its not end of this crisis this is going to last many years. The aftermath of crisis will
also appear in other sectors of the world economy. Indeed capitalism is a permanent
crisis. It is true when everything is being financialised, finance can no longer extract
value. By September 2008 as the crisis exploded with the collapse of Lehman Brothers
the global value of financial assets were $ 160 trillion three-and-a-half times larger than
the value of global GDP.


In a research report by McKinsey Institute (Oct. 2008), the value of financial assets in the
United States had reached 450% of GDP, which is 4.5 times of total GDP and in the
European Union it stood 356% of GDP. Thus even a capitalistic logic this is undesirable
economic system her amount of financial assets is four times the value of GDP.
This would be surprising information for readers that in September 2008, the total value
of credit-default swaps (CDS) which give a commitment to compensation for losses on
defaults stood at almost $ 60 trillion which is a sum larger than global GDP. CDS is a
Made-in-America product in Sep. 2008 the outstanding debt due on CDS was over 400%
of GDP.
The total value of outstanding financial derivatives (a form of debt which derive its value
from other assets) and a very common financial instruments was almost 640 trillion
fourteen times the GDP of all countries in the world. In the United States there have been
five bailouts since the 1980s and billions of dollars from taxpayers money is pumped to
continue its leveraging flight.
Financial markets perform two vital roles in the economy:
(1) they take money from those with no immediate use for it, such as people saving for
retirement and the hereditary rich, and put it into the hands of firms and entrepreneurial
individuals with productive investment ideas but a shortage of cash to finance them;
(2) They allow individuals and institutions to reapportion risk to those more willing to
bear it. If Wall Street didn't exist, another method of allocating savings and risks would
have to be found. One alternative is diktat, but the history of the Soviet Union and other
Communist countries amply demonstrated the difficulties involved in centralizing
economic decisions.
The benign view of markets owes much to three Chicago economists: Milton Friedman,
Eugene Fama, and Robert Lucas. Friedman best known for his work on monetary theory
and his excited support of capitalism, early in his career had played a key part in
developing the "efficient markets hypothesis," which, together with its younger sibling
the "rational expectation hypothesis"see belowprovided the intellectual
underpinning for more than two decades of financial deregulation. Briefly put, the
efficient markets hypothesis states that prices of stocks, bonds, and other speculative
assets necessarily reflect everything that is known about economic fundamentals, such as

Courtesy: Google images

inflation, exports, and corporate profitability. The proof proceeds by contradiction.

Suppose stock prices have risen above levels justified by the fundamentals. If stocks fall
below their fundamental value, speculators will step in and buy them.
Friedman actually formulated the efficient markets hypothesis in an analysis of
currencies. It was Fama, one of his students, who applied it to the stock market and
pointed out an interesting consequence: if stock prices already reflect everything that is
known and knowable, then investors can't hope to outperform the market using trading
strategies based on publicly available information. Rather than wasting time and effort
trying to pick individual stocks, they would be well advised to place their savings in a
broadly diversified mutual fund that tracks the daily movement of the market. Largely
thanks to Fama and his followers, so-called index funds today have a central part in many
Americans' retirement planning.
Lucas, the third member of the Chicago triumvirate, was arguably more influential even
than Friedman. In a series of clever papers published in the 1960s and 1970s, he and
several colleagues extended the hyperrational methodology underpinning the efficient
markets hypothesis to other parts of the economy, such as the job market, the output
decisions of firms, and the formulation of economic policy. By the time they were done,
Lucas et al. had invented a new way of doing macroeconomics, known as the rational
expectations approach, which enshrined in higher mathematics the stabilizing properties
of unfettered markets. You don't have to spend much time in any financial market to
recognize that expectations are what drive the markets. If investors anticipate good news,
they buy; if they expect bad news, they sell.
Where, though, do these economic expectations come from? According to Lucas, they
reflect a predefined, externally grounded, and commonly agreed upon reality. In his
models, the economy's equations of motion are well defined and known to allfrom
Ph.D. economists at the University of Chicago to nurses and cab drivers. Utilizing this
common knowledge, people form "rational expectations" of things like inflation and
interest rates. They don't always get things righta certain amount of arbitrariness is
allowed forbut they are prohibited from making methodical errors. If in one period the
economy gets out of sync, in the next period it jumps back to the "equilibrium" defined
by the model.
Not content to create new models, Lucas also disparaged older theories that viewed
financial capitalism more skeptically. Keynesianism wasn't merely wrong, he declared at
one point: it was no longer intellectually respectable.
On the side George Soros who has been an active investor for more than half a century.
He was already a leading hedge fund manager. Not many people understood hedge funds
back then, but for those in the know Soros's Quantum Fund, which he founded in 1973,
was the model: year after year, it had achieved returns in excess of the broader market.
Soros had neither the inclination nor the technical ability to challenge the Chicago
school's formal arguments. What he does have, however, is voluminous amounts of
firsthand knowledge gained in the financial markets, together with a keen interest in

formulating a theory on the basis of his observations. Academic criticism on his fist book
The Alchemy of Finance didn't put him off that effort. "My conceptual framework
remained something very important for me personally," he writes. "It guided me both in
making money as a hedge fund manager and in spending it as a philanthropist: and it
became an integral part of my identity."
Outside the idealized world of Lucas's theory, knowledge is imperfect, people stick to
wrongheaded ideas, and there is no agreed version of how the economy works. In these
circumstances, Soros rightly points out, economic expectations, even biased ones, can
help to determine economic fundamentals.
One way to grasp what Soros is saying, Reflexivity can be interpreted as a circularity, or
two-way feedback loop, between the participants' views and the actual state of affairs.
People base their decisions not on the actual situation that confronts them but on their
perception or interpretation of that situation. Their decisions make an impact on the
situation (the manipulative function), and changes in the situation are liable to change
their perceptions (the cognitive function).
This was very important to understand these conceptual works of Financial Capitalism
but now leaving the academic discussion of both, The Chicago School of Economics and
a leading financer George Sores one ordinary person either belongs to East or West
judges a system upon its deliverability to the society. Financial Capitalism and the way it
works does not satisfies, now this is need to definancialise the major economies and
economic activities should be backed by physical assets rather by fake assets.

Economic Landscape and Islamic Banking19

Economic landscape of the country continued to show varied trends during January 10.
Amongst the macro-economic indicators, countrys trade deficit registered a decline of
21.99% as compared with the same of the last fiscal year. According to the figures, trade
imbalance was registered at US$8.44bn from July09-Jan10 as against US$10.83bn in
the same period of FY09. During the first seven months of FY10, exports showed a
slight increase of 0.46% as compared with the same period of FY09. During this period,
exports reached US$10.87bn as compared to US$10.82bn a year earlier. On the other
hand, the countrys imports showed a decline of 10.77% and totaled at $19.32bn in
July09-Jan10, as against US$21.65bn during the same period last fiscal year. Trade
deficit is said to be improving as exports grow despite the gas and power load shedding
while imports decline all in all, taken as a positive sign.
Remittances from abroad continued to show a rising trend; US$5.20bn was received so
far in FY10 as against US$4.28bn during the same period of last fiscal year, translating
into an increase of 21.53%. During January10, a sum of US$667.90mn was received as
compared to US$637.30mn a month earlier, up by 4.80%.
On the revenue collection side, the government continued to fail in meeting its revenue
collection target. According to provisional tax collection figures for January 10, the
collection again missed the target of PRs124.00bn by a considerable PRs20.00bn and
stood at PRs104.00bn. Going forward, the economy is still exposed to an array of
endogenous and exogenous risks like rising international commodity prices and
prevailing structural weaknesses e.g. energy crisis giving way to more inflation, dubious
political and law and order scenario affecting overall economic environment, substantial
resource gap in terms of inadequate revenues to cover expenditures and resultant fiscal
slippages and diminishing options to finance them and other significant investment
requirements in infrastructure.
SBP announced its monetary policy during the month under review keeping its discount
rate unchanged at 12.50%, in line with its cautious easing of the monetary policy given
inflation concerns stemming from rationalization in utility prices and the lack of visibility
with regard to external inflows from Friends of Democratic Pakistan pledges. Headline
inflation increased for the third consecutive month on Y-o-Y basis as it rose to 13.68% in

The article was published in the magazine Money Plus of daily English newspaper The NATION

January10. On M-o-M basis, this rate has risen by 2.42% on the back of several factors
including an 18.00% hike in gas prices, a 12.00% rise in power tariffs and on an average
8% surge in petroleum prices. During the month under review, the WPI increased by
4.23%, from 221.43 in December09 to 230.80 in January10. The spike in inflation is
likely to spill over into February10 on account of the hike in domestic end-user oil
product prices, lower base effect of Food inflation and the second round impact from the
16.50% hike in power tariffs over this fiscal year.
KSE 100 index gained 2.42% during the month under review, closing at 9,614.19 points;
on the back of rise in heavy weights and upcoming results season, the market touched the
10,000 level twice in intra day trading during the month. It touched a high of 9,954.41
but, unable to sustain these levels, it lost 3.42% on the last trading day of the month.
Trend of political undercurrent, continued insurgency in the country, fears of law and
order situation and NRO judgment issues were factors affecting the local bourse in the
later half of the month. Further, poor performance of companies also hampered investors
Average daily volumes stood at 187.18mn, while the top traded scrips for the month were
LOTPTA, FFBL, PTC, JSCL and TRG; amounting to 33.16% of the months total
Foreign investors remained in the market with net investments of US$4.79mn during the
month, heavier on the buy side with purchases worth US$17.16mn and sales of
US$12.36mn. The net foreign investment in the country in the seven months of the
FY10 fell by 34.40% to US$1.47bn as with US$2.23bn in the same period of FY09.
Out of total foreign investment, foreign direct investment fell 54.60% to US$1.17bn in
the first seven months of FY10, from US$2.59bn in the previous year. The foreign
portfolio investment flows however reversed with a US$290.70mn inflow in FY10 so far
compared with an outflow of US$355.80mn in the same period of the last fiscal year.

During the month under review, MIF constituted the highest fund size of PRs4.46bn and
grew by 2.48% from last month. MCF displayed the highest increase in fund size on Mo-M basis, from PRs3.28bn to PRs4.42bn in the current month, translating into a monthly
return of 10.49% while MCF yielded the highest annualized return of 10.09%

increase of 34.95%. With in the Islamic income and cash funds, POAIIF showed a

Under the other remaining categories of Islamic Equity and Asset Allocation funds, MIF
yielded both, the highest monthly and annualized return of 3.81% and 36.03%

increase of 34.95%. With in the Islamic income and cash funds, POAIIF showed a

Under the other remaining categories of Islamic Equity and Asset Allocation funds, MIF
yielded both, the highest monthly and annualized return of 3.81% and 36.03%

Capitalism: A Flawed System20

In an interesting book by John Girling, Corruption, Capitalism and Democracy, the
author suggested that there is an inherent contradiction, or clash, between the public
service ethos of democracy and the private gain imperative of capitalism, resulting in
corruption wherever the latter is not held under strong control.
Corruption represents the normative perception of capitalist excess: the culmination of
the systemic process of collusion among economic and political elites that results
contrary to democratic theory in the re-confusion of public and private spheres.
Normative definition provides the starting-point from which to consider two major forms
of corruption: corruption in relation to democratic theory and historic practice (power
corruption) and in relation to democratic practice in the age of capitalism (politicaleconomy corruption). The implications of normative definition point, first, to the modern
distinction between public and private, which is basic to legal-rational politics and
administration; and second, to the debate over restricted (legalistic) definition or broad
(social) definition of corruption.
The normative element in the notion of corruption remains crucial. It explains Lord
Actons well-known aphorism, Power tends to corrupt, and absolute power corrupts
absolutely, which stems from his belief in conscious rectitude as the abiding standard
of judgment of all persons in authority. Actons rather simple assumption that democratic
(and ethical) constraints on the power of rulers will reduce the tendency to corruption has
of course only partially been borne out in practice. Nevertheless, the two essential
conditions that he proposes checks on power and high moral standardshad, and still
have, a strong public appeal, both in the West and in the developing world.
The prevention of absolutism by a complex system of checks and balances, for instance,
is characteristic of American democratic pluralism, under which executive power is
offset, or even fragmented, by a separately elected legislature, the influence of voluntary
associations, and the federal system. Even so, the corruption of American office-holders
was a byword in the nineteenth-century heyday of voluntarism and laissez-faire (that is,
the supposedly arms length relationship between wealth and power). In an American
scenario, corruption points out the urban political machine, in particular, has been part
of an entire system of electoral and financial influence, in which legal patronage, porkbarrel legislation and lax regulation of city-based business interests are also important
It is evident, then, that neither the existence of checks and balances nor insistence on
ethical performance necessarily leads to honest government serving the common
interest. Yet the moral aspect is, crucial to the explanation: corruption is defined
normatively, as a deviation from the public good. Now, the expansion of democracy,

The article was published in the magazine Money Plus of daily English newspaper The NATION.

itself normatively definedgovernment of the people, by the people, and for the
people, in Lincolns famous phrasehas enhanced that definition, by sharpening the
distinction between public and private. For, in a democracy, politicians become
peoples representatives and bureaucrats public servants precisely because these
functions are deemed to be conducive to the common good. Corruption improper
behaviordenotes deformation of this norm. It is the abuse of public office, for private
gain, that constitutes corruption. Complementing the normative definition of corruption, a
distinction can be drawn between the morality of wealth (individual freedom and
initiative) and what we have seen to be the morality of power (responsibility for the
common good). For the morality of wealth concerns the individual producer (the
unproductive are discounted) and the individual consumer (freedom of choice). The
morality of power, to the contrary, emphasizes the role of the state in achieving social
goals. The perversion of power is its negative side: the abuse of political power for
private ends, or power corruption in Actons terms. Similarly, the perversion of wealth
is the abuse of economic power, which takes the form both of exploitation of the
powerless (so-called free labor) and penetration of the (ostensibly independent) political
system: that is, political-economy corruption. Paradoxically, democratic theory and
democratic institutions, which were expressly designed to counter power corruption, have
for this very reason (the almost exclusive concentration on politics) fallen easy victims to
political-economy corruptionprecisely because of the practical need, theoretically
disavowed, for an accommodation between political and economic systems.
Two major characteristics of political-economy corruption, emphasized by a French
analyst in an illuminating study, are corporate funding of the political process; and the
penetration of market values into the social and political spheres. The dramatic evidence
of these two features, revealed in major scandals from Italy to Japan, points to the
systemic character of corruption, rather than as being simply a matter of individual
responsibility, assumed by the legalistic definition of corruption. The implications of
these two different perspectives are of great significance. They can be set out broadly in
this way:
Social character of corruption: capitalism-democracy interaction: importance of
Individualistic character of corruption: theoretical disregard for the interaction in
practice of economics and politics: importance of procedures.
The systemic or dynamic conception of corruption is meaningful only in terms of the
whole society; the individualistic or static conception only in terms of breach of legal
procedures. The latter is inadequate, in my view, in understanding the interaction of
democracy, capitalism and corruption in modern society. The difference between the two
conceptions is therefore central to the discussion that follows. First, I consider the
modern re-confusion of public and private, resulting from the growth of government
and the ascendancy of capitalism; second, the distinction between substantive and
procedural definitions of democracy; correspondingly, third, the normative and positivist
definitions of corruption; fourth, the social context of capitalism, democracy and
corruption, that is, the interaction of economics, politics and values (here, normative

conceptions of society); finally, fifth, this social interaction points to, and returns to, the
systemic rather than aberrant character of corruption.
First, the conditions of modern democracy have given rise, specifically, to corporate
political funding and, generally, to the penetration of market values, because public
office has expanded greatly, in regard to the functions of politicians and the scope of
government activity. The latter requires an elaborate centralized administration, financing
important public works and welfare programmes; while the competitive growth of
political parties involves increasingly costly electoral contests. At the same time,
moreover, the opportunities for private gain legitimate or otherwise have increased
exponentially under modern capitalism. It is the resulting overlap of capitalism and
democracy the re-confusion of private and publicthat creates the tendency of
unchecked power to corrupt.
Corruption reflects this clash of values. Public service is the raison dtre of officials: to
serve the common interest, as defined by the electoral majority and its political
leadership. The raison dtre of the capitalist system, to the contrary, is private profit,
derived from the operation of a competitive market. Market values guide behavior. Thus,
buying voters, legislators and state officials is good business if it produces cost-effective
results. Obviously such a procedure, from the normative standpoint of democracy (the
sovereignty of the people) is corrupt: it is a deformation of the norm. Yet, in realistic
terms, the economic system has an undeniable impact on the political, who in democratic
theory it should not have: it should be the other way round. One way of bridging the gap
between theory and practice is by establishing either legal or acceptable (informal)
channels of influence between wealth and power; corruption is another way.
Such are-confusion of public and private, which undermines the very basis of modernity
(the legal-rational requirements of effective public administration) raises, in the second
place, the crucial question of
In the light of the drip-drip of revelations over recent weeks and months about
the behaviour of business leaders, particularly in the financial institutions, a number of
commentators have suggested that what has been demonstrated is that unregulated
capitalism will become inherently corrupt, as the instincts of the key movers and shakers
in a capitalist economy are corrupt and they are only held in check through effective
The ideology of unfettered markets promoted over the past three decades must now be
judged a failure. The era of liberalisation contained seeds of its own downfall in the form
of tendencies such as frenetic financial innovation and bubbles in asset prices. Naked
greed, lax regulation, excessively loose monetary policy, fraudulent borrowing and
managerial failure all played a role in bringing about the crisis. Richard Layard of the
London School of Economics weighs while arguing that we should stop the worship of
money and create a more humane society where the quality of human experience is the

Amid the worst financial and economic crisis in decades, the world tends to get caught up
in the daily fluctuations of the stock and commodities market. Tackling the crisis and
planning for the post-crisis order requires political leadership. Even more important, it
demands international co-operation. In this respect, networks matter as much as
individuals. What are the patterns of co-operation that have so far emerged; who are the
most influential movers and shakers; and how can they restore the confidence necessary
to turn the tide?
It could be thought that the news over recent times gives strong credence to that
argument. How can anyone justify the apparent lunacy into which financial institutions
slipped for no better reason than the maintenance of bonus payments for managers; or
what we have just heard about personal (but carefully disguised) loans by a bank to its
chairman? Not to mention all the stuff we discovered a few years ago about Enron and
And yet, it is facile to suggest that corruption is somehow symptomatic of capitalism, or
even of capitalism only. When the Soviet Union and its satellite states went under in the
early 1990s, one of the initial things we discovered was the systematic corruption which
had pervaded the upper levels of the system. Furthermore, we know that a number of
countries with authoritarian but left-leaning governments (Zimbabwe being an extreme
example) have demonstrated huge and often violent levels of corruption.
It seems to me that corruption is always a risk that we run, under any system of
government, when there is a sustained period of untroubled economic or political
development, such as a sustained boom in a market economy, or a dictatorship without
any visible or effective opposition. Recent events have demonstrated the need for
vigilance, but perhaps also suggest that every so often a disturbance is needed to clean
out unacceptable practices and wholesale lapses of ethics. And while of course it is a
disaster when a recession deprives people of jobs and security, it may at least have the
side effect of pushing to the surface the reprehensible behaviour of those who have
become arrogant.
The sometimes suggested response greater levels of regulation is not always ideal, as
its main effect tends to be to bureaucratise behaviour and inhibit initiative; but vigilance
is always needed, and the determination to ensure that corruption is never accepted as one
of the normal characteristics of public or private conduct. And no system can afford the
complacency of a belief that it is immune to such risks.

A Creative Form of Naked Capitalism 21

A demoralizing role of Hedge Funds in Financial Crisis
In fact the markets for stocks, bonds, commodities, futures, options, currencies,
mortgages, money markets, are now one huge market. The hedge funds use these all tools
of Options, futures, swaps, forwards, other derivatives, and all tools of hedge funds, are
only the buyer betting that something will go up and the seller that it will go down;
neither has a stake beyond the gamble.
The $700 trillion derivatives-hedge funds market is leveraged anywhere from 35 to 70
times. For example Citibank was leveraged at 280:1; the $2 trillion derivatives crisis at
Citibank required that they be essentially nationalized. With close to $3 trillion pledged to
throw at what could easily be a $10 trillion or even a $30 trillion problem, we have yet to
see if money circulation increases or if investors running for the exits reduces the
circulation of money (effectively destroying it) faster than money is thrown at the
A major loss such as Bear Stearns was facing, those investors cannot pay up, hedge costs
jump, and that bankrupts more derivative funds. As they are not paid, the intermediary
bank cannot pay the winner of that bet so they go broke. The unpaid winners of those bets
are on margin so they go broke. Just like Mafia betting, those who loaned the money for
those bets go broke because nobody is able to pay them. Thus the Federal Reserves of
USA engineered the $30 billion plus rescue of Bear Stearns-JP Morgan to prevent a total
meltdown of the then $526 trillion hedge fund-derivatives market which would have
extinguished the entire banking structure operating those hedge funds off book. The little
problem at Bear Stearns was just a little bump in the road. In the consequence Americas
20 largest banks were essentially bankrupt and being kept afloat by the Federal Reserve.
The history of speculations in options, futures, and other simple bets are dwarfed by the
derivative markets of the late 20th to early 21st century which evolved to bypass the
markets margin limitations.
Long-Term Capital Managements bankruptcy crisis in 1998 uncovered the unsettling
reality that this small hedge fund with a capital base of only $2 billion had over $1
trillion in bets in the derivatives markets, betting primarily on the Russian Ruble whose
value had been successfully destroyed. This was a margin of only 0.02% and many of the
estimated 400 other hedge funds then operating would have had similar slim margins bet
on similarly volatile currencies.
By late 2007, derivatives bets by the then 10,000 hedge funds created a $416 trillion
house of cards, eight times the GDP of the world economy, which climbed to $526 trillion
even as 20 of Americas largest banks were facing insolvency and the world economy
was shrinking.

The article was published in the magazine Money Plus of daily English newspaper The NATION.

The $200 billion written off by the banking system in February 2008, means roughly a $2
trillion shrinkage in circulating money (circulation of base money is the money supply).
So a financial bubble dependent upon continued expansion can unwind very fast and
these same banks are now considered to have at least $800 billion more in bad paper to
write down. For that to happen would mean a $20 trillion shrinkage in circulating money
(the money supply) which would be a total collapse of the economy.
Thus it is obvious why the Federal Reserve/Treasury is desperately bucketing money at
those banks and other sectors of the economy.
To avoid throwing the worlds financial markets into turmoil bankrupt hundreds of
hedge funds wipe out big-name financial institutions sabotage the investments of
pension funds and scramble the portfolios of millions of average investors, the
worlds central banks are pushing huge sums of created money at the financial markets.
All aspects of the markets have become chips in a casino game, played for high stakes
by people who produce nothing, invent nothing, grow nothing and service nothing.
Sharp traders have leveraged world markets with stock and currency options, futures on
options, meaning options on options, futures on interest rates, warrants, a form of option,
and thousands of other similar subdivisions of instruments, called derivatives, designed to
lay claim to wealth properly belonging to your, me, and all other productive citizens.
Hedge funds betting on everything in the markets, and sometimes outside the market
(weather for example) will go, leveraging those bets up to 70 times (meaning betting with
borrowed money) and, as said above, doing all this to the tune of $526 trillion worth of
derivative bets is what has all markets of the world holding their breath.
The collapse of the huge housing bubble in America triggered the crisis but was not the
cause. Interest rates were kept low, borrowers with poor credit or no credit were loaned
money on houses that were rapidly appreciating in value due to those lax standards.
Speculators were borrowing against their homes to buy more expensive homes and
condominiums which were rising 10 to 20% a year in price. Most of those speculators
started out with good credit. But when the rise in home prices topped out and the bubble
burst they were stuck with paying mortgages on homes priced higher than their
Those subprime loans were sold to Fannie Mae and Freddie Mac, the primary financing
for home loans, and others. The two FMs, banks, and other traders packaged those
subprime loans in with prime loans, gave them a triple A rating, and sold those bundled
debt instruments, collateralized debt obligations (CDOs) and structured investment
vehicles (SIVs), etc, on the markets. Those toxic debt instruments functioning as bonds
were bought by investors worldwide.

Problems arose when word leaked out that many of the debts within those bonds were
uncollectable. Quickly the markets seized up. The forced revaluations became the first
$200 billion dollar write down of major banks addressed above.
Central bank funds pouring $2 trillion to $3 trillion at the ethereal world of high finance
instead of at the real economy indirectly includes those hedge funds. If these publicly
provided trillions of dollars do not turn the financial markets around, those central banks
will have to loan directly to the real economy, a right that, in an emergency, the U.S.
Federal Reserve has always had. If investor and consumer confidence collapse, those
funds distributed, not loaned, directly to consumers and which may be required to restart
the economies.
This would be interesting to notice that Wall Street bankers used the above described
derivative tools to crash the Japanese land and market bubbles and vulture funds bought
up Southeast Asian properties. By printing 35 trillion in 2003-04, equaling $50 for each
person on earth, which was converted to dollars to buy US treasuries, Japan partially
evened the score.
It is also important to understand where derivatives and hedge fund monies come from.
One must start after the last financial crash which typically destroys massive sums of
unearned wealth.Here we will be challenged because entrenched wealth has a larger share
of a nations wealth than in normal times. But entrenched wealth owners are essentially
non-producers. It is the knowledge and talents of productive manager-owners and labor
who rebuild a society after a financial crash. In that process, they own the largest share of
increased wealth.
After the Great Depression, entrenched wealth slowly increased their excess rights and
kept claiming a larger and larger share of the wealth produced. In fact between 1974 and
2000 entrenched wealth claimed all the wealth created by efficiencies of technology,
about 30% gain per decade, plus a part of what once went to labor. Labor was lower paid
in 2000 while entrenched wealth had increased their annual profits by roughly 75%.
Under current property rights law as applied to natures resources and technologies,
denying others their rightful share, unearned finance capital piles up higher and ever
higher. Much is exported buying up properties around the world. Much of it bids stocks
up higher and ever higher. And there is still more unearned finance capital than can be
safely invested.
More gambling games must be devised to absorb all that massive finance capital that has
no place to be safely invested. Thus hedge funds and the derivatives market, totally zero
sum games, meaning they produce no wealth, grew like mushrooms. Before an economy
can rebalance and care for everyone somewhat equally, an economy must crash and
destroy massive sums of that unearned wealth. That is happening in the current, 2008-09,
financial crash.

Protecting their wealth and power, private bankers, having control of Federal Reserve
policy even though it is socially owned and are pointing all created money at that
unproductive ethereal world of high finance. But that financial balance cannot last long.
Wealth has not been redistributed, massive finance capital with no safe to invest still
exists, and these massive unearned sums will resume accumulating. Hedge funds,
derivatives, and other non-productive endeavorswill rapidly expand, and another
financial crisis will be upon us.