profitepaper pakistantoday 17th December, 2012

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Monday, 17 December, 2012

One sided concessions by Pakistan to India

How cities can save China Henry M Paulson Jr

ritory to destabilize FATA and Baluchistan, yet an understanding has been given to India that it will be given access to Afghan markets via land route.

Once India consolidates her position in Afghanistan and establishes strategic links with CARs through Pakistan and Afghanistan, she will be in a position to block or curtail Pakistan’s trade with Afghanistan and CARs, or open the trade route after extracting additional favors like putting all core issues in a cold freezer for times to come.

Should we again be misled into believing that this time India is genuinely interested in peace and friendship? If so, what is the basis of optimism? What practical steps India have taken to allay our legitimate fears, or to resolve outstanding issue of Kashmir, which bedevil Indo-Pak relations? For 64 years Pakistan has been ceding ground to win the friendship of India but couldn’t change the mindset of Brahman rulers. If India is genuinely interested in friendship with Pakistan, it must prove it by actions and not by deceptive and hypocritical sweet talk.

India has been constantly acquiring concessions from Pakistan under deceptive confidence building measures but giving nothing in return. Taking into account the hostile track record of India, Pakistan should open up its border with India for trade with due prudence, lest it falls into yet another trap. Grant of MFN status to India and land route through Wagah should be made conditional to the resolution of Kashmir, Siachen, Sir Creek and water disputes and stoppage of IndoAfghan cross border terrorism from Afghan soil. The US pressure and India’s guile must be resisted with full determination.

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

China is experiencing its most severe economic downturn in decades, and revitalizing its economic model is critical to future prosperity — not only in China, but around the world.

Central to that effort is the transformation of China’s cities. By adopting a new approach to urbanization, its leaders can assure more balanced investment, address a major source of debt, achieve a consumption windfall and clean up the country’s environment. Otherwise, China’s economic and environmental problems will worsen, with vast implications for the rest of the world. China’s success has been built on two pillars: investment and exports. But after decades of growth, this model is delivering diminishing returns. There is little doubt that China must change to a new model, one that relies on consumption to generate growth, while addressing debt and broadening the use of sustainable energy and environmental practices.

Cities, home to hundreds of millions of Chinese consumers, lie at the core of this problem — and offer a potential solution.

A flawed system of municipal finance is driving debt, corruption and dissent, while unsustainable urban planning has yielded polluted cities that are destroying China’s ecosystem. Yet China’s future requires continued urbanization, which, absent a new approach, will only make the problem worse. Cities can, however, be part of the solution: better urban policies can put China on a healthier path forward, economically and environmentally. For one thing, municipal financial reform is essential because debt is crushing Chinese cities, leaving mayors with no means of financing the central government’s policy mandates. Mayors have developed creative ways to raise revenues, including appropriating farmers’ land and seizing land on the outskirts of cities to sell to developers. But these practices contribute to urban sprawl and often feed corruption. Among other changes, China’s cities need transparent budgets and the devolution of more tax authority to cities. More innovative urban planning and design are also needed. To achieve the country’s goals of raising living standards for a broader share of the population, cities must be better designed to yield energy efficiency and environmental sustainability.

China’s potential is stifled by traffic and pollution. Gazing out my hotel window in Beijing on a recent trip, I saw air that was hazy and polluted — a stark contrast to the sparkling view of Lake Michigan I enjoy from my kitchen window at home in Chicago.

This isn’t just China’s problem. Experts found that dirty air from China contributed up to 20 percent of the ground-level pollution on the American West Coast in 2010. And that is when just one-tenth of Chinese own cars. Imagine what China’s air quality will become when this number triples, as some experts predict it will within the next several years.

Take another example: construction. Within city centers are countless “superblocks” — half-kilometer-square developments interspersed with huge boulevards that create monster traffic jams and skyrocketing pollution.

In response, an approach that featured smaller blocks and mixed-use neighborhoods and accessible public transportation would alleviate these unintended consequences. Such “livable cities” would balance economic development with energy efficiency, improve air quality and reduce congestion. Getting China’s urbanization right will matter to us all. Fortunately, many in China understand this, and cooperation with the United States government, corporate world and nonprofit sector, including my own research and advocacy institute, is bringing them the tools they need to prioritize design issues in their cities and adapt infrastructure plans now. These tools include instruction in sustainable practices for government leaders, public education in environmental issues and specialized training for the country’s urban planners.

China must adopt this new approach quickly, before vast infrastructure investment makes the current model irreversible. By 2025, China is projected to have a staggering 200 cities with populations over one million.

America has just nine.

Global prosperity depends on China’s continuing to be an engine of growth.

We all need China to reinvent its economic model. Working together on urbanization creates progress toward joint solutions to the challenges the world faces from overwhelming pressure on natural ecosystems, resources and commodities.

We need Chinese cities to succeed, and we can help ensure that they do so.

Henry M Paulson Jr, a former chief executive of Goldman Sachs and Treasury secretary, is the chairman of the Paulson Institute

Courtesy Opinion Maker

Courtesy The New York Times

Brig asif Haroon raJa

T

HE US brokered Pak-AfghanTransit-Trade-Agreement (PATTA) on July 19, 2010 allowing transportation of Afghan goods through Wagah to India and in return Pakistan getting permission to use Afghan territory for trade with Central Asian Republics (CARs). The US twisted Pakistan’s arm to make India part of PATTA so as to allow India to export goods to Afghanistan and beyond through Wagah border, grant Most Favored Nation (MFN) status to India and liberalize visa regime. Efforts are now in hand to pressure Pakistan to allow India to transport merchandise goods to and from Afghanistan without giving anything in return except for deceptive promises that trade with India will be of great benefit to Pakistan. A new opening is being given to India despite the fact that there is a serious trade imbalance in Indian favor.

On 2 November 2011, Pakistan agreed in principle to grant MFN status to India with a view to liberalize trade between the two countries, disperse clouds of distrust, build confidence and bolster peace process. By December 2012, India would transition to full MFN status. Several rounds of talks took place to remove bottlenecks and improve overall climate for two-way trade. Pakistan has been insisting to remove non-trade barriers against Pakistani goods and ease its quality control and customs procedures. Visa regime has been liberalized and new land routes are being sought by India. Apart from awarding MFN status to archenemy, India has also been made part of PATTA. MFN status to India will enable India to tilt trade balance completely in its favor since even now when Pakistan enjoys MFN status since 1996, its exports to India are worth $200-$350 million only and that of India without MFN status are $2.3 billion. Current trade balance remains heavily in favor of India. Once India is bestowed the MFN status without providing protection to local manufacturers and growers, and granted access to Afghanistan and Central Asian markets through Pakistan, it would not only flood our markets with cheap Indian goods and cripple our manufacturing industries, but would also fulfill India’s dream of monopolizing the economics of South Asia and Central Asia.

Pakistan has decided to compete with India and grant it additional concessions at a time when Pakistan’s industry and economy is highly vulnerable and fragile and the country is at the brink of becoming a failing state. The west has already started calling Pakistan a failed state. Pakistan GDP in 2010/11 stood at 2.4 % as against India’s 8.5 %. Indian exports to Pakistan stand at $1.2 billion as against Pakistan’s exports to India totaling $268 million.

Since India’s economy is robust and vibrant and has relatively secure environment, the trade deficit is likely to grow further. India will be in a much better position to flood Pakistani markets with cheap Indian goods to destroy Pakistan’s economy and local industry. Unable to compete with India, it will adversely impact Pakistan’s manufacturing industries and will also negatively impact Pakistan’s trade with Afghanistan and with CARs. Seeing the military and nuclear build up of Indian armed forces at a feverish pace, its threatening posture particularly because of its ominous strategic alignment with USA, Afghanistan and Israel, its refusal to solve any of the longstanding disputes, its ongoing water and covert war together with propaganda campaign against Pakistan, it is simply mind boggling to hear our rulers harping that India doesn’t nurture ill-designs against Pakistan. Hina Rabbani is upbeat that distrust gap between Pakistan and India is narrowing and greater people to people interaction and trade between the two countries would help in improving the overall climate.

The intriguing question is as to why should Indian business community risk trading with Pakistan where industries are closing down due to perpetual power shortages and scarcity of gas, and our businessmen are shifting to Bangladesh, Malaysia and India due to prolonged load-shedding, shortage of gas, insecure environment, unstable political situation and economy in dire straits? India doesn’t want to help Pakistan to become economically viable but it has been its fervent desire to make Pakistan economically unviable. Covert war combined with water war and propaganda war, and now supplemented with trade war is designed to strangulate Pakistan and forced to withdraw Kashmir case and forget about other disputes. Moreover, knowing that India is vying to become the leading contender among other competitors in Afghanistan and is using Afghan ter-

Fiscal cliff may unbuild America Peter orszag If you want a concrete example of the unanticipated harm that could come from the U.S. going over the fiscal cliff, look no further than Build America Bonds, an efficient alternative way to subsidize state and local investments.

They are part of the spending that is scheduled to be reduced in January.

Build America Bonds, which were created in the 2009 stimulus bill, are a shining example of the right way to subsidize activities through the tax code. The wrong way --which is also the way virtually all other tax subsidies are structured -- is to provide a tax deduction or exclusion. This means that the tax break per dollar of subsidized activity varies with the taxpayer’s marginal rate, and that is both unfair and inefficient.

Consider, for example, the exemption allowed for interest paid on state and

local bonds. A high-income taxpayer gets a larger tax break for each $1 of interest paid on the bond than a middle-income taxpayer who owns the same bond does.

This creates a windfall for high-income taxpayers, a variety of analyses have concluded. The interest rate on state and local bonds falls by less than the tax break the high earners enjoy. As a result, only about 80 percent of the forgone federal revenue shows up in reduced state and local government borrowing costs.

Direct Subsidy Build America Bonds, by contrast, provide a direct federal subsidy, an explicit tax credit that isn’t dependent on marginal tax rates. As a result, it is delivered fully to state and local governments.

As I emphasized in my previous article on the topic, these bonds have two other benefits: They attract new participants, such as pension funds, and they help lower the interest rates on traditional

state and local bonds.

Build America Bonds were created by the 2009 stimulus bill for issuance in 2009 and 2010.

During that time, state and local governments used them to finance more than $180 billion in capital infrastructure projects, saving, according to the Treasury Department, an estimated $20 billion in present value relative to the cost of traditional tax-exempt bonds.

Which brings us to the fiscal cliff. If the se-

quester -- the automatic budget cuts Congress agreed to as part of the 2011 deal to raise the debt ceiling -takes effect, issuers of Build America Bonds will see an increase in their costs because the bonds’ credit is included in the sequester.

Federal interest payments are protected from the sequester, for good reason. If the federal government were to miss or unilaterally reduce interest payments, investors would no longer want to buy the affected asset.

For most other types of spending, though, the damage lasts only as long as the spending reduction is in effect -- and

then quickly fades.

The problem for Build America Bonds could be fixed in various ways, including by reclassifying them into one of the categories that are protected against sequestration. If the Barack Obama administration has the authority to do that, as some experts believe, it should.

Given the bonds’ more efficient structure, it is a travesty that the authority to issue more of them has not been extended past 2010. Subjecting the credit payments on the bonds to a sequester would only make things worse.

This illustrates just one of the multiple ways in which going over the fiscal cliff would cause substantial problems. Reducing the federal credits provided by Build America Bonds would harm not only those who have already purchased the bonds but also any hope of reviving the program.

Courtesy Bloomberg

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Business 02

Why did Obama and Cameron save a criminal enterprise like HSBC? WilliaM k Black

W

HY is HSBC still in operation?

On the same day (December 10, 2012) that the Barack Obama administration leaked the story of the HSBC settlement, a story ran in the New York Times that was full of self-praise by the Obama and David Cameron (U.K.) governments for their "cooperative approach" to cracking down on systemically dangerous institutions (SDIs).

SDIs are treated as "too big to fail" because they pose a global systemic risk when they fail. The HSBC settlement puts the lie to the Obama/Cameron crackdown on the SDIs for it revealed a disgrace -- Obama and Cameron treat the SDIs as too big to prosecute.

Indeed, HSBC demonstrates that the SDIs' senior officers are treated by Obama and Cameron as too elite to prosecute. The propaganda meme of the NYT story -- that the SDIs would never again be given special favors due to reforms being adopted by Obama and Cameron -- lasted four hours before it was destroyed by the disgraceful reality of the Obama and Cameron governments' refusal to prosecute HSBC and its officers for their tens of thousands of felonies.

The NYT article begins by accepting the Obama/Cameron framing of the SDI issue, without any critical analysis. "It is one of the thorniest problems hanging over the financial system: how should authorities deal with the collapse of a sprawling global bank to protect the financial system at large?" The reporter's implicit assumption is that we must have banks that are systemically dangerous when they fail.

This example exemplifies why implicit assumptions are so dangerous. They exclude far better alternatives or terrible risks from even being considered -- and they do so unknowingly. If the reporter had made the assumption explicitly he would have been forced to defend it with analytics. The article acknowledges that SDIs drove the financial crisis that caused the Great Recession. In the U.S. alone this caused over a $15 trillion loss in wealth and led to the loss, or prevented the creation, of over 10 million jobs. According to the Bush and Obama administrations we were lucky in preventing the crisis from growing vastly larger. SDIs are economic weapons of mass destruction -- but they cause their primary destruction inside the nation in which they reside.

Why allow a weapon of mass destruction that primarily destroys your own nation? That is an act of insanity. The City of London cannot credibly threaten the United States by creating SDIs and threatening to destroy the UK's economy. The proponents of SDIs bear an enormous burden of persuasion to prove why we shouldn't end the catastrophic danger they pose by shrinking them to the point where they are no longer potential weapons of mass economic destruction. Their burden is even greater when one considers the dominant view of economists that the smaller banks would be more efficient than the SDIs, which are massively too large to manage. The NYT reporter does not even attempt to meet that burden. The reporter also presents no indication that the U.S. and U.K. regulators even considered ending our exposure to these weapons of mass economic destruction.

The article acknowledges that trying to prevent an SDI from causing a systemic, global financial crisis once it fails is likely to fail. First, the regulators are not at all sure that they can prevent a systemic crisis with their "cooperative" proposals. Second, few regulators would risk a global systemic crisis when the alternative of bailing out the failing SDI inherently exists. Regulators have seen the disastrous results of failing to bail out Lehman.

The obvious alternative (to everyone except the reporter, the U.S. and U.K. regulators, and the Obama and Cameron governments who have implicitly assumed it out of existence) is to shrink the SDIs to the point that they no longer pose a systemic risk and to conduct the shrinkage now before they fail. That alternative would vastly reduce the economic WMD and make the banks more efficient -- a win-win solution.

The further good news is that those two "wins" are not the limits of the advantages of shrinking the SDIs before they fail. The NYT article, implicitly, assumes the Obama/Cameron framing of another issue critical to determining the SDI policies we should adopt. "'Too big to fail' is the label for the problem that confronts governments when a large bank is on its last legs." The implicit assumption is that SDIs pose a "problem" only when they are on their "last legs." Had the reporter made this assumption explicitly he would have recognized it is unsupportable.

Beyond their inefficiency, SDIs pose grave risks to a nation when they are profitable and growing. SDIs make "free markets," integrity and justice impossible

to maintain, they create the perverse political power that produces crony capitalism, and they drive the "competition to laxity" that drives regulatory failure.

I have explained most of these points in prior writings, so I will summarize.

SDIs' uninsured, general creditors get bailed out even though the contractual deal they agree to would normally cause them to suffer severe losses. The result is that they can borrow significantly more cheaply from general creditors than can their smaller rivals. SDIs that are insured banks receive an explicit governmental subsidy (deposit insurance), but the implicit federal subsidy to general creditors is far larger and is unique to SDIs. The very conservative economists who authored the book Guaranteed to Fail (2011) describe the implicit subsidy as being so large that it is the metaphorical equivalent of "bringing a gun to a knife fight." They conclude that the subsidies are so large that they inherently create "a highly distorted market." Indeed, they argue that the SDIs that created the mortgage crisis so distorted the market that there was "nothing free" about the mortgage markets. The authors also explain the SDIs' immense political power and their ability to corrupt regulators and regulation.

The HSBC case illustrates why SDIs destroy integrity and justice. Public reports of the results of the government investigations of HSBC describe a bank that has been a criminal enterprise for at least 15 years. The current settlement addresses only three of the many scandals HSBC has committed over that time period. HSBC is a recidivist of epic proportions, but the Obama and Cameron governments have failed to prosecute HSBC or any of its officers. When powerful corporations and their controlling officers grow wealthy through massive frauds and do so with impunity from criminal sanction integrity and justice are eaten away. Effective financial regulation, supervision, and prosecutions are essential to "free" financial markets. When cheaters prosper honest

firms are driven from the markets, a point that the Nobel Laureate George Akerlof explained in his famous 1970 article on markets for "lemons." He described a "Gresham's" dynamic in which bad ethics drove good ethics from the marketplace.

Fraud and the destruction of integrity among SDIs will tend to spread to their market rivals due to this Gresham's dynamic. The result is another form of systemic risk.

The Justice Department, HSBC's regulators, and the Obama and Cameron governments had the perfect opportunity to break this Gresham's dynamic and restore justice and integrity by prosecuting and taking vigorous regulatory steps that forced HSBC to shrink over the next five years to the point that it was no longer an SDI. They could have done so at a time when HSBC was reporting very high profits rather than during a crisis. It was their paramount role and duty as prosecutors and regulators to break the Gresham's dynamic by restoring the rule of law. Doing so would have been good for the markets, for increased competition, for bank efficiency, for the independence of the regulators and prosecutors, for safety and soundness, and for our democracy. Instead, they made the Gresham's dynamic far worse, shamed their institutions and professions, and betrayed their duty to the nation and citizenry.

But things are likely far worse than this description suggests, for the pathetic truth is that there is no indication that the regulators, prosecutors, or government leaders considered doing the right thing at HSBC. That is how destructive making implicit assumptions and adopting the pro-crony framing of issues is in the real world. I hope I am wrong and that an insider will resign in disgust and disclose how she fought to shrink HSBC but was overruled by her superiors.

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

Courtesy Huffington Post

Greece’s bogus debt deal asHoka Mody The process of official forgiveness of Greek debt has begun. Referred to as “official sector involvement” (OSI), it includes several initiatives aimed at reducing Greece’s debt/GDP ratio to 124% in 2020, from roughly 200% today.

Even as the deal was announced, however, newspaper reports suggested that officials recognized that the measures would be insufficient to meet the target; further negotiations on additional steps would be needed at a politically more convenient moment.

The economist Larry Summers has invoked the analogy of the Vietnam War to describe European decision-making.

“At every juncture they made the minimum commitments necessary to avoid imminent disaster – offering optimistic rhetoric, but never taking the steps that even they believed could offer the prospect of decisive victory.”

This strategy needs to be inverted – and Greece offers a real opportunity to get ahead of the curve. Instead of driblets of relief, a sizeable package, composed of two elements, is the way forward. First, as Lee Buchheit, the attorney who oversaw the Greek private restructuring, has proposed, maturities on official Greek debt could be greatly extended. A simple structure would be to make all debt payable over 40 years, carrying an interest rate of 2%. This would move Greece and its official creditors beyond the continuous angst that now prevails.

The second element of the debt-relief package would be more innovative: If Greece’s economy performs well, the generous extension of maturities can be clawed back or the interest rate raised. A formula for this could be linked to the debt/GDP ratio – a scheme with advantages that transcend the Greek case. The idea of linking debt relief to a c o u n t r y ’ s debt/GDP ratio has b e e n around for a while, but has never gained significant acceptance. Applying it in Greece would be a highly visible test; if successful, it would set a valuable precedent.

Why bother?

Because the very premise of the current deal and the expectations it sets out are wrong. First, the notion that there is a smooth transition path for the debt/GDP ratio from 200% to 124% is fanciful. Second, even if, by some miracle, Greece did reach the 124% mark by 2020, the claim that its debt

will then be “sustainable” is absurd.

Thus, continuing down this path will further erode policymakers’ credibility – not that they seem to care – while imposing on the rest of the world a persistent sense of crisis and uncertainty, with real financial and economic costs.

Make no mistake: policymakers’ track record on forecast-

ing Greek economic performance during the crisis has been an embarrassment. In May 2010, the International Monetary Fund projected – presumably in concurrence with its European partners – that Greece’s annual GDP growth would exceed 1% in 2012. Instead, the Greek economy will shrink by 6%. The unemployment rate, expected to peak this year at 15%, is now above 25% – and is still rising. The debt/GDP ratio was expected to top out at 150%; absent the substantial write-down of privately held debt, which was deemed unnecessary, the ratio would have been close to 250%.

In September 2010, four months after the official Greek bailout was put in place, the IMF issued a pamphlet asserting that “default in today’s advanced economies is unnecessary, undesirable, and unlikely.”

The conclusion was that official financing would carry Greece past its short-term liquidity problems. Calls for immediate debt restructuring went unheeded.

Six months later, after substantial official funds had been used to pay private creditors, the outstanding private debt

was substantially restructured.

Such were the errors committed over short time horizons. Relatively speaking, 2020 is an eternity away. Even assuming better forecasts, the projection of 124% could be a gross underestimate. The precision of the numbers underpinning the deal is a façade, if not a reflection of an alternate reality.

And, again, even if Greece somehow did achieve the 124% milestone, its debt would still not be sustainable. At that point, Greece would merely be where it started in May 2010. The most reasonable comparison is with Latin American countries during their debt crises in the 1980’s and 1990’s. Despite significantly lower debt/GDP ratios and continuous debt restructuring, they eventually needed the large debt reduction that came with the issuance of Brady bonds to achieve some breathing room.

Getting ahead of the curve will give Greece a realistic chance of controlling its own destiny. It will also be a reminder of the dangers of rushing in with official money where private debts have become unsustainable. Staying the course, as Summers warns, will lead only to “needless suffering” before that course inevitably collapses, bringing Greece – and much else – crashing down.

Ashoka Mody is a visiting professor of International Economic Policy at the Woodrow Wilson School of Public and International Affairs, Princeton University.

Courtesy Project Syndicate

Monday, 17 December, 2012