No system can survive for long (though capitalism did it) if it is fundamentally flawed, but what eventually can spell its doom is its corruption by its self-righteous implementers while its ideological supporters standby as silent spectators. This is precisely what happened with capitalism over the past three decades.
The shocking aspect of this failure is that, while globalisation of trade connected almost every state with the rest creating mutual dependencies, it failed to build a vital bond among them - joint ownership of successes and failures. This is manifested by the way nations have opted, almost overnight, to start believing in a detestable slogan: "everyone for himself, only God for us all". Reminds you of the 'Friends of Pakistan'?
Suddenly every link in the great chain built by globalization of trade has become dispensable. The massive outflow of the 'vagabond' portfolio investment from developing countries is crippling these economies reminding them of the mess witnessed in the late 1990s. No emerging economy seems to have learned a lesson there from; Pakistan is a shining star in this galaxy.
Globalisation of trade had charmed the International Chambers of Commerce (ICC) into watering down the sanctity of Letters of Credit (LC) that must be established only by banks to give exporters the surest payment guarantee. The ICC proposal, whereby businesses were to be allowed to establish LCs, could have undermined the trust in LCs. All credit to the bankers who successfully opposed this flawed idea.
There was a reason why ICC thought as it did: in the name of competition (the kill-thy-adversary type) under-pricing competitors became the pervasive culture because, ably supported by advertising, it afforded access to 'new' consumers - the simple, first-time buyer and quality-unconscious millions migrating to cities from villages, courtesy the scores of 'industrial revolutions' that were then raging in developing states.
With banks bent upon earning highly questionable profits, their service charges skyrocketed. In this milieu, and with the concurrence of reckless exporters, the costly LCs mechanism was discarded; instead, imports on collection basis or on open account providing no payment security to exporters or their financing banks became common. The shift signified banks' and exporters' misplaced confidence in importers.
This scenario changed overnight as banks everywhere went into a tailspin. Exporters no longer want to export even against LCs; they now seek issuing banks' payment risk under LCs to be guaranteed by banks of their choice. This implies that LCs be confirmed by banks that exporters consider more reliable than the LC issuing banks. Courtesy the global financial crisis, such 'reliable' banks are suddenly in short supply.
Pakistani banks face a variety of dilemmas rooted in the financial sector crisis; getting their LCs confirmed is the one added recently to that list. Generally, banks extend lines of credit for taking on specific risk-types of another bank, which limits the risk-involving transactions a bank may carry out for another. Presently, foreign banks have suspended these lines; such transactions are now accepted on a case-to-case basis.
This 'friendly' environment that Pakistani banks now face is not peculiar to Pakistan; most developing countries face it. In the coming weeks and months it will force exporters in developing countries to either stop exporting or export without any assurance of payment. How will it impact exporters in developing countries and re-building of those countries' fast depleting exchange reserves, is an unfolding tragedy.
As for importers, most of them must now pay in advance because LCs established by their banks on their behalf, are no longer acceptable. Until end-2007 foreign banks were charging LC confirmation commission at 0.5 percent of the LC amount; now it can be as high as 6.5 percent effectively raising the landed cost of goods to this extent besides the hike being caused by the continually depreciating Rupee.
So much for the 'globalisation' of trade and the great chain of welcome dependencies and common interests it had built. We now begin the era of self-reliance. This is the unpleasant reality. But who broke that great chain? It wasn't capitalism - is was the corruption of it in the name of lifting barriers to trade and allowing competition to replace the core value of long-term economic vision with the fly-by-night philosophy.
The real culprits are policy-makers followed closely by market regulators who, very irresponsibly, fell into the number-game trap. They didn't ask the private sector firmly to ensure that growth must predominantly be real. That it must not be excessively consumption-driven. The discovery that the planet is now short on water, food and energy for sustaining civilised existence thereon, unmasked a laxity that went unpunished.
It proves that policy-makers and market regulators allowed resources to be misused grossly by the private sector. To ensure sustained growth, economies must spend on social and physical infrastructure building that is enough to guarantee a reasonable future for the coming generations. This fundamental truth was lost on the state as a whole in most countries including the great democracies.
Regulation, instead of being a step ahead of financial innovation, was an after thought once innovation led to disasters - invariably always caused by big businesses. Now central banks are lending directly to these monstrosities to prevent them from falling apart that could force millions on to the streets. No one was ready to shun the traditional US value - big is beautiful - until the current crisis signalled its being flawed.
All political parties of Pakistan put together have not found a politician who could act as the country's Finance Minister in this critical phase of its history. This void conveys a clear message: politicians only know how to spend what has been accumulated (no matter at what cost) by the previous regime. Reversing an economic downturn is beyond the politicians' intellectual and managerial capacities.
Not surprisingly, politicians can't decide on their own about sectors that must stay in state control and those that shouldn't. Do you know that the state still owns the Ghee Corp of Pakistan, Morafco Industries, Tomato Paste Plant Corp, Pakistan Automobiles Corp, Republic Motors Ltd, Sindh Engineering Ltd, Services International Hotel Lahore, and State Cement Corp of Pakistan? No politician knows why.
What the state has opened to the private sector are services (health, primary education, energy, power generation and mass transport) whose retention by the state is mandatory because, for the survival of the common man and the industry, these must be provided without profit being built into their prices. This confused mix of state priorities shows how it can be taken for a ride, almost indefinitely, by the self-seekers.
Now they are united in condemning capitalism for the bitter harvest we reap although the culprit is the state that needs to reform itself before people lose confidence it its legitimacy as the most responsible of all institutions. It is time politicians spent less of their energies on making emotional speeches and more on comprehending the emerging macroeconomic realities to outsmart the whiz kids of the private sector. The wrong dear Brutus (ie fellow Pakistanis) is not in our stars (ie capitalism), but in ourselves (ie our politicians).
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