Tuning the growth & inflation
Issa Khan Durrani

IT HAS become a blatantly repeated phrase that our economy is on a “trajectory of growth”. The average GDP growth of 6 % in the recent four fiscal years too support the much repeated slogan of economic take off. Socio-economic development however, is still a distant dream that is yet to be realized. Inflation and the resultant poverty are the two biggest challenges faced by the government even after achieving numerous economic milestones like record foreign direct investment, and mounting foreign reserves etc. Inflation is one area that has continued to put a black mark on the effectiveness of government’s policies and competencies of economic gurus in charge. Government suggests that inflation has not been brought under control partly because of the expansionary nature of Pakistan’s economy and partly due to some uncontrollable factors like surging international oil prices. Opponents on the other hand, are of the view that it is attributable to the deliberate mismanagement on part of government and its wrong policies that this giant inflation could not be contained. This article however, discuses a neutral and independent view of the causes and implications of inflation.
Inflation observed in the recent years has been back breaking for the fixed income group of society. Shrinking middle class is the result of continuous inflation that has felt its shocks the most. Reports suggest that the average household budget of a middle class family has swollen up to five times in last two years. Ever increasing prices of daily consumer products and services has brought the standard of living down as evident from the HDI ratings. Eroding social setup is a corollary to the sustained inflationary pressures as witnessed by our society where basic human rights such as food, clean water, education, and security etc have become luxury items for a common man. Studies propose that inflation contribute significantly in increasing social crimes as well. Street crimes have increased 115% in the last five years which shows that there is no accidental relationship between inflation, poverty and crimes. Other then social impacts of poverty and inflation, there are many adverse economic implications as well. Inflation raises the cost of capital that limits the economic activity hampering the growth of SMEs. These SMEs are said to be economic drivers of developing economies that contribute the most to the annual output of the country. Inflation makes survival of these small business operators difficult that essentially means giving a serious blow to the economy.
Inflation is determined on a basic economic principle of Supply-demand gap. We will consider the both side of the gap and draw our conclusion on the basis of a multidimensional view on the causes of inflation.
On demand side, the very first element is the monitory policy. Our economy is still feeling the aftershocks of loose monetary policy acquired by the state bank during year 2003 and 04. The loosening of credit in these years resulted in a tremendous supply of money that contributed to the demand hikes and its spillovers are still observed in form of inflation. Other factors that increased the aggregate supply of money include the huge surplus of financial capital coming from abroad in form of remittances and foreign aid. These apparently, never-ending lines of credit coupled with increase in disposable income due to increase in employment posed incredible increase in total demand causing a supply demand gap.
Another policy lapse causing high demand and resultant inflation is the consumer financing boom that we are still witnessing these says. Providing consumers with an easy installment based pricing system made products attractive and affordable. Banks leading the consumer financing boom although made considerable riches and fortune out of it however, it ended up triggering further demand and hence inflation.
On supply side, the basic factor causing the gap is essentially the low productivity of our agriculture and manufacturing sector as reflected in the SBP’s first quarter report of 2007 as well. Lack of modern technology and stone aged processes make these industries incapable of producing efficiently. Their annual output and production can not cater to our increasing domestic demand and hence we have to rely on imports that not only cause inflation but also put burden on the government. Other then industrial inefficiency, supply shortages are also attributable to artificial scarcities created by some major players in the market. Hoarding, profiteering, smuggling and formation of cartels and monopolies are issues we are not unfamiliar with. Few influential groups work in their self interest under the protective umbrella of legal authorities and are condoned by the government. Such groups find the attitude of government conducive to continue acting in the same selfish manner and crisis like sugar, cement and most recently the wheat crisis, keep on appearing every now and then. Rise in international oil prices also give a substantial impetus to inflation. Oil is a major input in almost all production units which well explains why even $1 increase in oil price at one end of the world impacts the prices of commodities at our end.
The gravity of this issue “inflation” which has almost become a cause of national crisis is such that it just cannot be overstated. Some of the recommendations that can be fruit-full in controlling the soaring prices are discussed below in the last part of this article.
Firstly, such a fiscal path should be adopted that can complement the tight monetary policy. It has been three years since money supply was tightened when in year 2005 State bank decided to acquire a tight monetary policy to control inflation. Results however were not commendable and inflation continued to persist. This to a large extent, is due to the fact that the fiscal policy adopted was expansionary which sort of neutralized the effect of tightening the credit. When such a combination of fiscal and monetary paths is adopted, debt starts accumulating which ultimately results in inflation through higher prices of public goods and services. Therefore a supporting fiscal policy should be implemented that can help control inflation.
Another policy level solution for inflation lies in the over all economic orientation of our country. Strong stable economic growth is projected as the hallmark of this government by many government officials. Independent international studies however, have an altogether different story to tell. They explain that the current economic growth of Pakistan is entirely consumption based which has no sustainability prospects in long and even medium term future. There is a dire need to have shift from consumption led economic expansion to investment driven growth. Although it can be argued that first quarter report of Fy07 released by SBP claims that investment to GDP ratio this year, has stood at 24%. However it can be attributed to creative accounting by government officials that this ratio has been wisely made so attractive. A large portion of the above stated ratio is composed of investment coming in form of privatization of national assets and family silvers. Other then that, opening up of even a chain of fast food restaurants, Mc Donald for instance is considered to be an investment. A real time investment is what is required to change our economic orientation for good so that we don’t have to rely on consumer financing boom to make our figures of growth pretty. Continuing with this point, it has already been mentioned that the huge surplus of money coming from abroad in form of remittances and foreign aid has been a bonanza for this government. Unfortunately these funds could not be managed properly and were directed either towards real estate or towards the vulnerable stock market. This resulted in further escalation of prices causing yet more inflation. We again need to channelize these funds and direct them to long and medium term investment so that the dividends can be received in the future. Restoring productivity of our agriculture and especially large scale manufacturing should be the top priority of the concerned personnel in the government. Modern Value additioning processes should be incorporated. Renovation should be brought where possible and innovation where necessary. Subsidies should be given to protect our infant industries and the process should be held intelligently where it should be ensured that in competencies and complacencies of the industry don’t get supported by the subsidizing mechanism. Subsidizing in the research and development areas can be fruitful as these are regions where we lack significantly. Improving industrial productivity means low cost production of goods and services and a greater supply towards lowering down of inflationary pressures.
International oil prices too to a large extent determine our domestic inflation as mentioned earlier as well. However if our government can show the audacity to absorb some portion of the soaring oil prices instead of making money out of it, an immediate relief can be given to a common man and a small local producer as well.
Bringing tax reforms is also an indirect way of controlling inflation to some degree. Large portion of the total tax revenues is composed of indirect taxes for example GST (General sales tax), which directly reduces the purchasing power of a poor man. If government can ensure better tax administration bringing more and more tax defaulters under light of justice, the potential of direct income tax revenue can be utilized at optimum level. In this way government will no more be lying on GST and an immediate relief can again be given to the masses.
Finally, giving due considerations to the issues like monopolies and cartel formation, smuggling, hoarding etc can avoid a lot of artificial supply shortages. Proper management and administration if shown at government offices can do wonders in this area and numerous selfish groups can be taught the lessons of justice.
Every now and then, ministers and other official spokesperson keep on coming on TV and continue offering lip services to this issue, institutionalizing the concern however, remains the challenge and is yet to be achieved. A striking balance should be maintained between the growth and inflation. Such policies should be adopted and implemented that are not only conducive for economic growth but should also be effective in containing inflation which in turns is equally important for both the societal relief and long term economic sustainability.


An airport modernizes
Lan Xinzhen

D
IT IS all systems go for the new Terminal 3 at the Beijing Capital International Airport (BCIA). Called the “Gateway Project,” Terminal 3 passed its final tests on November 6 and will begin operations as of February 2008.
With a total floor area of 902,000 square meters, the terminal will be able to handle 60 million passengers every year, surpassing the total handling capacity of the two terminals now in use
A week before the final checkup, the third runway of BCIA passed tests administered by the General Administration of Civil Aviation of China (CAAC) and has been deemed operable. With a length of 3.8 km, the new runway can handle arrivals and departures of large aircraft such as the Airbus 380. The instrument landing system can guide aircraft to land safely under poor visibility. BCIA is also the first Asian airport with three runways in use simultaneously.
The completion of Terminal 3 and operation of the third runway signal that major projects for the extension of the BCIA are complete. The finalization of the project helps alleviate, to some extent, the transportation bottleneck to the capital city.
50 years of service
Opened in March 1958, BCIA was the initial commercial airport in China and at first it only had a small terminal building. On January 1, 1980, Terminal 1, with an area of 60,000 square meters, as well as the tarmac and parking area, were completed. As the passenger flow increased, Terminal 1 became filled to capacity. The more advanced, 336,000-square-meter Terminal 2, went under construction in October 1995 and was dedicated on November 1, 1999. The opening of Terminal 2 meant the closing of the outdated Terminal 1. However, as passenger flow continued to increase, Terminal 1 was put into operation again on September 20, 2004 after complete renovation.
In recent years, the business volume of BCIA has been rapidly growing and Terminals 1 and 2 have been filled to capacity. The newest extension of BCIA broke ground in March 2004.
During the period of expansion, the business volume of BCIA continued its fast growth. According to statistics released by Beijing Capital International Airport Co. Ltd., in 2006, the annual passenger handling capacity of BCIA reached 48.65 million, over 376,600 flights arrived at or departed from the airport, and its cargo and parcel handling capacity was 1.02 million tons, up 124 percent, 101 percent and 85 percent, respectively, compared with 2000.
Between 2000 and 2006, BCIA was ranked from 93 to 28 among all airports in the world in terms of flight volume, from 31 to 21 in terms of cargo and parcel handling capacity, from 42 to nine in terms of passenger handling capacity. It is the first airport in the Asia-Pacific region that ranks among the top 30 in all the three major categories.
In the first half of 2007, BCIA became the eighth largest passenger handler in the world, said Beijing Capital International Airport Co. Ltd.
Technological upgrades
The automatic pedestrian walkways, baggage handling system and information processing system at BCIA’s Terminal 3 all use internationally advanced technologies and equipment.
According to Dong Zhiyi, General Manager of Beijing Capital International Airport Co. Ltd., Terminal 3 will adopt an automatic baggage handing system for the first time. This system will be able to handle 8,000 pieces of departure baggage and 6,500 pieces of arrival baggage per hour at peak times, securing the accuracy and speed of baggage handing. The system includes radio frequency identification equipment so that baggage can be monitored when being transferred. The system also has five-grade security check equipment to find even the most concealed contraband goods.
Wireless Internet access will be available throughout Terminal 3 so that passengers can enjoy Internet surfing anytime and anywhere and also give airlines the ability to increase mobile check-in service at peak times. At the same time, restaurants and vendors can adopt wireless ordering and wireless sales services. At present, wireless Internet access is only available in the business centers of Terminals 1 and 2.
In order to reduce the walking distance for passengers, Terminal 3 provides 51 elevators and 63 escalators. It takes passengers less than five minutes to walk from the entrance to Terminal 3 to the furthest boarding gate.
The 2008 Olympic Games also bring challenges to BCIA. At present, there are an average of 1,100 flights arriving at or departing from BCIA every day. It is estimated that during the 2008 Olympic Games, the number will increase to 1,500-1,600. At peak times, 1,900 flights may arrive at or depart from BCIA every day.
Terminals 3 and 2 will be the major air passenger facilities serving the Olympic Games. According to Dong, Terminal 3 will receive charter flights for the Olympic Games as well as Olympic delegations taking regular international flights. Preliminary estimates show that it will take 40 minutes to receive a charter flight for the Olympic Games, 80 minutes to receive a charter flight for the Paralympic Games, 70 minutes to receive an Olympic delegation taking a regular international flight and 130 minutes to receive a Paralympic delegation taking a regular international flight. Terminal 2 will mainly receive ordinary international flights, with 55 minutes needed to receive a flight at this location.
“The time of stay for Olympic visitors at the airport will be shorter than during the 2000 Sydney Olympic Games and 2004 Athens Olympic Games,” Dong said.
No longer far away In June 2008, the light rail line linking BCIA and Dongzhimen in downtown Beijing will be put into operation. It will only take 16 minutes for passengers to travel from Dongzhimen to the airport via the light rail line, much faster than taking an airport shuttle bus.
According to Dong, an urban terminal will be set up at Dongzhimen, providing check-in and luggage checking services, which will greatly facilitate passengers’ travels. With a total length of 28.1 km, the light rail line to the airport has four stations. It connects to subway Line 2 and Line 13 at the Dongzhimen station. After arriving at the airport, passengers can reach the terminals via escalators.
The light rail line to the airport will provide aviation-like service and each train will carry up to 4,500 passengers per hour. The interval between trains will be five minutes at the early stage and will be shortened to four minutes in the future. “It will be more convenient to go from the urban district of Beijing to the airport,” Dong said.

(The Daily Mail-Beijing Review Articles Exchange Item)




GCC Summit: Prospects & challenges
Abdulaziz O Sager

THE GCC leaders will meet in the first week of December in Doha, Qatar for their regular annual summit meeting to discuss the current issues and future challenges facing the GCC nations and the region in general. Most likely the final communiqué of the summit will refer to the usual Gulf concerns and other regional issues of interest. However, the Iranian nuclear crisis will definitely be at the forefront of these issues. Relations between Iran and the GCC states cannot be limited to the nuclear issue. This is not to underestimate the importance of this issue to the GCC countries. The concern felt by the GCC states can be partly attributed to some extreme statements and actions by the Iranian government over other issues of interest. Thus, it is important to view the Iranian nuclear crisis within the wider context of the policies and attitudes of the Iranian regime toward the Gulf region in particular and the Arab world in general.
Since Iran is an Islamic state, and a neighbor of the Arab world, it is imperative for Gulf-Iranian relationships to be based on the firm foundation of mutual interests, friendly neighborliness, respect of sovereignty and noninterference in internal affairs. However, the problem is with the confrontational nature of the policies of the Iranian regime which creates a state of instability in the region. Much of this emanates from internal conflicts and imbalances within the Iranian political system. Of course we cannot ignore the other sources of instability in the region, chief among which is the failure of US policies in Iraq, which ultimately works to the interest of Iran. In this context, it could be said that the interventionist nature of Iranian policy vis-a-vis Arab affairs has the same dangerous impact as the Iranian nuclear policy. This aggressive policy has damaging effects on the security of the Arab world in the near and long term. Iran is controlling the main centers of power within the Iraqi state. It has virtual domination over the political process and decision-making mechanism in Iraq. It plays a major role in the political and security scene in Lebanon, and has a clear presence in Palestinian politics. This is in addition to its total rejection of any possible peaceful solution to the issue of its occupation of the three UAE islands. Some recent statements from within Iran repeated the old false claims that the sovereign Kingdom of Bahrain is just another Iranian province.
Also, Iran has failed until now to build confidence among its neighbors in the Gulf region and reassure them about its nuclear program. The GCC summit will be held at a time when the option of a military confrontation over the Iranian nuclear crisis is gaining considerable momentum. Iran under Ahmadinajad is more or less taking the same position as Iraq under Saddam Hussein, which led to catastrophic results. The two UN Security Council resolutions 1737 and 1747 called upon Iran to suspend, with immediate effect, all enrichment-related and reprocessing activities on its territory. Since March 2006, the UN Security Council has repeated its calls, but Iran continued with its enrichment process, while the political and military leadership of the country raised the level of political rhetoric.
It is worth mentioning here that the call for the suspension of uranium enrichment activities is no longer an American or European demand; rather, it has become an urgent requirement by the international community. It is a demand that has the credence of international legality conferred upon it by the UN Security Council resolutions.—Arab News