Complete

PBR ISSN 1561-8706
PAKISTAN BUSINESS REVIEW

Indexed and Abstracted by ECONLIT, Journal of Economic Literature Inedexed by EBSCO, USA HEC Approved Journal
Volume 13 Number 3
October 2011
Motif Private Sector Responses to The Global Crisis: The Case of Pakistan Sultan Ahmed Chawla Research Germanys South Asia Strategy: Implications for Pakistan Betina Robotka Testing the Validity of CAPM and APT in the Oil, Gas and Fertilizer Companies listed on the Karachi Stock Exchange H. Jamal Zubairi, Shazia Farooq Students Prior Degree Performance as Predictor of their Performance at MBA Level Ali Asghar Malik Aggregate Imports and Expenditure Components in Pakistan: An Empirical Analysis Ch. Sohail Ahmed Schizophrenia: The Exterminating Angel: A Deleuzoguttarrian Critique S.M. Mahboob-ul-Hassan Bukhari Identifying Active Factors to Address the Excess Flash Problem in Plastic Injection Molding Process Ejaz Ahmed, Muhammad Wajahat Ali The Islamic Calendar Effect in Karachi Stock Market Khalid Mustafa Case Study Stock Valuation: Hub Power Company Shazia Farooq, Dileep Kumar Maheshwari, Rabbiya Ghulam Mohammad, Rafia Abdul Sattar, Sateesh Balani Book Review Taha Turabi (Ed. 2009) Turabiyat Allama Rasheed Turabi Memorial Trust Karachi Javed A. Ansari Conference Report Strong Leadership Strong Institutions: Its a Matter of Change Report on Seminar held on February 26, 2011 Nasreen Husain Overseas Chambers of Commerce and Industry Seminar on Pakistan: Challenges and Aspirations Syed Maqbool-ur-Rahman
INSTITUTE OF BUSINESS MANAGEMENT

MANAGEMENT EXCELLENCE CENTRE
KORANGI CREEK, KARACHI-75190, PAKISTAN UAN (9221) 111-002-004, FAX: (9221) 509-0968, 509-2658 E-mail: sabina@iobm.edu.pk, bsc@iobm.edu.pk http://www.iobm.edu.pk
Volume 13 Number 3
October 2011
Contents
Motif Private Sector Responses to The Global Crisis: The Case of Pakistan Sultan Ahmed Chawla Research Germanys South Asia Strategy: Implications for Pakistan Bettina Robotka Testing the Validity of CAPM and APT in the Oil, Gas and Fertilizer Companies listed on the Karachi Stock Exchange H. Jamal Zubairi, Shazia Farooq Students Prior Degree Performance as Predictor of their Performance at MBA Level Ali Asghar Malik Aggregate Imports and Expenditure Components in Pakistan: An Empirical Analysis Ch. Sohail Ahmed Schizophrenia: The Exterminating Angel: A Deleuzoguttarrian Critique S.M. Mahboob-ul-Hassan Bukhari Identifying Active Factors to Address the Excess Flash Problem in Plastic Injection Molding Process Ejaz Ahmed, Muhammad Wajahat Ali The Islamic Calendar Effect in Karachi Stock Market Khalid Mustafa Case Study Stock Valuation: Hub Power Company Shazia Farooq, Dileep Kumar Maheshwari, Rabbiya Ghulam Mohammad, Rafia Abdul Sattar, Sateesh Balani Book Review
Taha Turabi (Ed. 2009) Turabiyat Allama Rasheed Turabi Memorial Trust Karachi
415 424 439 459 488 513 547 562
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Javed A. Ansari Conference Report Strong Leadership Strong Institutions: Its a Matter of Change Report on Seminar held on February 26, 2011 Nasreen Husain Overseas Chambers of Commerce and Industry Seminar on Pakistan: Challenges and Aspirations Syed Maqbool-ur-Rahman Instructions to Authors
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PAKISTAN BUSINESS REVIEW OCTOBER 2011
Volume 13 Number 3
Editorial Committee
October 2011
Amna Abbas, Humeira Jawed Abidi, Syed Aijaz Ahmed, Ejaz Ahmed, Javaid Ahmed, Maqsood Ahmed, Samin Ahmed, Ch. Sohail Ahmed, Naseem Akhtar, Ghayyur Alam, Khalid Amin, Javed A. Ansari, Sadia Aziz Ansari, Linah Askari, Nadia Ayub, Sharique Ayubi, Mirza Aqeel Baig, Sahib Khan Channa, Aslam Dossa, Shazia Farooq, Syeda Mahtab Fatima, Sameena Hasan, Nasreen Hussain, Fareeda Ibad, Sheikh Muhammad Irfan, Samra Javed, Fauzia Kanwar, Talib S. Karim, Faisal Kazi, Shahida Kazi, Urfi Khalid, Fazal Anwar Khalidi, Muhammad Asif Khan, Muhammad Ma ssarrat Ali Kha n, La iq Mu ha mma d Kha n, Krisha n Lal Khatri, Deep Kira n, Ali Ashghar Malik, Bismah Malik, Shahnaz Meghani, Mujtaba S. Memon, Abdul Qadir Molvi, Mehboob Moosa, Fakhir Musharraf, Sarwat Nauman, Munazza Owais, Abdullah Patoli, Tauseef Ahmed Qureshi, Kamran A. Rabbani, Ajaz Rasheed, Wajdan Raza, Farheen Razzak, Syed Maqboolur Rehman, Samina Riaz, Owais Riaz, Bettina Robotka, Sadiyah Saeed, Kausar Saeed, Syed Imdad Shah, Asad Shahzad, Nida Shaukat, Asiya Shirazi, Lubna Siddiqi, Shama Siddiqi, Ejaz Wasay, Shahida Wizarat, Sobia Younus, Humayun Zafar, H.Jamal Zubairi.
Muhammad Ashraf Janjua: Sabina Mohsin: Fareeda Ibad: Muhammad Asif Khan Sheikh Muhammad Irfan Ghulam Dastagir: Shahzad Ali:
Chief Editor Managing Editor Literary Editors Production Associate Editorial Co-ordinator
International Advisors (Referees) Prof. Izlin Ismail, Faculty of Business and Accountancy, University of Malaya, Kuala Lumpur Prof. David L. Jones, Indiana University Center on Southeast Asia, USA Prof. Dennis R. Briscoe, University of San Diego, USA Prof. James M. Burns, University of San Diego, USA Prof. Angelo Santagostino, University of Brescia, Italy Mr. Thomsas Winter, University of Rostock, Rostock, Germany Dr. Ishrat Husain, Institute of Business Administration, Karachi Prof. Gerald D. Huston, Arizona State University, USA Mr. Darshan Johal, UNCHS (Habitat) Prof. Mehtab Karim, John Hopkins University, USA Dr. Geoff Kay, City University, London Dr. Khalid Nadvi, IDS, University of Sussex Dr. Peter O Brien, SADCC, South Africa Prof. Sarfaraz Qureshi, Islamabad Dr. T.M. Roepstorff, UNIDO, Vienna Dr. Shahid Hasan Siddiqui, Research Institute for Islamic Banking and Finance Prof. Charles J. Teplitz, University of San Diego, USA Prof. Munir Wasti, University of Karachi, Karachi Dr. K.M. Larik, Iqra University, Karachi Dr. Javed Iqbal, University of Karachi, Karachi Dr. Rashid A. Naeem, Allama Iqbal Open University, Islamabad Prof. Dr. Shafiq ur Rahman, University of Karachi, Karachi Dr. Rizwana Zahid, Government APWA College for Women, Karachi Dr. Arshi Ali, Federal Urdu University, Karachi Prof. Dr. Rafique Ahmed Khan, PAF-Kiet, Karachi Dr. Ayub Ali Meher, Karachi Mr. Amir Hussain Siddiqui, Trade Development Authority, Karachi Syed Zeeshan Arshad SZABIST, Karachi Dr. Abdul Wahab Suri, University of Karachi, Karachi Prof. Dr. Abdul Waheed, University of Karachi, Karachi (Contd)
October 2011
Volume 13 Number 3
Referees Dr. Naveed, Institute of Business Administration (IBA), Karachi Dr. Moazzam Khan Sherwani, Institute of Environment Studies, University of Karachi Dr. Samiuzzaman, Global Environmental Lab (Pvt) Ltd. Korangi, Karachi Dr. Anila Ambar Malik, University of Karachi, Karachi Dr. Seema Munaf, University of Karachi, Karachi Dr. Nabeel A. Zubairi, University of Karachi, Karachi Dr. Sabira Sultana, Foundation for Advancement of Science and Technology (FAST), Karachi Dr. Zainab F. Zadeh, Bahria University, Karachi Dr. Ziasma, University of Karachi, Karachi Prof. Asim Jamal Siddiqui, University of Karachi, Karachi Prof. Dr. Mudassir-ud-din, University of Karachi, Karachi Ms. Yasmin Zafar, Institute of Business Administration (IBA), Karachi Dr. Muhammad Zubair, University of Karachi, Karachi Dr. Uzma Parveen, University of Karachi, Karachi Ms. Nighat Bilgrami Jaffery, Applied Economics Research Centre, University of Karachi, Karachi Mr. Mohsin H. Ahmed, Applied Economics Research Centre, University of Karachi, Karachi Prof. Syed Afrozuddin Ahmed, University of Karachi, Karachi Prof. Ghulam Hussain, University of Karachi, Karachi Mr. Mahboob-ul-Hassan, University of Karachi, Karachi Dr. Muhammad Mahmood, Khadim Ali Shah Bukhari Institute of Technology, Karachi Dr. Nargis Asad, Aga Khan University Hospital, Karachi Dr. Abuzar Wajidi, University of Karachi, Karachi Mr. Mohammad Umar, Takaful Pakistan Limited, Karachi Ms. Rubina Feroz, University of Karachi, Karachi Prof. Dr. Talat Wizarat, Institute of Business Administration (IBA), Karachi Dr. Muhammad Zaki, University of Karachi, Karachi Mr. H. Jaleel Zubairi, Allied Bank Ltd. , Karachi Dr. Zaira Wahab, Iqra University, Karachi Dr. Ismail Saad, Iqra University, Karachi Mr. Naim Farooqui, Pak-Kuwait Investment Company Ltd. Karachi Dr. Sara Azhar, University of Karachi, Karachi Prof. Ahmad Farooq Shah, Bahauddin Zakarya University, Multan Mr. M. Mazhar Khan, State Bank of Pakistan, Karachi Dr. Tariq Yousuf Khan, Karachi Dr. Fauzia Shamim, University of Karachi, Karachi Mr. Mohammad Soliman, University of Sciences and Technology Chittagong, Bangladesh Prof. Abdul Mannan, School of Business, University of Liberal Arts Bangladesh Dr. Fatima Imam, Federal Urdu University, Karachi Prof. G.R. Pasha, Bahauddin Zakariya University, Multan Mr. Shameel Ahmad Zubairi, University of Karachi, Karachi Mr. Imran Naveed, Joint Director., State Bank of Pakistan, Karachi Mr. Qaisar Mufti, Chief executive, Qaisar Mufti Associates, Shahra-e-Iraq Saddar, Karachi. Ms. Afra Sajjad, Head of Education & Policy Development, ACCA Pakistan, Lahore 54660 Dr. Khan Brohi, Director, Institute of Environmental Engineering and Management, Jamshoro Mr. Amir HussainEconomist WTO Cell, Trade Development Authority of Pakistan, Karachi Mr. Tanveer Anjum, Department of Business Communications, Iqra University Dr. Arifa Farid, Department of Philosophy Ex-Dean Faculty of Arts, University of Karachi Mr. Mushammad Asim, Department of Business Administration, Karachi Mr. Kamal Udin, Karachi Mr. Bhagwan Bharvani, Retired Internal Auditor, Pakistan International Airlines, Karachi Mr. Muhammad Zubair, Department of Islamic History, University of Karachi, Karachi
October 2011
Volume 13 Number 3
INSTRUCTIONS TO AUTHORS (Research Section) 1. 2. Papers must be in English. Papers for publication should be sent in triplicate or by e-mail to: Managing Editor, Pakistan Business Review Institute of Business Management Korangi Creek, Karachi- 75190, Pakistan UAN: (9221) 111-002-004 Fax: (9221) 3509-0968, 3509-2658 E-mails: sabina@iobm.edu.pk, mec@iobm.edu.pk Submission of a paper will be held to imply that it contains original unpublished work and is not being submitted for publication elsewhere. The Editors do not accept responsibility for damages or loss of papers submitted. 3. PBR is a multi-disciplinary journal covering all subject areas of relevance to business in Pakistan. Research in the areas of Finance, Human Resources, Management, Informatics, Marketing, Psychology, Economics and issues related to governance is specially encouraged. Manuscripts should be typewritten on one side of the page only, double spaced with wide margins. All pages should be numbered consecutively, titles and subtitles should be short. References, tables and legends for figures should be typed on separate pages. The legends and titles on tables and figures must be sufficiently descriptive such that they are understandable without reference to the text. The dimension of figure axes and the body of tables must be clearly labelled in English. The first page of the manuscript should contain the following information; (i) the title; (ii) the name(s) and institutional affiliation(s); (iii) an abstract of not more than 100 words. A footnote on the same sheet should give the name and present address of the author to whom reprints will be sent. Acknowledgements and information on grants received can be given before the references or in a first footnote, which should not be included in the consecutive numbering of footnotes. Important formulae (displayed) should be numbered consecutively throughout the manuscript as (1), (2), etc., on the right hand side of the page where the derivation of formula has been abbreviated, it is of great help to referees if the full derivation can be presented on a separate sheet (not to be published). Footnotes should be kept to a minimum and be numbered consecutively throughout the text with superscript arabic numerals. The references should include only the most relevant papers. In the text, references to publications should appear as follows: Khan (1978) reported that. Or This problem has been a subject in literature before [e.g., Khan (1978) p. 102]. The author should make sure that there is a strict one-to-one correspondence between the names (years) in the text and those on the list. At the end of the manuscript (after any appendices) the complete references should be listed as: for monographs and books. Ahmad, Jaleel, 1978, Import substitution, trade and development, Amsterdam: North-Holland, For contributions to collective works Newbery, Daved M.G., 1975,. The use of rental contract in peasant agriculture, in: Reynods, ed., Agriculture in development theory, New Haven: Yale University Press p. 3-40. Continued next page
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Volume 13 Number 3
October 2011
INSTRUCTIONS TO AUTHORS (Research Section)
From previous page: For periodicals Baumol, W.J., 1982, Applied fairness theory and rational policy, American Economic Review, 72(4): 639561. Note that journal titles should not be abbreviated. 10 . Illustrations should be provided in triplicate (one original drawn in black ink on white paper and or with two photocopies). Care should be taken that lettering and symbols are of a comparable size. The drawings should not be inserted in the text and should be marked on the back with figure numbers, title of paper and name of author. All graphs and diagrams should be numbered consecutively in the text in arabic numerals. Graph paper should be ruled in blue and any grid lines to be shown should be inked black. Illustrations of insufficient quality which have to be redrawn by the publisher will be charged to the author. 11 . All unessential tables should be eliminated from the manuscript. Tables should be numbered consecutively in the text in arabic numerals and typed on separate sheets. Any manuscript which does not conform to the instructions may be returned for necessary revision before publication.
Motif Motif
Private Sector Responses to the Global Crisis
PRIVATE SECTOR RESPONSES TO THE GLOBAL CRISIS: THE CASE OF PAKISTAN

Sultan Ahmed Chawla ex-President FPCCI, Karachi Introduction This paper outlines the Pakistani private sectors response to the challenges posed by the global economic crisis which began in late 2007 to the national economy. Part one presents an analysis of the nature of this crises. Part two discusses current responses of both metropolitan and developing countries to ameliorate the worst effects of this persisting economic downturn. Part three presents the proposals the private sector has recently made to the Pakistan government to restore inclusive sustainable growth to the national economy. I-The Nature of the Crisis The crises that begin in the American wake of the subprime mortgage defaults in late 2007 is still with us and is usually interpreted as financial in nature and the typical policy response has been a somewhat mild tightening of financial regulatory regimes at the national level. This concern with restoring financial balances and shoring up threatened financial institutions has obscured several important structural characteristics of the global economy which have made this crisis so long lasting. It is these underlying structural characteristics that I will try to identify in this section. The 2007 crisis certainly manifested itself as a financial phenomenon. During 2007-2009 several mega financial institutions were threatened by insolvency in the metropolitan countries. But very few were allowed to collapse and trillions of 415 PAKISTAN BUSINESS REVIEW OCTOBER 2011
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dollars of tax payers money was pumped into the financial markets in America and in several European countries to salvage them. In response financial health was at least temporarily restored and macroeconomic growth prospects revived in the United States and at least Western European countries. However, since 2009 we have been confronted by threats of sovergin insolvency as one Western European country after another finds itself unable to service its external debt. And of course several non emergent developing countries including my own - are also on the brink of default. Pakistans external debt has increased by about 70 percent during the last five years while its capacity to service this debt has if anything stagnated. Moreover, the bailout initiatives of the metropolitan governments do not seem to have done the trick. The recovery that is occurring in Europe and America seems more and more dependent on continued and indeed expanded public support hence both the United States and the European Union have in 2010 continued to provide financial assistance of billions of dollars to sustain recovery and to prevent both private sector and sovergin insolvency. This continued need for state support illustrates the inadequacy of the response to the crisis. The most obvious evidence of this inadequacy is the jobless character of the growth that it is occurring in the metropolitan countries. This shows that the efforts that are being made to revive national economies are by passing the bulk of the population specially the poor. Thus capacity to participate in this recovery, through enhanced purchasing power is not being enhanced. Income distribution patterns which have become more and more unequal since the early 1980s specially in America and in the core European economies have if anything become more unequal during the crisis years. This is because the massive bailout programmes are invariably tax financed and represent a major transfer of resources from the general public to a small number of financial institutions whose shareholders and office bearers are among the richest people in the world.
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It is inadequately recognized that sustainable financial recovery requires an upsurge in real economic activity in industry, in agriculture, in trade, in services. If growth in the real sector is stagnant financial recovery is also necessarily unsustainable. The present crisis occurred primarily because of the overdevelopment of the global financial sector and this overdevelopment was itself a product of the stagnation of effective demand in the real sectors agriculture, manufacturing and services. Effective demand in these real sectors depends crucially upon the growth in the purchasing power of the broad masses. The rich are not and cannot be major consumers of food products, clothes and educational services there are simply too few of them to make a major impact in these markets (and often they are also ageing). The overdevelopment of the financial sector is a sure sign that firms are not finding opportunities for profitable investment in the real markets. This is exactly what was happening in Europe and America during 2002-2007. Real sector firms were replete with surplus savings corporate saving rates were high but opportunities for real sector investment were constrained by rising inequalities. And where effective demand was buoyant it was sustained by borrowing not by the growth of real income. Hence firms turned to financial markets for availing lucrative investment opportunities and their customers turned to financial markets for increasing purchasing power. Financial sectors became more and more overdeveloped in the sense that a mountain of financial derivatives were precariously balanced on a diminishing real base. The macro structure was stood on its head as the following figures show: Financial Sector Financial Sector
Real Sector
A Normal Economy
Real Sector
A Crisis Prone Economy
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II- The Response A striking feature of the response both global and national to the present crisis is the non emergence of a new policy paradigm. Unlike previous crises period following for example 1873 and 1929 no establishment voices are proposing a fundamental change in theoretical perspectives there is no Marx, no Veblen, no Keynes in sight. Policy perspectives remain broadly unaltered and the emphasisis on the development of a more effective regulatory regime rather than a restructuring or overhaul of the system. The resort to neo Keynesian policies by the Bush / Obama and several EU regimes is of an adhoc, character and the underlying premises of this reform effort seems to be that state bail out and simulative efforts will necessarily be of a self liquidating character. A time will soon come when such Keynesianism for the rich will no longer be necessary. More sophisticated prudential regulation of the financial institutions and an essentially symbolic widening of the global structures of policy co-ordination will prove sufficient for ensuring sustainable recovery and business as usual. This approach does not address the fundamental structural deformity underlying this crisis which merely appears as a crisis of finance but is at its core a crisis of the relative overdevelopment of the financial sector vis--vis the real sector. The crisis is thus in its essence a crisis provoked by the growing inequalities fortressed by the global and national policy regimes that have been in place since the early 1980s, adopted both by conservative regimes and their social democratic successors in most metropolitan and developing countries.. If this view is correct if the crisis is fundamentally caused by growing inequality then those economies which have as yet been relatively lightly affected by the present crisis should take heed. Inequality is rising rapidly in several emergent economies especially in India, China, Brazil and Mexico. Moreover, subsumption of these regimes within globalized structures of regulation as articulated why the FSF, the IMF, and the WTO etc. ensures that the same pattern of relationships is built between the public and private sector in these emergent PAKISTAN BUSINESS REVIEW OCTOBER 2011 418
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economies that exist in the metropolitan economies. This means that overdevelopment of finance will characterize the growth of these emergent economies capital will be pulled away from agriculture, from manufacturing from services to money and capital markets both home and abroad and the gulf between the haves and havenots will widen. Moreover, since the poor and dispossessed in the developing countries are far worse off than the poor and dispossessed in the West, rising inequalities will have much more serious consequences as far as political stability and social harmony is concerned in their countries. For growth to be sustainable in the developing countries it must be inclusive growth - this is a political and social imperative which no governing elite in the emergent economies can afford to ignore. A regulatory state abiding by the rules endorsed by multilateral institutions such as the IMF and WTO will find it very difficult to encourage real sector development in the developing economies. Increasing inequalities have grown in tandem with the globalization of the macro policy regimes indeed financialization is often seen as a necessary consequence of the globalization of national macro regulatory regimes. Thus if the developing countries are to develop a policy framework which focuses on the reduction of inequalities and the promotion of wide spread employment growth within the real sectors, the international macro regime must be redesigned to enable them to articulate such macro strategies. The view that the minimalist Nozickian state which confines its role to the regulation of private markets both financial and real is optimal in the sense that it enables every national economy to realize its economic potential is not vindicated by empirical evidence and is theoretically incoherent. International economic policy co-ordination must find space for according legtimization to what Samuel Huntington christened as development states in the 1970s. A developmental state does not confine itself to regulation. It actively participates in all markets to ensure that equitable and efficient development takes place on a sustainable basis. III - What is to be done? I will not attempt to outline changes in the global policy co-ordination regime that in my opinion are necessary to address 419 PAKISTAN BUSINESS REVIEW OCTOBER 2011
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the fundamental structural disjunctures that have both participated and sustained this crisis. No doubt there are several people at this august forum much more qualified to speak on these issues than I am. I am a representative of Pakistani business I have just completed a two year term as President of the Federation of Pakistan Chambers of Commerce and Industry and am now serving as Vice President of the apex federation of business in the Central and West Asia region know as ECO and grouping together Pakistan, Iran, Turkey and the ex Soviet Central Asian Republics. As President FPCCI I commissioned a comprehensive report on challenges facing Pakistans manufacturing sector which outlined a set of policies that in our opinion the government of Pakistan should adopt if the manufacturing sector and overall macroeconomic growth is to be stimulated in a manner which makes it both inclusive and equitable on the one hand and sustainable on the other. I now summarize these recommendations. The FPCCI, President or his nominee should be included on the Board of Directors of the State Bank of Pakistan so that the formulation and execution of monetary policy measures should routinely and explicitly take account of their implications for industrial development. An initiative should be taken to promote universal banking in Pakistan. All financial institutions should be given targets for total long term industrial sector investment on an annual basis. The establishment of sector specific banks and capital market funds jointly owned by federal and provincial government with private sector participation should be encouraged in a) the engineering sectors b) textile and apparel sectors. The State Bank of Pakistan must reinstitute the formation of an indicative National Credit Plan on an annual basis. This plan should estimate the credit requirements of major manufacturing sectors if they 420
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are to grow at the required rate so that the desired annual rate of growth of GDP is achieved. This will provide benchmarks against which the actual advances performance of the financial institutions can be systematically monitored. Public investment in large scale manufacturing and in mining must increase substantially. This is essential to reverse the near terminal decline of the capital goods producing industries in Pakistan. It is also necessary to increase the non tax revenue receipts of the government. As the South Korean and Japanese examples have shown public enterprise profit can become a major source of public development financing. Government should attempt to evolve management structures linking public and private ownership and control in both industry and finance. Much of the success of the miracle economies of East Asia was due to successful interweaving of public and private management structures at the level of the firm. Initiatives are required to rekindle the national project rehabilitation initiative which has been all but abandoned. The problem of growing portfolio infection of the financial system cannot be tackled without successful project rehabilitation. A policy benchmarking system must be established within the federal ministries of industry and commerce to monitor changes in industry and trade specific policies of our key trading partners the USA, the European Union, China the UAE and Saudi Arabia for example. This will identify opportunities and barriers in key markets and enable Pakistan to evolve best practice production, investment and marketing strategies. It can also lead to the 421 PAKISTAN BUSINESS REVIEW OCTOBER 2011
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development of an appropriate policy support system targeting specific markets. The federal ministry of commerce should monitor WTO regulations and international quality standards continuously to identify scope for interpretation of these regulations and standards in a manner which is in accordance with Pakistans national interests. We should acquire Chinese expertise for this purpose and learn from Beijing the art of developing national standards and regulatory frameworks which are within the ambit of global commitments but primarily designed to serve national needs. Integrating trade and FDI investment strategies can yield rich dividends in sectors such as textiles, pharmaceuticals and automobiles. FDI facilitation should be linked to export performance domestic resource use and technology transfer targets. The focus of trade and investment incentivization strategies should be on Pakistani communities resident in the Gulf, the USA and Europe. Institutional mechanisms for the establishment and strengthening of Pakistani Chambers of Commerce in the UAE, Saudi Arabia the UK and the USA with strong policy implementation capabilities should be explored and government funding should be provided for this purpose. I hope that these recommendations make clear what sort of policy reform is required to initiate and perpetuate sustainable and inclusive growth in Pakistan. Pakistan is a relatively large developing country with a population of over 170 million. But it remains disparately poor with a per capita income less than $ 1,000 and a highly inequitable pattern of income and asset distribution. Pakistan has been hit hard by the crisis real GDP growth fell from an average of over 6 percent during FY04 to FY08 to about 1 percent in FY09 and 3 percent in FY10. In FY11 growth is forecast at about 2.5 percent. Pakistan suffered a major PAKISTAN BUSINESS REVIEW OCTOBER 2011 422
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financial upheaval in the first and second quarters of FY09 when the government had to spend billions of rupees to salvage major banks with foreign equity participation and management. Export growth in both FY09 and FY10 was also severely affected by the collapse in demand in Pakistans major export markets the USA and West Europe. Both direct and portfolio investment plummeted during the crises years. On the other hand, the governments external debt grew rapidly and will exceed $60 billion by the end of the present fiscal. Since 1988 Pakistan has been participating in IMF stabilization programmes the current one has been extended up to Sept 2011. The commitments under these programmes have been investment growth constraining. During the crises years private investment has stagnated and public investment has virtually disappeared from the commodity producing sectors. There has been almost no macroeconomic structural change. The share of manufacturing value added in GDP has remained stagnant at 12 percent for over two decades. Capital goods industries have been destroyed. Pakistan, one of the leading textile exporters of the world, produces no textile machinery. The private sector calls for the state to take on a development not a hands off arms length regulatory role to institutionalize sustainable, inclusive growth. There must be a major revival of public industrial investment. Public and private corporate management structures must be interlinked. Trade and investment strategies must be integrated. The priority policy concern must be the promotion of domestic demand. A fundamental orientation of the macropolicy paradigm is required if Pakistan and most developing countries are to increase them, crisis resilience and to institutionalize sustainable inclusive growths which realizes their full economic potential.
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Germanys South Asia Strategy: Implications for Pakistan
Research Research
GERMANYS SOUTH ASIA STRATEGY: IMPLICATIONS FOR PAKISTAN

Bettina Robotka Centre for Area and Policy Studies Humboldt University, Berlin I. Historical Background Germany is a country that is traditionally highly regarded in the countries of South Asia. The German people and German products are valued and generate a positive response in South Asia. This attitude of regard and even admiration is due less to the real engagement of Germany in any of the South Asian countries; rather it has historical roots and is based on perceptions which seem to be transmitted in the region from one generation to the next. Among the historical reasons for this favourable view is the fact that Germany was never a colonial power in South Asia. On the contrary, Germanys political rivalry with Great Britain during the late 19th and the first half of the 20th century created the impression among the nationalist and anti-colonial popular movements that the enemy of my enemy should be my friend. That was the reason why during World War I there was a group of young Indian nationalists in Berlin who had come for studies and who tried to influence the German public in favour of the Indian freedom movement hoping to get some political and material support. Those hopes of course never materialized. In a second wave it was Netaji Subhas Chandra Bose who during World War II contacted Hitler and his government asking for support in his fight against British colonial rule. He had to leave Germany without any result. All initiatives which were taken by German foreign policy to act in South Asia such as the encouragement of the reshmi rumal plot or the German support for the fakir of Ipi were weak and ill funded and were never successful. PAKISTAN BUSINESS REVIEW OCTOBER 2011 424
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Germanys disinterest in colonial expansion in the 18th and early 19th century was not so much an expression of its missing aggressiveness but much more due to the economic and political weakness of Germany at the time and a result of missing German unification. This gave an opportunity to German intellectuals, poets and writers to develop a rather romantic picture of the Orient. One of the most famous representatives of this romantic view of the Orient is the German poet Johann Wolfgang von Goethe. Living at a time in Germany, when the idea of nationalism which eventually would close the minds of the people for the achievements of other cultures had not yet taken root. He was a real Weltbuerger - a global citizen. A strong believer in God but a critic of Christian religious tradition and church he took strong interest in ideas not Christian at all, philosophies, religions, poetry from far-away regions such as the Orient. For Goethe the Orient was the place where the wonderfully smelling spices come from, where good and righteous rulers ruled, where a highly sophisticated culture and civilization was producing deep philosophical wisdom, fabulous wealth, exotic textiles, perfumes, ornaments and surrealistically romantic stories and poetry. His West-Eastern Divan, a collection of poems published first in 1819 reflected deep interest in the East. His studies of the Koran, the first translations of poems of the Persian poet Hafiz and the first translation of the Sanskrit drama Shakuntala are landmarks in German Oriental scholarship of that time. Another example of this romantic view about India is the German Max Mueller who studied Sanskrit and became famous for translating the Vedas which he thought to be the source of the wisdom of the East. He never visited India during his life; may be the harsh Indian realty of poverty, dirt and repression may have destroyed his romanticism.1Needless to say that this romantic view of the East current in the 19th and early 20th century vanished after German unification in 1871 and its growing eagerness to join the rest of Europe in the push for colonies, cheap labour and resources and is largely absent in todays Germany. The only left-over from that period is an extraordinary large number of Sanskrit studies and traditional Islam studies in German universities. Even more, the persisting 18th century view about the East and ancient India in academics could be one of the reasons for the missing political conceptualization of German foreign policy with regard to South Asia and the realties there. PAKISTAN BUSINESS REVIEW OCTOBER 2011
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II. The Current Situation After the second World War Germany emerged as a divided country struggling to overcome the disastrous economic, political and psychological consequences of the military defeat. The division of the post-war world into a capitalist and a communist part and the beginning of the cold war era made it difficult for the two Germanies to overcome the fall-out of that war and its consequences.2 With regard to their foreign policies both German states became dependent on the victors of that war who were not interested in an independent role for Germans in foreign policy. That may be the main reason why only in 1993 a first Asia concept of the Federal Republic of (re-united) Germany was formulated which looked at Asia as a whole and did not specify regional policies within Asia. This first concept was strongly focussed on the economic interests of the former FRG3. East Germany during its existence had been even more dependent on Soviet guidelines for its foreign policy and did not develop any independent concept. East and West German foreign policy was tilted towards India as the largest country with the largest economy and may be also because of the mentioned historical romantic traditions idealizing India. In addition, East Germany had a preference for India because of Indias attachment to the Soviet Union through the treaty of friendship and mutual cooperation concluded in 1972.4 West Germany had mainly economic reasons for their tilt towards India. Pakistan was viewed as a US ally by East Germany and, therefore, had a low priority in its foreign relations. It came into focus of West Germany policy in the nineteen sixties during Ayub Khans rule when a rather active economic development aid program was run in Pakistan. Pakistan during that time was regarded as an example of successful development policy. Gradually German foreign policy in Asia according to their own evaluation5 has given a growing emphasis to the export of political institutions and ideas of democracy, human rights and other enlightenment values to Asia even if this in some cases would hamper their economic interests. After 9/11 all Asia related policies of the West and of Germany came under an PAKISTAN BUSINESS REVIEW OCTOBER 2011 426
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increasing focus of security related issues. A specified foreign policy concept for South Asia was for the first time in German history developed and presented to the public in 2002 on the occasion of an event named Asia Day of the German Foreign Office German foreign policy after 9/11 on the 25th June 2002 in Berlin. The document which is available on the webpage of the German Foreign Office6 formulates in 17 pages the priorities of German foreign policy in South Asia for the medium-term perspective. A closer look at the text reveals no basic changes in the concept from the earlier policy. The focus on India which is seen as the new upcoming world power is obvious and has been declared to be one of the basic principles of German foreign policy in the region. Indo-German relations are based on an Agenda for German-Indian partnership in the 21st century signed in 2000. A German-Indian parliamentarian group and a German-Indian consultation group containing publically well known personalities of the two countries are among the planned initiatives. Pakistan at that time under a Musharraf-led government- was promised support on the way towards a return to democracy, but apart from political advising and support in education, human rights and the like promoted through the German political foundations active in Pakistan and NGOs, no concrete measures, especially no economic initiatives or investments have been envisaged. With regard to economic cooperation the paper says that Pakistan is unattractive for direct investment plans but some scope for cooperation in the fields of telecommunication and engineering are identified in a general way. Though accepted in 2002 the concept does not elaborate on the war in Afghanistan and how it might influence mutual relations. A policy update might have been made but is not displayed on the webpage of the Foreign Office. On the basis of this foreign policy concept Germany is trying to manage its relations with South Asia including Pakistan and Afghanistan. It can be said that this is a rather defensive policy concept without a clear vision for the region as a whole and with a heavy tilt towards India. It seems that even more than sixty years after the end of WW II and twenty years after the reunification of Germany the restraint that was put on German foreign policy has not fully been overcome. In addition, the focus of Germany today seems to be more on the EU and EU extension 427 PAKISTAN BUSINESS REVIEW OCTOBER 2011
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problems and right now on economic difficulties at home. Pakistani expectations of a closer cooperation with and reliance on Germany face, therefore, a rather dim outlook for success. That has apart from the conceptual restraints practical and homegrown reasons. Against all hopes and expectations, since 2002 the economic and political situation in Pakistan has destabilized rather than improved. Pakistans active involvement in the War against Terror has resulted in a destabilization of this country which is anyway troubled with a weak state apparatus. The ordeal around the dismissal of the Chief Justice of Pakistan and the fatal treatment of the Lal Masjid crisis in 2007 have added to the undermining of state institutions and have spread militancy from the tribal into the settled areas and the cities of Pakistan. The PPP government in place since 2008 is busy undoing the few attempts of the Musharraf era for stabilizing the political system such as democratization of the inner party structures through intra-party elections, accountability and promotion of higher education. The judiciary which has been under direct attack in Pakistan since 1998 by both the governments of Nawaz Sharif and Musharraf is now being undermined by the PPP government. The verdict of the Supreme Court of Pakistan on the NRO which has been declared null and void ad initio is not implemented by the government given the consequences for their sitting representatives. The scandal of fake degrees of quite a number of parliamentarians from all parties is undermining the creditability of the National Assembly. For Germany which is so much more interested in the transfer of Western values and institutions to South Asia than it is in economic aid or investment this is a clear sign that their focus away from Pakistan is right. Growing corruption in all walks of Pakistani life, deterioration of the security situation and the promotion of non-issues like the renaming of provinces instead of dealing effectively with the economic downturn is unlikely to urge Germans to do more for Pakistan.
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III. The ideological background of Germanys foreign policy It is important to understand the mindset behind this German attitude in order to be able to understand political priorities and attitudes and to develop a suitable strategy. This is right not only with regard to Germany and German policy but also with regard to European policy in general and it also partly explains American attitudes. One of the amazingly insightful and clear expressions of this was General McChrystals remark in his assessment of the situation in Afghanistan in 2009 that the conflict in Afghanistan is not a war in the conventional sense but a war of ideas and perceptions.7 As a result of Enlightenment which took place in Western Europe in the course of the 18th century certain values became prevalent in European thinking and world view and on the basis of this, corresponding political institutions were developed. Some of these values are reason (meaning that everything in this world should be logical and understandable through human reason), secularism (meaning the separation between church as a representative of God which is regarded as unreasonable and the state and life in this world which should be organized according to human reason) and thirdly, individualism (meaning that the individual and his/her needs and rights carry prevalence over all others including those of the community). This state of affairs was the result of a specific development in European thinking from the classical time and the specific role the Christian church had played in European history as well as the devolution of the traditional community-based European society by the economic development of capitalism. On the basis of this European development of Enlightenment and the French revolution which shaped first French and later European societies according to those enlightenment values a world view was created which defined progress as material progress exclusively and looked at human development from a universalist point of view. That meant that the European model of development was thought to be the defining concept of progress. This had to be the road the rest of the world had to take in order to progress. The fact that the intellectual development of Enlightenment was limited to Western Europe and that its ideas were exported to the colonies America, 429 PAKISTAN BUSINESS REVIEW OCTOBER 2011
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Canada, Australia and New Zealand through European migration only while the rest of the world such as Africa, Asia, parts of Eastern Europe and South America had not experienced such a development and accordingly were holding on to very different values and world views is conveniently forgotten and disregarded by the West today. This should explain why the West in general and Germany in particular is so interested in universalizing enlightenment values and the institutions based on them to the rest of the world: it is in the first place to spread progress and it is in the second place to secure a leadership role over those countries and people who had to be enlightened with these ideas. This leadership role would of course come handy when the economic interests of the West are to be secured. Colonial rule from the 18th century had been justified by this world view regarding it as a civilizing mission to spread Enlightenment values and progress to territories lacking them and conveniently hiding economic self-interest behind this curtain of Enlightenment expansion. Since the end of World War II with the downfall of the old colonial empires and their European representatives Great Britain, France, Germany, Belgium and the Netherlands the initiative has shifted to the US to take the lead in creating a new strategy of neo-colonial domination of the world. While Germany and old Europe (quote of former US Defence Secretary Donald Rumsfeld) have lost the initiative in this war of ideas they still represent those same values and the agenda to spread them in order to make progress possible in the rest of the world. After the collapse of communism which is widely perceived as a victory of Enlightenment values many of the Eastern European as well as Asian countries have enthusiastically taken to democracy and market economy. This is taken as proof that this model of parliamentary democracy combined with market economy is the right and the only way towards progress, which is why efforts to promote these values and institutions in countries like Pakistan and even Iraq and Afghanistan are strengthened.
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There is another facet to this also. European modernity in its conviction that it is the only right path towards progress has developed quite an amount of aggressiveness towards that part of the world which had to be converted to its values and institutions. This aggressiveness was visible during colonial rule in the colonies and even outside direct colonial rule. This is the imperialist design which wants to impose its progressive ideas and structures through military power. After the collapse of traditional colonial domination after World War II under the new leadership of the US many such imperialist wars to extend the political, economic and ideological domination of West have been fought. Korea, Vietnam, Iraq, Afghanistan are examples of this.8 While old Europe and especially Germany has not taken a leading role in this - Germany avoided participation in the Iran-Iraq war it could not uphold this position under intense American pressure as the wars in Iraq and Afghanistan show quite clearly. The new NATO strategy called NATO 2020 developed under the leadership of the former US Secretary of State Madeleine Albright is another sign that this attitude is not going to be revised even in future despite the disastrous situation of the war in Afghanistan. In 2002/ 3 there was a strong mass-based anti-war movement in many western countries including the US with millions of people going into the streets to protest against a war in Iraq which was disregarded by the respective democratic governments and finally fizzled out. This clearly showed that in this post-modernist era democracy has become less expressive of the will of the people and is occasionally manipulated. There is no such pressure of street power visible today in Europe or the US on the contrary, nine years of propaganda of nurturing fears of Islam and Muslims have resulted in a situation where Islamic symbols like the holy prophet of Islam can be officially maligned under the cover of freedom of expression, the dress code of Muslim women living in European countries is interfered with by the law and Germany for instance is trying to create something like a united church of Islam so as to deal with Muslims residing in Germany. IV. The way forward In 2007 during Germanys presidency in the EU the Friedrich-Ebert- Stiftung, the political foundation of the Social431 PAKISTAN BUSINESS REVIEW OCTOBER 2011
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Democratic Party of Germany, initiated a project on the future of German foreign policy under the title Compass 2020.9 The authors have selected those regions of the world which they thought would be the important ones within this timeframe. In Asia they have focused their attention on China, ASEAN, Central Asia and India not South Asia. Pakistan and Afghanistan are left out. This shows that even for the foreseeable future Germany is not planning to change its focus with regard to South Asia and Pakistan. India is envisaged to be at the center of German foreign policy attention. The reason for this is clearly mentioned in the paper which is available on the webpage of the Foundation: This reason is Indias growth rate at an average of 8 per cent and a perceived sharing of interest in an international order based on democracy and human rights.10 In the article about the importance of the ASEAN the authors again point at the main reasons for this selection: The strategic pivotal function, which the German EU Council Presidency in 2007 has attributed to ASEAN, ultimately results from the political weight attached to the approximately 560 million consumers comprising this market as well as to the political role ASEAN countries are playing in the region.11 How to proceed from here? Any revised relationship between Pakistan and Germany would need changing attitudes and conditions on both sides. Given the domestic situation in both countries and the pressures arising from that as well as their integration into political and military alliances - Pakistan within the US war against terror and Germany within EU and NATO - no short-term substantial changes can be reasonably be expected. All that could be done is to recommend ways for an improved understanding of each others positions and of ways towards practical implementation of some new initiatives. This is attempted in the following for both sides. Germany As has been stated Germanys foreign policy focus on India is a long-term decision grounded in the sheer size, the economic potential and the rising political importance of that country. It is an expression of the huge opportunities the Indian market is offering and of the rapid economic development of PAKISTAN BUSINESS REVIEW OCTOBER 2011 432
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India during the last decade. Therefore, it would be unreasonable to expect any change in this policy orientation. Germanys political focus in Pakistan so far is directed at the promotion of Enlightenment values like human rights and secularism and at Enlightenment institutions like parliamentary democracy. As has been demonstrated there has been no Enlightenment in South Asia and as a consequence, Pakistani society is based not on individuation but on communities such as tribes, castes and biradris. The family and extended family system is almost entirely intact and when talking about the rights of individuals we have to recognize that those rights are secondary to the right of the community in cases of clashes between the two. A secularization process has never taken place in Pakistan. Therefore, promotion of Enlightenment values presupposes a change in the social fabric of Pakistani society which is as yet non existent or at most minuscule.. How did this social change occur in Europe? Together with a movement known as the renaissance in the ideological field it was triggered through the change in the economic system and the development of capitalism. Therefore, in order to promote social change in Pakistan, changes in the economy should be promoted, both in an improvement and intensification of agriculture as well as in the development of new industries and the improvement of existing industries so as to make them compatible in the international market. This would at the same time fight poverty by creating jobs, enhance food security and promote training and education of the work force. So far German economic interaction with Pakistan is focussed on aid not on investment and trade and on sectors such as healthcare, basic education and renewable energy instead of agriculture and industry. This focus should be shifted from aid to investment or aid should at least be supplemented by investment projects in both agriculture and industry which would create sustainable development and employment opportunities. So far projects have been focussing on remote and underdeveloped areas like Balochistan and Khyber Pakhtunkhwa 433 PAKISTAN BUSINESS REVIEW OCTOBER 2011
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(KP). Given the precarious security situation in those areas today future projects should be initiated instead in the underdeveloped areas of Sindh and of the Seraiki belt which are more peaceful while civil war is going on in the tribal regions. Successful constructive work is hardly possible in a destructive surrounding as the Afghan situation is showing. With regard to the basic aims of German foreign policy such as the promotion of Enlightenment values it might be useful to initiate a discussion at home regarding Enlightenment values and the whether European conception of progress is truly universal and the only option. Can the development that had taken place in Europe centuries ago possibly be repeated in South Asia? In the face of a society based on different communal structures and in the absence of secularization the complete substitution of the values connected with this different situation seems to be either impossible or a very long-term project. Such cognition would open the way for an attitude towards accepting the different structure of Pakistani society and its values as given and taking them into account while designing foreign policy and practical steps within their context. Another possible mode of dealing with Pakistan could be to see it not so much as the break-away part of India but as a part of the political region comprising of Turkey, Iran, Afghanistan, Pakistan and the Central Asian republics. There are many good reasons for taking this view. Historically and ethnically Turkish and Iranian influences in the shape of political, economic and cultural contacts between those regions as well as exchange of population have been characteristic over many centuries. Mughal rule which was of Turko-Mongolian ethnicity and central Asian culture has promoted this connection over several centuries. Equally close has been the interaction with neighbouring Afghanistan with many Pashtun tribes crossing into the subcontinent and ruling parts of northern India. Iranians have come and settled in the subcontinent as administrators, craftsmen and Islamic proselytizers. The ancient silk route connected those territories and people with each other and with China rather than with todays India. The on-going war in Afghanistan is also vividly illustrating this connection; the warPAKISTAN BUSINESS REVIEW OCTOBER 2011 434
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waging parties are more and more realizing that a solution of the conflict is impossible without the involvement of Iran, Pakistan and the adjoining Central Asian republics. Therefore, it makes good sense to view Pakistan as a part of this region which is strategically situated at the intersection of the Near East, Central Asia, Russia, China and India. Peace and economic development in this region is a precondition for European and German projects like energy security and strengthening of independence from Russian energy supplies. In that sense Germany could re-evaluate Pakistans role and importance and German involvement in Pakistan. Pakistan The German foreign policy strategy in Pakistan or any change in it is of course not a one-way affair. It would require a change in Pakistani positions as well which is not an easy demand. While one of the areas where change would be needed was of course the relationship between India and Pakistan there is also a realization that this is not going to happen soon because it needs the willingness of both sides. The deep distrust and enmity between the two will not vanish as a result of sporadic rounds of bilateral talks. Another issue in this regard is the factual nonfunctioning of SAARC. As can be seen in the German foreign policy concept for South-East Asia for instance, Germans prefer to deal with ASEAN so as not split forces too much. They would prefer a well-functioning SAARC also. But this is not in sight as yet. It is this situation which should make Pakistan on its side realize that while efforts to come to terms with India and within SAARC should not be given up a turn towards the western neighbours specially the ECO countries would offer new vistas and opportunities for economic and trade development. Partly this has already been realized with regard to Iran. The IPI power project which has generated strong resistance from the US has been persisted on and signed by Pakistan. There is some cooperation between the two countries in the security field especially with regard to checking the growth of the terrorist 435 PAKISTAN BUSINESS REVIEW OCTOBER 2011
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group Jundullah which operates in the frontier region between the two countries and is said to be aided by the CIA. But there is much more room for improving and developing relations with Iran. Iran has from the very beginning of Pakistans existence been a good neighbour having recognized Pakistan as one of the first countries in the world. Pakistans relations with Afghanistan have traditionally been difficult which is in the first place due to of the disputed nature of the borderline. The war in Afghanistan is another problem which makes the relationship between the two neighbours ambivalent. And last but not least Indian efforts to create and nurture anti-Pakistani feelings and attitudes are an impart factor. But again, there is growing realization that the fate of both countries is interconnected: peace and stability in Pakistan depend to a great amount on peace and stability in Afghanistan. It is quite clear that the economic development of Pakistan is also closely connected to Afghan cooperation; so is the extension of those relations towards central Asia. In 1985 the Economic Cooperation Organization (ECO) was formed with Pakistan, Iran, and Turkey as its only members, but Afghanistan, Azerbaijan, Kyrgyzstan, Tajikistan, Turkmenistan, and Uzbekistan joined in 1992. This has been a beginning on which Pakistan could base its revised policy in future. The ECO given time and attention could emerge as a potential Muslim common market. So far political rivalries, especially between Iran and Turkey, have limited its effectiveness. But with Turkeys economy developing quite forcefully while its prospects of being admitted as a member of the European Union remaining rather bleak it can be expected that Turkey will as a consequence turn towards its eastern neighbours which would greatly help raise the efficiency of ECO. Pakistans relationship with Turkey has traditionally been friendly and close; there is a lot of potential in the economic as well as in the political sphere for its promotion. Within Pakistan one of the problems hampering German engagement is bad governance and the presence of corruption in all fields including in government institutions. The fact that PAKISTAN BUSINESS REVIEW OCTOBER 2011 436
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the Pakistani state is weak and law and order is deteriorating does of course not encourage German enthusiasm. The destructive role of the sitting government in the degree fraud matter for instance does substantial harm to goodwill and trust in the Pakistani establishment and in their will to fight corruption and fraud. It destroys the image of official Pakistan, its parliament and its government in a degree that nobody seems to realize or to care about. Notions of Pakistan being a failed state are created by such failures more than by real insufficiencies in material conditions. V. Conclusion The need to bring peace and stability to the region of which Pakistan is a significant part should be the driving force for a re-consideration of Germanys South Asia policy concepts. This will be if at all a gradual process which also includes the need to end the war in Afghanistan. But with the enthusiasm for this war diminishing and the 2011 withdrawal date of the US forces in sight it may be the right time to start thinking about what comes next. Germany has not lost all of the good-will which it used to own in the region and especially in Pakistan. Therefore, Germany could play a leading role in the process of healing the wounds which the war has caused not only in Afghanistan but in Pakistan as well. For this a new concept is needed based on the realties of the present. The time of Goethe and Mueller is gone and it will not come back. It would be unreasonable to try to build foreign policy concepts on it. But what about the Enlightenment values to which Germany is subscribing? Equality is one of them. A focus on this idea of equality and balance in the dealings with the country and the people could be a ground on which a new policy concept could be based. The proposed inclusion of Pakistan into the region Iran/Afghanistan/Central Asia could be a viable way for restructuring foreign policy concepts. In order to realize the idea of equality it will be necessary to re-think the presumed universality of Enlightenment values and the ways to reach them. This needs a discussion which partly had been started by Heidegger and some other German philosophers. History shows that economic development can 437 PAKISTAN BUSINESS REVIEW OCTOBER 2011
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take place without Enlightenment values as China, Japan, India and even Turkey show vividly. That means that the cultural and religious traditions of those countries have not hampered their economic progress which could mean that there is no need to westernize these societies. We may concentrate on the economic sphere with technology transfer, opening of markets and investment in agriculture and industry. Notes 1.It is a telling fact that Germany is represented culturally in Pakistan by Goethe- Institutes and in India by Max-MullerBhavans. 2. The first Secretary General of NATO H. L. Ismay once noted that the task of the Nato was to keep the Americans in, the Russians out and the Germans small. http://www.presseportal.de/ pm/59019 3.Bundeszentrale fuer politische Bildung http://www.bpb.de/ veranstaltungen/YZSD32.html 4. As an East German I had the impression in 1989 that while East Germany had a preference for India West 5- Germany should have one for Pakistan which turned out to be wrong 5. See http://www.bpb.de/veranstaltungen/YZSD32.html 6. http://www.bpb.de/files/PTSRIL.pdf 7.Commanders initial assessment, 30 August 2009, http:// media.washingtonpost.com/wp- srv/politics/documents/ Assessment_Redacted_092109.pdf 8. The problem of terrorism or countering terrorism is connected to this but is outside the scope of this article. 9. www.fes.de/kompass2020/regionen.htm 10. www.fes.de/kompass2020/pdf/Indien.htm PAKISTAN BUSINESS REVIEW OCTOBER 2011 438
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Testing the Validity of CAPM and APT
TESTING THE VALIDITY OF CAPM AND APT IN THE OIL, GAS AND FERTILIZER COMPANIES LISTED ON THE KARACHI STOCK EXCHANGE
H. Jamal Zubairi, Shazia Farooq Department of Finance and Accounting College of Business Management, Karachi Abstract The Capital Asset Pricing Model (CAPM) and Arbitrage Portfolio Theory (APT) have been commonly used techniques in the global investing community for calculating the required return of a risky asset. This paper investigates whether CAPM and APT are valid models for determining price/return of the fertilizer and the oil & gas sector companies listed on the Karachi Stock Exchange (KSE). The purpose of the research is also to identify plausible reasons for deviations from the theories. The conclusions arrived at through data analysis reveal weak correlation between realized excess returns (i.e. actual returns over and above the risk free rate) and the expected return based on CAPM. With respect to APT model, the study reflects that macroeconomic factors including changes in GDP, inflation, exchange rate and market return do not serve as valid determinants of returns on oil, gas and fertilizer stocks. Key Words: Asset pricing theory, Capital Asset Pricing Model, Arbitrage Pricing Model, macroeconomic factors, Karachi Stock Exchange. JEL Classification: G11, G12
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I.
Introduction
The Capital Asset Pricing Model (CAPM) has been one of the most widely used techniques in the global investing community for calculating the required return of a risky asset. This paper aims to test whether CAPM is a valid model for predicting the price/return of the fertilizer and the oil & gas sector companies listed on the Karachi Stock Exchange (KSE). Also we investigate, whether there appear to be some deviations from the model and look for plausible reasons to explain these. For the purpose of the research, actual quarterly returns of sample companies listed on KSE for the period January 2004 to December 20091 are compared with the CAPM based (predicted) returns for the corresponding time period. The benchmark for the risk free rate Rf is taken as Karachi Interbank Offer Rate (KIBOR) 2 corresponding to the relevant monthly and quarterly time periods. For estimating market return Rm, changes in the KSE-100 index for each relevant time period is used. Stability tests are also conducted to assess the consistency of results over the entire range of data. The paper also attempts to empirically compare CAPM with Arbitrage Portfolio Theory (APT) to find out which of the two is a better method for predicting stock returns of companies belonging to the above mentioned sectors on KSE. The conclusions arrived at through data analysis might lead to useful recommendations about how and to what extent CAPM/APT can be used as tools for predicting stock returns and facilitating investment decisions, in general, and particularly for the fertilizer and the oil & gas sector companies in Pakistan.
excluding the last two quarters of 2008 due to a floor set for stock prices to halt a plunge that wiped out $36.9 billion of market value since April 2008
2
KIBOR could be considered a good proxy for risk free rate, given its high degree of certainty
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II.
The Theory and Literature Review
CAPM developed by Sharpe (1964), Lintner (1965) and Mossini (1965) builds upon the Portfolio Theory introduced by Harry Markowitz (1959). CAPM presents the basis for determining the required rate of return on all risky assets. CAPM theory is built upon the assumptions of the Portfolio Theory plus some additional ones. The major factor that allowed Portfolio Theory to develop into CAPM Theory is the concept of the risk free asset. The inclusion of the risk free asset resulted in the derivation of a Capital Market Line (CML) which was referred to as the new efficient frontier. The required rate of return on a risky asset (Ri) was derived as a function of the risk free rate (Rf) and risk premium of the individual asset. The risk premium is the product of systematic risk of the asset referred to as beta (i) and the current market risk premium. Market risk premium is defined as the difference between return on the market (Rm) and Rf. The CAPM equation is as follows: Ri = Rf + i (Rm - Rf) (I)
Systematic risks are those market risks which cannot be diversified such as interest rates, inflation and economic downturns. On the other hand, unsystematic risk can be diversified by increasing the number of stocks in the portfolio. According to CAPM, the only relevant measure of stock risk is beta. It determines the sensitivity of the stock to the market i.e. by how much will the price of the stock go up or down in relation to specific up and down movements of the stock market. The equation for i is: i = Cov (i,m) Var(m) (II)
where, Cov (i,m) = Covariance between the returns on a risky asset i and the stock market Var(m) = Variance of the market
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Ansari, Naeem and Zubairi (2005) stated that, according to CAPM, the market rewards risk bearing, since people are generally risk averse. The risk premium for the aggregate of all risky assets must be positive to induce people to hold the total amount of risky assets in a financial system. The market (according to CAPM theory) rewards only efficient risk bearing. The risk premium on any individual security is not related to its own risk but to its contribution to the total risk of an efficiently diversified portfolio. The two fundamental assumptions underlying the CAPM can be stated as: All investors have the same forecast of mean expected rates of return and its associated standard deviation and correlation of rates of return of risky assets; therefore they hold risky assets in the same proportion. When investors are optimally holding these risk portfolios, the aggregate demand for each security is equal to its supply and the financial market is in equilibrium.
When testing the validity of the CAPM in the real world, there are two key questions. First, how stable is beta? It is important to establish the validity of past betas for predicting stock returns in the future, since beta measures the only risk under consideration. Second, is there a positive linear relationship as hypothesized between beta and the rate of return on risky assets? More specifically, how far is the CAPM equation able to explain stock market returns. A number of studies have examined the stability of beta and generally concluded that the estimates were more stable for portfolio of stocks compared to individual securities. Further, the higher the number of stocks (e.g. over 50 stocks) and longer the period (over 26 weeks), the more stable the beta value of the portfolio.3
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Frank Reilly, Investment Analysis and Portfolio Management,7th Ed. PAKISTAN BUSINESS REVIEW OCTOBER 2011 442
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Various tests have also been conducted to test the usefulness of CAPM in explaining returns on risky assets and the existence of a significant positive linear relationship between beta and stock returns. A study by Douglas (1969) showed that intercepts were larger than existing risk free rates and the coefficients for the systematic risk were not significant. Sharpe and Cooper (1972) discovered a positive return and risk relationship between NYSE common stocks during the period 1931-67, although it was not completely linear. Black, Jensen and Scholes (1972) studied the risk and return relationship for portfolio of stocks and found a positive linear relationship between monthly excess return i.e. return over and above the risk free rate and portfolio beta, although the intercept was higher than the expected value. Fama and French (2004) revealed that empirical work since the late 1970s challenged the Black version of the CAPM. Specifically, evidence mounts that much of the variation in expected return is unrelated to market beta. A study by Basu (1977) showed that when common stocks were sorted on the basis of earnings/price ratios, future returns on high E/P stocks were higher than those predicted by the CAPM. Banz (1981) documented a size effect; when stocks were sorted on the basis of market capitalization (price times shares outstanding), average returns on small stocks were higher than those predicted by the CAPM. Bhandari (1988) found that high debt-equity ratios (book value of debt over the market value of equity, a measure of leverage) also helped explain the cross section of average returns after both beta and size are considered. A study by Fama and French (1992) concluded that during the period 1963 to 1990, beta was not relevant. The study also showed that the most significant predictor variables were book to market value and size. Another problem was raised by Roll (1981) who contended that it was not possible to empirically derive a true market portfolio, due to which it is not possible to test the CAPM model properly or to use the model to evaluate the market portfolio. 443 PAKISTAN BUSINESS REVIEW OCTOBER 2011
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Ross (1979) developed the Arbitrage Portfolio Theory (APT) which was both simpler and also had fewer and more realistic assumptions as compared to CAPM. Unlike CAPM, APT did not assume the following: A market portfolio contains all risky assets and is meanvariance efficient Normally distributed security returns Quadratic utility function
The theory assumes that stock returns depend on pervasive macroeconomic influences. The return is assumed to have the following simple relationship:
Ei 0 1bi1 2bi 2 ... k bik ( I I I )

Where,
Ei = Return on the risky asset i
0 = expected return on asset with zero systematic risk risk free

rate is generally taken as the proxy for this rate of return
k = the risk premium related to each of the common

macroeconomic factors - for example the risk premium related to interest rate risk bik = the pricing relationship between the risk premium and asset i, i.e. how responsive is asset i to the common factor k
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APT does not offer any guidance as to how many factors should be used to explain return and what these factors should be. These factors may also differ from one period to the next. There could be an oil price factor, an exchange rate factor, and so on. The return on the market portfolio might also serve as one of the factors. Empirical tests of CAPM and APT have been conducted in different markets. Yang and Donghui (2006) concluded that CAPM does not give a valid description of the Chinese Stock Market. The test was conducted on 100 companies listed on the Shanghai Stock Exchange during the period 2000-05. In accordance with CAPM model, the excepted returns and betas were linearly related with each other during the entire period. However, the results offered evidence against CAPM hypothesis for the intercept, which should equal zero and the slope that should equal to the average risk premium. The results of the tests conducted by Michailidis, Tsopoglou, Papanastasiou, and Mariola (2006) on data of 100 companies listed on the Athens Stock Exchange for the period of 1998-2002 provided evidence against the CAPM. The tests refuted the CAPMs prediction that the intercept should equal zero and the slope should equal the excess returns on the market portfolio. However, their findings did not present evidence in support of any alternative model. Canegrati (2008) studied the relationship between the sign of market returns and beta coefficients within six sectors of stocks listed on the Milan Stock Exchange. The evidence showed that the intercept was equal to zero, supporting CAPM theory which assumes that the only relevant variable in the regression is the excess return on the market portfolio. As a consequence of this, it was concluded that betas completely capture the cross sectional variation of expected excess returns and can be seen as a measure of asset risk. Tests using a fifteen-year sample of monthly returns examined the relation between the sign of market returns and beta coefficients and detected existence of an ex post positive (when the market is at an Up state) and negative
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(when the market is at a Low state) relationships between returns and betas. Nguyen (2010) examined the stock price behavior of the Stock Exchange of Thailand (SET), by applying APT. Employing the data for the period before the Asian financial crisis of 1997-98, i.e. between January 1987 and December 1996, the research investigated the relationship between stock returns in Thailand and some economic fundamentals, namely returns on the SETIndex, changes in exchange rates, industrial production growth rates, unexpected changes in inflation, changes in the current account balance, differences between domestic interest rates and international interest rates and changes in domestic interest rates. The test results showed that the APT does hold in the stock market of Thailand, while the CAPM fails to do so. Dash and Rao (2009) studied a sample of fifty stocks listed on the National Stock Exchange (NSE), belonging to eight most flourishing industries in the Indian economy. The objectives of the study were to compare and assess applicability of the CAPM and APT to Indian capital markets, and to find out how macroeconomic variables affect the returns of different securities. The results of the study show that the APT does not have a significantly better explanatory power over the CAPM for Indian capital markets. In Pakistan, Javid and Ahmad (2008) investigated the risk and return relationship of 49 companies listed on the Karachi Stock Exchange (KSE) during the period July 1993 to December 2004. The empirical findings did not support the standard CAPM as a model for explaining asset pricing in the Pakistani equity market. The critical condition of CAPMthat there is a positive trade-off between risk and returnwas rejected and some role of residual risk was identified in pricing risky assets. The empirical results of this study partially vindicated the conditional CAPM, with time variation in market risk and risk premium. The results confirmed the hypothesis that risk premium was time-varying type in Pakistani stock market and strengthened the notion that
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rational asset pricing exists, although inefficiencies were also present in unconditional and conditional settings. Iqbal, Brooks and Galagedera (2008) investigated whether allowing the CAPM parameters to vary improves the performance of the CAPM and the Fama-French model. The data comprised of monthly closing prices of 101 stocks and the Karachi Stock Exchange 100 index (KSE-100) during the period October 1992 to March 2006. The findings of the study revealed that conditional asset pricing models scaled by conditional variables such as trading volume and dividend yield, generally resulted in small pricing errors. However, a graphical analysis showed that the predictions of conditional models are generally upward biased. They found that the unconditional Fama-French model augmented with a cubic market factor performed the best among the competing models. Nikolaos (2009) analysed 39 stocks from London Stock Exchange on monthly basis for the period of January 1980 to February 1998, to test the validity of CAPM. Results of the study indicated that CAPM was not valid, although beta was found to be compatible to the model as it was a significant coefficient for measuring returns. Hanif and Bhatti (2010) have also rejected the CAPM model in the local institutional frame work based on their study of 360 companies in the Pakistani market during the period 200308. Their findings suggested that CAPM showed accurate results for a limited period and for few companies only - out of 360 observations only 28 results supported the theory. Another study conducted by Hanif (2010) on tobacco sector companies listed on stock exchanges in Pakistan presented similar results for the period 2004-07. The study showed that beta calculation depicted different results for different periods. Monthly relationship between actual and CAPM forecast returns was found to be stronger than a similar relationship based on weekly data since beta with smaller period observations was found to be higher than that for longer period observations.
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Krish (2010) tested the validity of CAPM theory in Indian capital market & the stability of beta. The study was conducted on 10 stocks & 10 sectoral indices listed on the Bombay Stock Exchange (BSE), for a period of 4 years (January 2005 to December 2008). The study provides evidence against the CAPM hypothesis as well as the stability of systematic risk. Empirical tests on CAPM conducted so far have yielded mixed results, largely indicating inapplicability of the model in its original form. However, the tests mainly uphold the basic risk and return principle underlying CAPM theory. Although the APT model requires fewer assumptions and includes multiple factors for explaining the risk of an asset, the CAPM has an advantage in that its single risk factor is well defined. I. Methodology and Sample
This section describes the variables used in the study, null hypotheses tested and methodology used to test the hypotheses. Furthermore, various measures of the variables along with the sources of data are also presented. Following is a brief discussion of the variables employed to estimate Ri, the required rate of return as per the CAPM equation (Ri = Rf + i (Rm - Rf) stated as Equation 1. Risk-Free Rate of Return (Rf) Rf represents the compensation received by the investor for placing money in an asset with almost entirely certain expected (nominal) return. In other words, the standard deviation of the nominal return expected on such an asset equals zero. The return on government securities is generally used as a proxy for this return. For the purpose of this study, Karachi Interbank Offer Rate (KIBOR) was used as the risk free rate given the fact it is an actively used benchmark with a high degree of certainty. KIBOR was also used as a proxy for measuring expected return on an asset with zero systematic risk while calculating the required rate of return using the APT equation.
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Return on Market (Rm) Rm is the expected rate of return on the stock market. In this study, KSE 100 index was selected as an appropriate proxy for the Pakistani stock market. Quarterly change in this benchmark was taken as a measure for expected rate of return on the market for the purpose of this study. Beta( i) Beta is a measure of systematic or non-diversifiable risk of the asset. Beta was calculated by dividing covariance between quarterly stock and market returns during the period 2004-09 with the variance of the market over the same period. Beta was assumed to be constant while calculating CAPM based returns during each quarter. Return on Risky Asset (Ri) The required rate of return (Ri) was calculated for each quarter and then compared with corresponding actual return on the stock to assess the validity of CAPM. Actual quarterly returns on stock were determined using change in stocks prices i.e. difference between the opening and closing price divided by the opening price. The effect of dividends was not taken into account while calculating actual stock returns due to difficulty in gathering data. The APT equation to calculate Ri (the dependent variable) for the purpose of this study was expressed as a function of the following four factors (independent variables):
Table 1: Determinants of the APT Equation Factor t Real GDP (R1) Exchange rate (R2) Inflation (R3) Market Return (R4) Measured by Change in GDP Change in value of Pak Rupee relative to US Dollar Change in CPI Index Change in KSE-100 Index
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The equation for estimating stock return for this research can be stated as follows: Ri = Rf + 1 (R1 - Rf) + 2 (R2 - Rf) + 3 (R3 - Rf) + 4 (R4 - Rf) (IV) Where, Ri = Return on risky asset as explained above R1, R2, R3 and R4= Return on each factor (Rfactor) measured as mentioned in Table 1 Rfactor - Rf = Risk premium associated with each factor 1, 2, 3 & 4 = Sensitivity of the risky asset to each factor risk calculated by dividing covariance between the return on the factor and the risky asset by the variance of the factor return. The main objective of this research is to determine the explanatory power of CAPM and APT in predicting returns of oil, gas and fertilizer companies listed on the Karachi Stock Exchange. In order to achieve this objective, the realized excess return was measured applying the following statistical model on actual return Ri and the return calculated using the CAPM equation. Ri - Rf = + i (Rm - Rf) (V)
where termed as intercept should be zero if CAPM equation was imposed on the data. Similarly, the model when applied to APT equation based return will be as follows;
Ri - Rf = + 1 (R1 - Rf) + 2 (R2 - Rf) + 3 (R3 - Rf) + 4 (R4 - Rf) (VI)
T he validity of CAPM and APT was tested by determining whether the alpha of any security as determined through equations V and VI was statistically different from zero. The regression was run with available stock returns data in order to test the following two hypotheses:
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Ho: The intercept when CAPM is imposed on the stock returns data is equal to zero. Ho: The intercept when APT is imposed on the stock returns data is equal to zero. Under the alternative hypothesis, the intercept or alpha is not equal to zero. The standard test is a t-test on the intercept of the regression. If the intercept is more than 2 standard errors from zero (or having a t-statistic greater than 2), then there is evidence against the null hypothesis or the validity of CAPM and APT. The study is limited to testing the validity of CAPM and APT in explaining returns on fertilizer, oil and gas companies listed on the Karachi Stock Exchange for the period 2004-09, excluding the last two quarters of 2008 when a floor was imposed on the market. A sample of 17 companies was taken resulting in 361 observations. Quarterly opening/closing data of stock prices and KSE100 index were taken from the website of Karachi Stock Exchange. KIBOR and macroeconomic data were sourced from the State Bank of Pakistan. I. Empirical Results
This section presents the results of the regression analysis. The interpretation and detailed discussion of the empirical findings are also reported in this section. Finally, a possible explanation, on the basis of the financial theory reviewed above, is presented to explicate the empirical findings.
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Table 2: Pooled Regression Results (CAPM)

Dependent Variable: Realized Excess Return Variable C(intercept) CAPM R-squared Adjusted R-squared S.E. of regression Sum squared resid Log likelihood Durbin-Watson stat Coefficient 5.780885 0.320824 0.019526 0.016794 55.34935 1099815 -1960.17 2.095235 Std. Error 2.999115 0.119987 t-Statistic 1.92753 2.673812 Prob. 0.0547 0.0078 7.687368 55.82007 10.87073 10.89228 7.14927 0.007842
Mean dependent var S.D. dependent var Akaike info criterion Schwarz criterion F-statistic Prob(F-statistic)
The computed t-statistic reveals a significance level of 10% at which the intercept value is very high. Additionally, low R-squared value implies that only 1.9% variation in realized excess return is explained by CAPM. F- statistic is significant at 1% whereas DW statistics shows no auto-correlation problem. High standard deviation of realized excess return shows that there is no consistency in stock price performance of oil, gas and fertilizer companies listed on the KSE. The above results show that the CAPM model does not explain variations in realized excess return. Inefficiency and volatility in emerging markets such as Pakistan may be the underlying reasons for this behavior. Similarly, we have taken the expected excess return based on APT as the determinant of realized excess return to test the validity of the APT theory. The results are shown in Table 3.
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Table 3: Pooled Regression Results (APT)

Dependent Variable: Realized Excess Return Variable C APT R-squared Adjusted R-squared S.E. of regression Sum squared resid Log likelihood Durbin-Watson stat Coefficient 6.900988 0.189472 0.038694 0.036017 54.80563 1078313 -1956.6 2.075036 Std. Error 2.891915 0.049843 t-Statistic 2.386304 3.801371 Prob. 0.0175 0.0002 .687368 55.82007 10.85099 10.87253 14.45042 0.000169
Mean dependent var S.D. dependent var Akaike info criterion Schwarz criterion F-statistic Prob(F-statistic)
T he computed t-statistic implies that the null hypothesis (that the intercept when APT is imposed on the stock returns data is equal to zero) is rejected at 5% level of significance. Similarly, low R-squared value (only 3%) implies a weak relationship between excess return based on APT and realized excess return. F-statistic is significant at 1% while DW statistics shows no statistical problem signifying satisfactory results. High standard deviation of realized excess return in this case also shows that there is no consistency in stock price performance of oil, gas and fertilizer companies listed on the KSE. The results are broadly the same for expected excess returns based on both CAPM and APT theories neither provide any explanation of variation in expected excess return.
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I.
Conclusions
In this study, data of a sample of 17 oil, gas and fertilizer sectors companies listed on KSE was analyzed through a pooled regression model to determine whether CAPM and APT models are valid determinants of the realized excess return on these companies. The study was based on quarterly data for the period 2004-2009, excluding the last two quarters of 2008 during which a floor was imposed on the market. This resulted in 361 observations for the regression analysis. The data analysis reveals almost no correlation between realized excess returns and the expected return based on CAPM. With respect to APT model, the study reflects that changes in GDP, inflation, exchange rate and market return do not serve as valid determinants of returns on oil, gas and fertilizer stocks. These results are generally in line with other studies conducted on listed companies in Pakistan, while minor differences are observed when the same results are compared with those of similar studies conducted on stock exchanges of other developed and developing countries. As discussed in the literature review, a similar study conducted by Dash and Rishika (2009) revealed low R-squared values of 16% and 24% respectively when CAPM and APT models were applied to 50 companies on NSE in India, implying that the models do not have sufficient explanatory power. Furthermore, standard CAPM does not appear to be a valid model for predicting stock returns based on the results of other studies discussed earlier, mostly pertaining to emerging markets including Greece, Bucharest, Thailand and Pakistan. The table below summarizes the tests/findings of the recent studies on CAPM and APT, reviewed by us:
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Table 3: Summary of Results of Other Studies on CAPM and APT

Study Testing the CAPM Model -- A study of the Chinese Stock Market Tests/Findings t-tests were used. CAPM does not fully hold good in the Chinese Stock Market during the period 2000- 2005. t-tests were used primarily to test the data. The tests refuted the CAPMs prediction that the intercept should equal zero and the slope should equal the excess returns on the market portfolio. However, their findings did not present evidence in support of any alternative model. Regressions were run to test the data Results of the work seem to confirm the validity of the three Sharpe-Lintner CAPM empirical tests. Testing CAPM on Stocks traded at Bucharest Stock Exchange The coefficient t-statistic to measure the level of the significance of beta Adjusted R-squared to check the goodness of the model Durbin-Watson coefficient to check for serial in residuals; Pattern of residuals to check the noise in data. Power of beta as an estimate of risk was not very strong, given the resulting readings of adjusted R-squared Asset Pricing Models in Indian Capital Markets The study uses the standard two-step regression method to estimate the CAPM and the APT using the sample scrips. To test for the significance of the difference between the CAPM and the APT, the F-test was employed. The results of the study show that the APT does not have better explanatory power over the CAPM for Indian capital markets. Validity of Capital Asset Pricing Model & Stability of Systematic Risk (Beta): An Empirical Study on Indian Stock Market t-tests were used. The studies provide evidence against the CAPM hypothesis and the stability of systematic risk. t-tests were used primarily to test the data. APT does hold in the stock market of Thailand, while the CAPM fails to do so.
Testing the Capital Asset Pricing Model (CAPM): The Case of the Emerging Greek Securities Market
Testing the CAPM: Evidences from Italian Equity Markets
Thai Stock Market
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An Empirical Evaluation of CAPMs Validity in the British Stock Exchange
Two step regression procedure was used. Results indicated that CAPM was not valid, although beta was compatible to the model. Wald Test, Chi square, p-values, t-tests Conditional asset pricing models scaled by conditional variables such as Trading Volume and Dividend Yield generally result in small pricing errors. However, a graphical analysis shows that the predictions of conditional models are generally upward biased.
Testing Conditional Asset Pricing Models: An Emerging Market Perspective (Pakistan)
The Conditional Capital Asset Pricing Model: Evidence from Karachi Stock Exchange
Generalised Method of Moment approach and Generalised Least Square (GLS) approaches are used to test the data The empirical findings do not support the standard CAPM model as a model to explain assets pricing in Pakistani equity market. The empirical results of the conditional CAPM, with time variation in market risk and risk premium, are more supported by the KSE data, where lagged macroeconomic variables, mostly containing business cycle information, are used for conditioning information.
Validity of Capital Assets Pricing Model: Evidence from KSE-Pakistan
Absolute difference between CAPM and actual returns was analysed. CAPM gives accurate results for a limited period for a few companies only. Out of 360 observations only 28 results supporting CAPM while 332 are against it, hence model is rejected in this institutional frame work.
Testing Application of CAP Model on KSE- Pakistan A Case Study on Tobacco Sector
Absolute difference between CAPM and actual returns was analysed. Findings raised questions about the validity of CAPM Theory. Security returns are not as per the demand of the model.
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Market inefficiency and uncertain political/economic situation in the country appear to be major factors responsible for the inapplicability of these models on local scrips. Volatile market conditions result in unexpected changes in systematic risk due to which predictability of returns based on constant beta values tends to result in deviations of actual returns from values determined through these models. Also it may be the case that stock prices are subject to manipulation by a small number of key players. It is pertinent to mention here that the study has some limitations such as a small size of 17 companies belonging to only oil, gas and fertilizer sectors. Further, the study was restricted to unconditional version of CAPM not taking into account other factors like size and book to market value factors. 1References Ansari, Naeem & Zubairi (2005), Financial Management in Pakistan Canegrati, Emanuele (2008), Testing the CAPM: Evidences from Italian Equity Markets Darasteanu, C.C. (2002), Testing CAPM on Stocks traded at Bucharest Stock Exchange Dash, Mihir & Rao, Rishika (2009), Asset Pricing Models in Indian Capital Markets Fama, E.F. and French, K.R. (2004), The Capital Asset Pricing Model: Theory and Evidence Hanif, Muhammad (2010), Testing Application of CAP Model on KSE- Pakistan - A Case Study on Tobacco Sector Hanif, Muhammad & Bhatti, Uzair (2010), Validity of Capital Assets Pricing Model: Evidence from KSE-Pakistan
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Harvey, C.R. (1995), Asset Pricing and Risk Management Iqbal, J., Brooks, R. & Galagedera, D.U.A. (2008), Testing Conditional Asset Pricing Models: An Emerging Market Perspective Javid, A.Y. and Ahmad, E. (2008), The Conditional Capital Asset Pricing Model: Evidence from Karachi Stock Exchange Krish (2010), Validity of Capital Asset Pricing Model & Stability of Systematic Risk (Beta): An Empirical Study on Indian Stock Market Michailidis, G., Tsopoglou, S., Papanastasiou, D. & Mariola, E. (2006), Testing the Capital Asset Pricing Model (CAPM): The Case of the Emerging Greek Securities Market Nguyen, Tho Dinh (2010), Arbitrage Pricing Theory: Evidence from an Emerging Stock Market Nikolaos, Loukeris (2009), An Empirical Evaluation of CAPMs Validity in the British Stock Exchange Reilly, F.K. & Brown, K.C. (2002), Investment Analysis and Portfolio Management, 7th Ed. Pp 260 -264 Yang, Xi & Xu, Donghui (2006), Testing the CAPM Model A Study of the Chinese Stock Market
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Research Students Prior Degree Performance as Predictor of their Performance
STUDENTS PRIOR DEGREE PERFORMANCE AS PREDICTOR OF THEIR PERFORMANCE AT MBA LEVEL

Ali Asghar Malik Department of Communication and Languages College of Business Management, Karachi This paper describes the performance of students at SSC, Intermediate, and degree levels as predictors of their performance in MBA. Sixty (60) students who graduated in 2009 from IoBM formed sample for the study. The data was collected personally by the researcher from the official records of the University. Regression Analysis and ANOVA were used for the analysis of data. SPSS was used to analyze the data. The study concluded that performance of students at Bachelor level was the strongest predictor of CGPA at MBA level. When performance at Bachelor level was analyzed, only the male performance was a significant predictor of the CGPA in MBA.. Significant differences were found between the contribution of the pre-admission performance of the BBA, B.com. and B.sc. groups as predictors of CGPA in MBA. The BBA performance of the male students was a strong predictor of CGPA at MBA level.The paper takes the position that there is a need for better collaboration and improvement in the curriculum at all the levels in general and at Bachelor level in particular. In view of the contribution of the students performance at Bachelor level in predicting their performance in MBA , the paper suggests giving Bachelor level performance suitable weightage in the Admission Criteria for admission in MBA programmes. Key Words: Prior degree Performance; Predictor; MBA level: SSC level ( Secondary School Certificate level ); Intermediate level; Degree level; CGPA ( Cumulative Grade Point Average). JEL Classification: Z0000
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Introduction and Literature Review In the study I have investigated students performance in pre-requisite examinations that included Bachelor, Intermediate, & SSC levels and their subsequent performance at MBA level. I also studied the male-female and subject group differences in performances as predictors of students performance at MBA level. This study sought to provide evidence to guide decisions in relation to the utilization of students performance data in the prerequisite examinations for admission into MBA programmes, based on empirical evidence. In Pakistan, generally the marks obtained by students in pre-requisite examinations, admission test and interviews are used as a basis for students admissions into different professional education programmes. In this study, the relationship between students performance in the prerequisite examinations as reflected in their marks (percentages) and their performance as reflected in their CGPA at MBA level has been studied. This study seeks to identify the predictive value of undergraduate performance for success in professional programmes of education . Thus it would also provide an empirical basis for devising better criteria for admission.. In previous research into the predictors of academic performance in different areas, researchers have considered the effect of age, ethnicity, gender, grade point average (GPA) and admission test scores on performance of students. (James and Chilvers, 2001; Wilkinsonwell and Bushnell, 2004). Roth et al. (1996) examined the relationship between the objective pre-medical credentials and performance on Step 2 on the United States Medical Licensing Examination (USMLE) of 480 students at Virginia Commonwealth University, School of Medicine. The purpose of the study was to identify those selection criteria that might best predict performance on an examination designed to assess problem- solving skills, the essence of clinical medicine. Pre-medical data from classes of 1993 and 1994 were analyzed, and a regression equation was used to calculate theoretical USMLE Step 2 scores for the students in the class of 1995, who had not yet taken this examination. The pre-medical variables were scores on the verbal and math sections of the Scholastic Aptitude Test (SAT) scores on the six sections of the PAKISTAN BUSINESS REVIEW OCTOBER 2011 460
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pre-1991 Medical College Admission Test (MCAT) grade point average (GPA) in science courses required of pre-medical students and undergraduate major. Once the class of 1995 had taken the USMLE Step 2, the equation was cross validated, and the theoretical and actual scores of the class of 1995 were correlated. The correlation between the theoretical and actual scores was r=.443. In the analysis for the classes of 1993 and 1994, the single variables highly predictive of USMLE performance were scores on the verbal section of the SAT (r=.317) and the Skills Analysis: reading section of the MCAT (r=.331). In the final regression analysis, the MCAT scores were excluded . The resulting regression equation using SAT verbal section and pre-medical GPA accounted for 21.2% of the variance in performance for the class of 1995. Roth et al.(1996) concluded that students performance on the verbal section of the SAT as a predictive factor was strongly related to pre-medical GPA score. They also suggested that high verbal aptitude serves well even when coping with complex scientific concepts. In another study, Evans et al. (2007) investigated the extent to which Medical College Admission Test (MCAT) sub scores predict overall academic performance of osteopathic medical students. The researchers examined the value of MCAT sub-scores in predicting students global academic performance in osteopathic medical school as defined by the grade point average in basic sciences (Basic GPA), clinical instruction (Clinical GPA), cumulative grade point average (Total GPA) and National Licensing Examination, (COMLEX-USA), Level 1 and Level 2. The subjects for the Evans et al. (2007) study were 434 medical students of the Oklahoma State University, College of Osteopathic medicine in Tulsa who graduated or were expected to graduate between 1999 and 2003. Standard multivariate linear regression analyses were conducted for each of the five performance variables. The results of the study demonstrated that UGPA was the most important significant predictor (beta=.13-.33)
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in overall student academic performance for all five analyzed variables.Less predictive of overall academic performance (beta=01-.21) were MCAT sub-scores. However, Evans et al. (2007) results showed that the MCAT biological sciences sub-score was a significant predictor of basic GPA (beta=.14) , the MCAT physical sciences sub-score significantly predicted COMLEX-USA Level 1 scores(beta=.15), and the MCAT verbal reasoning sub-score significantly predicted COMLEX-USA Level 2 scores (beta= .21). The sub-score for the MCAT writing sample was not a significant predictor of overall academic performance. Evans et al. (2007) concluded that total undergraduate GPA had the highest predictive value for academic performance as measured by basic GPA, clinical GPA, total GPA and COMLEX-USA Level 1 and Level 2 scores. The study found that MCAT sub-scores were of limited predictive value in determining global academic performance. Julian (2005) reported that in his study he investigated the extent to which MCAT scores supplement the power of undergraduate grade point average (UGPA) to predict success in medical school, United States Medical Licensing Examination (USMLE)Step scores, and academic distinction or difficulty. Julians study followed two cohorts from entrance to medical school through residency. Students from 14 medical colleges 1992 and 1993 entering classes provided data for predicting medical school grades and academic difficulty / distinction, while their peers from all the US medical colleges were included in the study to predict performance on USMLE Step1,2 and 3. Regression analysis assessed the predictive power of the combination of MCAT scores and UGPAs, with MCAT scores providing a substantial increment over UGPAs scores alone. MCAT scores ,according to the findings of the study, were strong predictors of scores for all three step examinations, particularly Step 1. Julian (2005) concluded that MCT scores almost double the proportion of variance in medical school grades explained by UGPAs , and essentially replace the need for UGPAs in their impressive prediction of Step scores.
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In another study Dixon (2004) investigated the relationship between pre-admission academic variables , osteopathic medical school performance in the first two years, and performance on the comprehensive Osteopathic Medical Licensing Examination (COMLEX-USA) Levels 1 and 2. The study group comprised 174 students in the class of 2001 of New York College of Osteopathic Medicine. Pre-admission academic variables were the Medical College Admission Test (MCAT) sub-scores and undergraduate grade point average (UGPA). Physical sciences (Physical MCAT) and biological sciences (Biological MCAT) sub-scores were significantly correlated with Level 2 performance. COMLEX USA Level 2 performance was correlated with the year 1 GPA (0.64) and the year 2 GPA (0.68). Strong correlation existed between all year 1 and most year 2 course grades and COMLEX-USA Level 1 scores. Silver and Hodgson (1997) examined the relationships among undergraduate student characteristics, standardized indicators of medical school academic performances and clinical performance at University of California , Riverside (UCR) , School of Medicine, Los Angeles. The data were collected in 1993 for the 1990-93 classes of the Bio-medical science programme. All these students had completed their undergraduate studies at UCR. Data were collected with regard to the students demographic characteristics , undergraduate grade-point average (UGPAs) , Medical College Admission Test (MCAT) scores, National Board of Medical Examiners Part 1 (NBME 1) scores and clinical performance as measured by core clerkship grades. Regression analysis was used to evaluate the relationship between clinical performances and data available at admission on the same variables. Top and bottom 25% of each class were identified by UGPAs and compared by their NBME 1 scores and clinical performances to determine whether differences noted at admission continued to separate the students. Independent two tailed t-tests were used to study the differences. Of the 92 students
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data were available for 88 (96%). 39% were female and 38% were foreign-born. The sample was fairly heterogeneous in terms of UGPAs, MCAT scores, clinical performance grades, and NBME 1 scores. The results of the first regression analysis indicated that mean clinical performance was not related to any of the undergraduate predictors of performance, or the students demographics. The second regression analysis indicated that MCAT scores and cumulative science UGPAs were related to their performance on the NBME 1, but not in their clinical performances. Silver and Hodgson (1997) concluded that although UGPAs and MCAT scores are good indicators of NBME 1 performance , they are not useful in predicting clinical performance, even where students data are taken from the same undergraduate institution.
Truell and Woosley.(2008) investigated whether college of business admission criteria and other variables predicted undergraduate college of business student graduation.The specific variables examined included gender, race/ethnicity, math academic college aptitude score, verbal academic aptitude score, college of business accounting GPA,college of business computer proficiency GPA, college of business economics GPA, college of business statistics GPA, required English GPA, and required math GPA.The results of the study demonstrated that college of business (COB) statistics GPA was positively associated with high probability of graduation. 87% of the students meeting the COB admission criteria who began studies in Fall 2000, graduated by July 2005. Many universities have selective admission tests.They use some type of criterion to determine which applicants will be accepted and which rejected. Ideally, the process should differentiate and admit those students who are likely to succeed. According to Hawkins & Clinedinst (2006), the main factors in
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the admission process continued to be (in order): grades in college preparatory courses, standardized admission tests, and overall high school grade point average. Class rank and the application essay was placed fourth to fifth while teacher/ counselor recommendations were sixth. A students demonstrated interest in attending an institution also constitutes a key factor in admission. Berry & Sackett (2009) demonstrated in their study that the validity of SAT scores and high school grade point average (GPA) as predictors of academic performance has been underestimated because of previous studies flawed performance indicators (i.e. college GPA) that are contaminated by the effects of individual differences in course choice. They controlled the contamination by predicting individual course grades, instead of GPAs, in a data set containing more than five million college grades for 176,816 students representing entry classes at 41 colleges in 1995 through 1997. The researchers calculated correlations of SAT scores and high school GPAs with ICGs ( Individual course grades). The sample included grades from 145000 + courses without excluding negative correlations. They compared how well SAT scores and high school GPAs predicted ICGs with how well they predicted two common GPA criteria: College freshman GPA and cumulative GPA throughout the college career. They also assessed the validity of SAT scores and high school GPAs when used in conjunction to predict ICGs, as most colleges use same combination of the two in the admission process. The researchers concluded that percentage of variance accounted for by SAT scores and high school GPAs was 30 to 40% lower when the criteria were individual course grades .SAT scores and high school GPAs together accounted for between 44 and 62% of the variance in college grades. Naik and Ragothaman (2004) evaluated the ability of three different models namely logistic regression, probit analysis, and neural networks, to predict MBA performance. Gayle and Jones (1973), and Baird (1975) found a significant positive relationship between Graduate Record
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Examination (GRE) scores and graduate grade point average (GPA) in graduate studies. Ahmadi et.al. (1997) used bi-variate regression models to examine the relationship between graduate GPA and a number of factors and found that undergraduate GPA and GMAT were significant variables in predicting academic success. They reported a study done by Edwards (1990) who surveyed 657 accredited institutions to study the admission process for their MBA programmes. Out of 333 responses received, all but one of the responding schools used some sort of admission testing. The researcher found that John Hopkins does not require candidates to submit pre-admission test scores such as GMAT. Some other graduate programmes including Standford, Boston College, and University of Indiana, at Bloomington require submission of GMAT score for consideration, but do not mandate a minimum acceptable score. The most popular decision method for most MBA programmes was an index system based on GMAT score and undergraduate GPAs. From the responding schools, 177 respondents used an index, 81 imposed a minimum test score in addition to applying an index, and the rest used a minimum test score without applying an index. Naik et. al. (2004) in their review of research reported that Paolillo (1982) employed step by step regression in his study and found that the applicants junior and senior undergraduate grade point average was the first variable to enter into the equation; Schwan (1988) found GGPA to be significantly correlated with GMAT scores, undergraduate grade point average, and junior/senior grade point average among Murray State University MBA students. However, Wright and Palmer (1997) used analysis of variance to examine GMAT scores among groups of graduate students and concluded that the use of total GMAT scores in the admission process may be misleading and more attention should be paid to specific verbal and quantitative components. Murray (1972) compared a group of MBA students who had graduated from the programme at Hofstra University in June, 1970 and February, 1971, with a group of 17 students who had withdrawn from the programme at earlier points. Five predictor
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variables were identified: undergraduate GPA; undergraduate business concentration GPA; total, quantitative scores on the ATGSB ( Admission Test for Graduate Study in Business).; graduation versus withdrawal; and overall graduate GPA. The results of the study show that undergraduate GPA and undergraduate business concentration GPA are the most effective success predictors. ATGSB, however, proved to be the least effective predictor. Malik (2010) studied the scores (percentage marks) of students at SSC, Intermediate, and degree levels as predictors of their performance in MBA. Sixty (60) students who graduated in 2009 from IoBM Karachi, formed sample for the study. The data was collected personally by the researcher from the official records of the University. Regression Analysis and ANOVA were used for the analysis of data. SPSS was used to analyze the data. The study concluded that performance of students at Bachelor level was the strongest predictor of CGPA at MBA level. When performance at Bachelor level was analyzed, only the male performance was a significant predictor of the CGPA in MBA.. Significant differences were found between the contribution of the pre-degree performance of the BBA, B.com. and B.sc. groups as predictors of CGPA in MBA. The BBA performance of the male students was a strong predictor of CGPA at MBA level. Summary of the predictors of the students performance in medicine and business administration (MBA) based on the review of research is presented in Summary table 9. II. Methodology This paper aims at studying the students performance in the pre admission variables (Percentage in SSC, Intermediate, and Bachelor degree) as predictors of their performance at MBA level. The study tested the following null hypotheses: 1. Students scores at SSC, Intermediate, and Bachelor levels are not significant predictors of CGPA at MBA level.
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2. Subjects scores at SSC, Intermediate, and Bachelor levels are not significantly different predictors of CGPA in MBA. 3. Scores of male and female subjects at SSC, Intermediate and Bachelor levels are not significant predictors of CGPA in MBA 4. Scores of male and female subjects at SSC, Intermediate, and Bachelor levels are not significantly different predictors of CGPA at MBA level. 5. SSC, Intermediate, and Bachelor level scores of the BBA, B.com, and B.sc. groups are not significant predictors of CGPA at MBA level. 6.SSC , Intermediate, and Bachelor level scores of the BBA and B.com. groups are not significantly different predictors of CGPA in MBA. 7.SSC, Intermediate, and Bachelor level scores of the B.com. and B.sc. groups are not significantly different predictors of CGPA at MBA level. 8.SSC, Intermediate, and Bachelor level scores of the BBA, B.com. and B.sc. groups are not significantly different predictors of the CGPA at MBA level. The following procedure was used to test the research hypotheses of the study: Selection of Subjects A group of sixty (60)MBA students (30 male and 30 female) were randomly selected from the IoBM graduating students list, 2009. Systematic random sampling was used for the selection of the sample. Collection of data The official records of the MBA students was procured from the University, and the relevant data was personally recorded. The data included the students percentage marks obtained at Bachelor, Intermediate, and SSC levels, students gender and their subject groups at Bachelor level namely BBA, B.com., and B.sc. groups.
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Analysis of data Regression analysis and Analysis of Variance were used for the analysis of data. The SPSS was used for Regression analysis and ANOVA.. Findings, Results and Conclusions The findings, results ,and conclusions that emerged from the study were summarized and presented in the final section of this paper. III. Results Null hypothesis 1: Subjects scores at SSC, Intermediate, and Bachelor levels are not significant predictors of CGPA at MBA level. Table 1 : Analysis of variance: Subjects performance in SSC, Intermediate, and Bachelor (Percentages) as Predictor of CGPA in MBA
Variable Model-1 Regression SS squares .425 Df 3 Mean squares .142 F 4.439* .076 Residual 1.789 56 .032 .05 Sig.
Total
2.215
59
*p<.05 a. Predictors: (constant), Percentage in Bachelor degree, Percentage in Intermediate, Percentage in SSC. b. Dependent variable: CGPA in MBA.
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Table 1 shows that the F-value (F=4.439 ; 3,56) is significant at .05 level of significance. The null hypothesis is rejected. There is significant contribution of the subjects performance at Bachelor, Intermediate, and SSC levels in the resulting variance in the subjects CGPAs in MBA. The subjects scores in the pre-admission variables are significant predictors of their CGPA at MBA level. Null hypothesis 2: Subjects scores at SSC, Intermediate, and Bachelor levels are not significantly different predictors of CGPA in MBA. Table 2 : Regression Analysis: Predicting CGPA in MBA on the subjects performance at Bachelor, Intermediate, and SSC levels.
Variable Model-1
(constant) Percentage in SSC Percentage in Intermediate Percentage in Bachelor
B (unstandardized Coefficients) 2.672 .000
St. error
Beta (standardized Coefficients)
Sig..
.300 .004 -.037
8.912 -.258
.05 .797
.004
.003
.162
1.140
.259
.006
.002
.406
3.298*
.05
*p>.05 a. Predictors: (constant), Percentage in Bachelor degree, Percentage in Intermediate, Percentage in SSC. b. Dependent Variable: CGPA in MBA.
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Table 2 shows that regression B coefficient for subjects performance at Bachelor level was significant at .05 level of significance. (B =.406; t=3.298). The B coefficient for subjects performance at Intermediate and SSC levels was not significant at .05 level of significance. The null hypothesis was therefore partially accepted . The performance at Bachelor level was a strong predictor of the CGPA at MBA level. The performance at Intermediate level was a modest predictor of CGPA in MBA (B=.162; t=1.140).The performance at SSC level was the weakest predictor of the three pre-admission variables included in the study. Null hypothesis3: Scores of male and female subjects at SSC, Intermediate, and Bachelor levels are not significant predictors of CGPA at MBA level. Table 3 : R2 value for male-female comparison of the subjects performance accounted for the variance in CGPA at MBA level.
Variable
R square
Adjusted R Square
St. error of the estimates
Model -1 Male Female .758 .306 .575 .093 .526* -.011 .13025 .20235
a. Predictors: (constant),Percentage in Bachelor degree, Percentage in SSC, Percentage in Intermediate. b. Predictors(constant). Percentage in Bachelor degree, Percentage in Intermediate, Percentage in SSC. c. Dependent variable:: GPA in MBA
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Table 3 shows that in the male group, their performance (percentage) in pre admission variables accounted for 52% of the variance in CGPA at MBA level . In the female group, their contribution accounted for in the variance in CGPA at MBA level is not significant. The performance of the male group at SSC, Intermediate, and Bachelor levels is a significant predictor of CGPA in MBA. (Male R2=.526; Female R2=-.011) Null hypothesis 4: Scores of male and female subjects at SSC, Intermediate, and Bachelor levels are not significantly different predictors of CGPA at MBA level. Table 4 (a) Analysis of variance : Predicting CGPA in MBA on subjects performance at Bachelor, Intermediate, and SSC levels: male-female comparisons.
Variable Model-1 Male Regression Residual Total Female Regression Residual Total
SS
df
MS
Sig.
.596 .441 1.037 .110 1.065 1.174
3 26 29 3 26
.199 .017
11.712*
.05
0.37 0.41
.892
.458
*p<05 a. Predictors: (constant). Percentage in Bachelor degree, percentage in SSC, percentage in Intermediate. b. Predictors: (constant). Percentage in Bachelor, percentage in Intermediate, percentage in SSC.
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Table 4(a) shows that the two groups (male and female) were significantly different at .05 level of significance. The F value for the male group was significant F(3,26)=11.712 but it was not significant for the female group. The results suggest that the male group performance at Bachelor, Intermediate ,and SSC levels significantly affected their performance at MBA level and it was a strong predictor of CGPA in MBA .However, the performance of the female group in the pre-admission variables showed no significant effect on their performance at MBA level and it was a weak predictor of CGPA in MBA. Table4(b): Regression Analysis: Predicting CGPA in MBA on the subjects performance at Bachelor, Intermediate, and SSC levelsMale-female comparisons.
Variable Model-1 Male (constant) Percentage in SSC Percentage in Intermediate Percentage in Bachelor Female(constant) Percentage in SSC Percentage in Intermediate Percentage in Bachelor
B (unstandardized Coefficients) 2.488 -.004
St. error
Beta (standardized Coefficients)
Sig..
.339 .005 -.151
7.342 .815
.05 .422
.001 .14 2.606 .003 .003 .003
.004 .003 .491 .005 .005 .003
.065 .714 5.305 .107 .139 .265
.347 5.016*
.732 .05 .05 .604 .499 1.76
.524 .686 1.393
*p>.05 Dependent variable: CGPA in MBA
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Table 4(b) shows that standardized Beta coefficient for male subjects performance at Bachelor level was significant at .05 level of significance. (B =.714; t=5.016*). The Beta coefficient for female subjects performance in all the pre-admission variables was not significant at .05 level of significance. The null hypothesis was therefore partially accepted . Only the male performance at Bachelor level was a significant predictor of the CGPA at MBA level. Null hypothesis 5: Scores at SSC, Intermediate, and Bachelor levels for the BBA, B.com., and B.sc. groups are not significant predictors of CGPA at MBA level. Table5: R2 value of pre-admission performance of BBA,B.Com. and B.sc. groups in predicting CGPA at MBA level.
Variable Group-1 BBA Group-2 B.Com. Group-3 B.sc.
Model
R square
Adjusted R squire
Standard error of the estimate .1347 .1478 .2034
1 1. 1
.723 a .702 b .433 b
.523 .492 .188
.479* .323 * -.218
*p>05 a. Predictors: (constant). Percentage in Bachelor degree, Percentage in SSC, Percentage in Intermediate. b. Predictors: (constant). Percentage in Bachelor degree, Percentage in Intermediate, Percentage in SSC.
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Table 5 shows that in BBA group, the students performance at Bachelor , Intermediate and SSC levels accounted for 47.9% of the variance in the CGPA at MBA level. In the B.Com. group, students performance at Bachelor, Intermediate and SSC levels accounted for 32.3%. The performance of the B.sc. group in the pre-admission variables accounted for -.21.8%. Hence, the null hypothesis was rejected. There was a significant difference in the contribution of pre-admission performance in the variance in the subjects CGPA at MBA level. ( BBA R2 = .479; B.Com. R2=.323; B.sc. R2 =-.218) Null hypothesis 6: SSC, Intermediate, and Bachelor level scores of the BBA and B.com. groups are not significantly different predictors of CGPA at MBA level. Table 6: Analysis of variance : Predicting CGPA in MBA on subjects performance at Bachelor, Intermediate, and SSC levels: BBA and B.Com. comparisons.
Variable Model-1 BBA Regression Residual SS Df MS F Sig.
.656 .599
3 33
.219 .o18
12.048* 2.907
a .05 b .094
Total B.Com. Regression Residual Total
1.255 .190 .197 1.174
36 3 9 .063 .022 .
*p<05 a. Predictors: (constant). Percentage in Bachelor degree, percentage in SSC, percentage in Intermediate. b.Predictors: (constant). Percentage in Bachelor degree, percentage in Intermediate, percentage in SSC. d. Dependent variable: CGPA in MBA 475 PAKISTAN BUSINESS REVIEW OCTOBER 2011
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Table 6 shows the two groups (BBA and B.Com.) were significantly different at .05 level of significance. The F value for the BBA group was significant F(3,33)=12.048) but it was not significant for the B.com. group. The results suggest that the BBA group performance at Bachelor, Intermediate ,and SSC levels significantly affected their performance at MBA level and was a strong predictor of CGPA in MBA.. However, the performance of the B.com. group in the pre-admission variables showed no significant effect on their performance at MBA level and was a weak predictor of CGPA in MBA. Null hypothesis7: SSC, Intermediate, and Bachelor level scores of the B.com. and B.sc. groups are not significantly different predictors of CGPA at MBA level. Table 7: Analysis of variance : Predicting CGPA in MBA on subjects performance at Bachelor, Intermediate, and SSC levels
Variable Model-1 B.Com. Total B.sc Regression Residual SS Df MS F Sig.
.387 .057 .248
12 3 6
.019 .o41
.462
b .719
Total
.306
*p>05 bPredictors: (constant). Percentage in Bachelor degree, percentage in Intermediate, percentage in SSC c.Dependent variable: CGPA in MBA
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Table 7 shows that the B.Com. and B.sc. groups were not significantly different. The F value for the B.Com. and B.sc groups was not significant at .05 level of significance. The results suggest that the performance of the two groups at Bachelor, Intermediate ,and SSC levels had no significant effect on their performance at MBA level and was a weak predictor of their CGPA in MBA. Null hypothesis 8: SSC, Intermediate, and Bachelor level scores of the BBA, B.com., and B.sc. groups are not significantly different predictors of CGPA at MBA level. Table 8:Regression Analysis: Predicting CGPA in MBA on subjects performance at Bachelor, Intermediate, and SSC levels: BBA, B.Com. and Bsc. groups comparison The three pre-admission variables were used in a regression model to predict MBA CGPA. Table 8 shows that the Bachelor level performance score was significant predictor variable for MBA performance in the BBA group at .05 level of significance. (B=.671; t=5.438). SSC level performance was significant predictor for MBA performance in the B.com. group. ( B=.731; t= 2.347). The performance in the pre-admission variables was not significant predictor for MBA performance in the B.sc. group.
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Variable
Unstandardized coefficients B
St. error
Standardized coefficients Beta
T Sig.
Model-1 BBA (constant). Percentage in SSC Percentage in Intermediate Percentage in Bachelor degree B.Com Model -1 (constant) Percentage in SSC Percentage in Intermediate Percentage in Bachelor degree B.sc. Model-1 (constant) Percentage in SSC Percentage in Intermediate Percentage in Bachelor degree
2.533 -.005
.302 .003 -.207 -1.505 .142
.002
.003
.110
.787 .437
.014
.003
.671
5.438*
.05
1.821
.624
2.919
.17
. 017 8.741
.007 .007
.731 .004
2.347* .013
.05 .990
.001
.003
.069
.253
.806
3.202 -.009
1.509 .019
-.384
2.122 -.471
.078 .654
.004
.016
.175
.230
.825
.006
.014
.225
.456
.665
*p>05 b. Predictors: (constant). Percentage in Bachelor degree, percentage in Intermediate, percentage in SSC c. Dependent variable: CGPA in MBA PAKISTAN BUSINESS REVIEW OCTOBER 2011 478
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Summary Table 9 Predictive Variables for Performance in Professional subjects(Medical & MBA)
Predictive Variables (Independent Variables) 1. (a) SAT (verbal portion) scores
Dependent Variables USMLE (US Medical Licensing Examination)
(b) MCAT : Reading---Skills analysis (Medical College Admission Test) (Roth et.al.. (1996) 2. Undergraduate GPA Medical School GPA a) Basic GPA b) Clinical GPA c) Total GPA d)COMLEX-USA Level 1 & 2 Scores
( Evanset et. al. (2007) 3. MCAT (Julian, (2005) 4. UGPAs MCAT (Silver & Hodgson, (1997) 5 SAT score High School GPA (Berry & Sacket, (2009) 6. UGPA Undergraduate Business Concentration GPA (Murray,(1972) NBME-1 GPA/grades (Medical School)
CGPA in MBA
CGPA in MBA
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7.. College of Business Statistics GPA
8.
GRE score ( Gayle and Jones, (1973)
High probability of graduation from Undergraduate College of Business CGPA in Graduate School
9. UGPA GMAT
Academic Success in Business School (Ahmadi et. al. (1997)
10
UGPA
Academic Success in Business School
( Paolillo, (1982) 11. Amount of work experience (Adams and Hancock, (2000) GPA and GMAT Undergraduate performance in Business School Success in Business School
(Brauntein, (2002)
Table continued nex page.
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12 Bachelor level performance Performance at Bachelor, Intermediate and SSC levels Male performance at Bachelor level Male and female performance significantly different
CGPA in MBA CGPA in MBA for the male
CGPA in MBA
CGPA in MBA
Performance of BBA, B.com., and B.sc. significantly different BBA group performance
CGPA in MBA CGPA in MBA (strong predictor) (accounted for 47.9% of the variance in CGPA in MBA) (Accounted for 32.3% of the Variance in CGPA in MBA) CGPA in MBA
B.com. Group performance
SSC level performance in The B.com. group
Malik, (2010)
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1V.
Conclusions The conclusions of the study are summarized below: 1. Performance of students at Bachelor level was the strongest predictor of CGPA at MBA level. There was however, a significant difference between at Bachelor, Intermediate, and SSC level performance as predictors of CGPA at MBA level on gender basis. When performance at Bachelor level as predictor of CGPA in MBA was analyzed, only the male performance at Bachelor level was a significant predictor and accounted for 52% of the variance in CGPA at MBA level. On the other hand the the female contribution as predictor was not significant at Bachelor level.Overall, the subjects performance at Bachelor, Intermediate, and SSC levels was stronger predictor of CGPA in MBA for the male rather than the female group. There was a significant difference between the contribution of the pre-admission performance of the BBA, B.com., and B.sc.groups as predictors of CGPA in MBA.There was a statistically significant difference between the BBA and B.com. groups. The BBA performance was the stronger predictor of the performance at MBA level. However for the B.com. group, SSC performance was a strong predictor of CGPA in MBA. There was no significant difference between the B.com. and B.sc. groups as predictors of CGPA at MBA level. In the BBA group, subjects performance in the preadmission variables accounted for 47.9% of the variance in CGPA at MBA level. In the B.com. group,
2.
3.
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subjects performance in the pre-admission variables accounted for 32.3% of the variance in CGPA at MBA level.The BBA group performance in the pre-admission variables was stronger predictor of CGPA in MBA than the B.com. group performance. 4. Bachelor level performance emerged as a strong predictor of performance in MBA. This needs to be reflected in the admission criteria for MBA programmes. The significant contribution of the BBA group performance as predictor of CGPA in MBA could be explained by the positive role of the related subjects studied at BBA level and the students familiarity with the system of study and evaluation. . The present study demonstrates the need for updating the curriculum at all levels in general and at Bachelor level in particular. The curriculum at BBA and B.com. levels need to be coordinated and improved to make it more useful, current and effective for the prospective MBA students.
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AGGREGATE IMPORTS AND EXPENDITURE COMPONENTS IN PAKISTAN: AN EMPIRICAL ANALYSIS

Ch. Sohail Ahmed Department of Economics College of Economics and Social Development, Karachi Abstract The main purpose of this study is to examine the determinants of imports in case of Pakistan by using the cointegration method. It investigates the long-run relationship between Pakistans aggregate imports and the major macroeconomic components of final expenditure (GDP aggregate expenditure). This study is divided into two parts. In the first part this study examines the total aggregate import demand function, and in the second part the disaggregate import demand functions are investigated (i.e. import demand function of raw material, fuel and machinery). This study uses Abbott et al. (1996) framework for empirical evidence. The empirical finding shows that private consumption expenditure is the major determinant of import demand in Pakistan for all categories of import except for vehicle import. Key Words: Import demand function, cointegation, ECM, Pakistan JEL Classification: F1, F4 I. Introduction In the present decade the size of aggregate import has become very large so that the trade deficit has became alarming for Pakistan. In the case of Pakistan, GDP growth has been strongly associated with import growth particularly of machinery technical know-how, fuel and essential food items. Over the last few years Pakistans import bill has been high for engineering PAKISTAN BUSINESS REVIEW OCTOBER 2011 488
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goods, but this was not due to large capital good imports. It was high due to imported automobiles imported by rich people. According to several empirical studies the basic import demand model relates import demand to relative prices and gross domestic product. It is assumed that the import content of public and private expenditure is the same. But, if different components of total national expenditure have different import content, then the use of a single variable in aggregate demand function will lead to aggregation bias ( Abbott and Seddighi, 1996). There are many research studies which attempt to examine the linkage between aggregate imports and macroeconomic components of expenditure such as private and public consumption expenditure, investment and export expenditures. In these studies authors have estimated import elasticities both at the aggregate and disaggregated levels for developed and developing countries. Disaggregated estimates of import elasticities are important for quantifying the influence of the various determinants of import demand and to provide a scientific basis for policy decisions, particularly for those related to demand restraint, devaluation, tariffs, etc.(Sarmad , 1989). When each macro-component of final expenditure has a specific import content, different compositions of expenditure correspond to different aggregate propensities to import. But in most economies, this composition of total expenditure tends to change over time and there is no stable relationship between imports and aggregate expenditures as measured by GDP. The organization of the paper is as follows. In Section II, we present an eclectic literature review. Section III develops the theoretical framework, and Section IV presents empirical results. In Section V, we highlight the main findings and conclusions.
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II. Literature Review This section presents a brief review of some of the studies which examine the aggregate import demand function for Pakistan and some other countries. Hafeez ur Rehman (2007) has conducted a similar study for Pakistan. This study attempts to estimate the aggregate import demand function for Pakistan by employing the Johenson and Juselius cointegration technique using annual data during 1975 2005. He followed the Doroodian et al. (1994) model for import demand. This is a log linear model in which he regressed the volume of import on real income, import prices, domestic prices, and legged volume of imports. He applied ADF test and the Phillips Parren (PP) test to determine the order of integration. Both trace and eigenvalue tests give the same results i.e. the null hypothesis of no cointegration is rejected for r =0 at 5% level of significance. He also applied an ECM to estimate short run as well as long-run elasticities. The results indicate that only real income (0.06947) and import price (-0.3602) elasticities are significant in the long run. The inelastic long run income elasticity implies that aggregate imports can be regarded as necessary goods in Pakistan. But in the short run the level of imports is not affected by the level of real income, domestic prices level, and import prices. Rehman also applied CUSUM and CUSUM of square (Brown, Durbin and Evans 1975) tests and Recursive coefficients to estimate stability of the import demand function. The results of the stability tests show that the import demand functions remain stable during the sample period. Mohammad Afzal (2006) presented a study estimating long-run trade elasticities in Pakistan using the cointegration approach. The objective of the paper was to estimate the MarshallLerner condition for Pakistan by employing the cointegration technique using annual data for the period 1960-2003. In this study he developed two models in log linear form, one for export demand and other for import demand.
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In the export demand model real exports are regressed on the ratio of unit value of Pakistans export in US dollars to unit value of world exports in US dollars, to world real income, and to nominal exchange rate (domestic price of the foreign currency). In the import demand model he regressed real value of import on relative price ratio of unit value of imports to wholesale price index of Pakistan; and to Pakistans real GDP ( 1990 =100 base) and to nominal exchange rate (domestic price of the foreign currency). All variables were in natural logarithm and in constant (1989-90 =100) prices. The empirical findings show that for export demand function, relative price elasiticity is -2.92; and world real income elasticity is 3.78; and nominal exchange rate has elasticity of 0.043. The import demand function shows that Pakistans Real GDP has elasticity of 3.19; relative price ratio of - 5.26 and nominal exchange rate has -2.27. The result of this study found that devaluation should improve the trade balance in Pakistan. But empirical evidence shows that following devaluation trade balance usually does not improve. This may be because devaluation sets in motion other forces that tend to neutralize the positive effect of devaluation on the trade balance. Some studies have reported that devaluation would improve the trade balance and is expansionary; while others concluded that devaluation is contractionary and will not improve the trade balance. Sarmad (1989) examined the factors influencing the demand for Pakistans imports both at aggregate and disaggregate level during the period 1959-60 to 1985-86. The functional form of the import equations was determined empirically. The results show that there is strong evidence to support the use of the log-linear form as the appropriate functional form of the import equation, both at the aggregate and disaggregated levels. Empirical findings show that the income, relative price, and foreign exchange availability elasticities have the right sign.
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The vast majority of them are significantly different from zero at the 10% level of significance. The aggregate income and price elasticities are on the low side, 0.631 and -0.669 respectively, while the foreign exchange elasticities is only 0.191. At the disaggregated level, the income elasticity ranges from 1.4 for import of oils and fats to as low as 0.45 for import of fuels. The relative price elasticities range from -1.2 for imports of machinery and transport to -0.42 for imports of oils and fats. Abbott and Seddighi (1996) used the cointegration approach of (Johansen and Juselius, 1990) and error correction models (Engel and Granger, 1987) to estimate an import demand model for the UK. Their results show that consumption expenditure has the largest impact on import demand with elasticity of 1.3, followed by investment expenditure with elasticity 0.3 and expenditure on exports has the elasticity of 0.1. The relative import price ratio to domestic price also has an elasticity of 0.1. Dutta and Ahmed (1999) used Engle-Grangers (1987) and Johansens multivariate approaches to estimate the aggregate import demand function for Bangladesh using quarterly data from 1974 to 1994. In this study, Bangladeshs aggregate import demand and its determinants, real import prices, real gross domestic product (GDP) and real foreign exchange reserves, were cointegrated. The estimated long-run elasticities of the explanatory variables based on Engle-Grangers (1987) approach were 0.52 (for relative prices), 1.63 (for real GDP) and 0.10 (for real foreign exchange reserves, but this variable was insignificant at the 10 percent level). A dummy variable was incorporated for the introduction of liberalization policies, but it was found to be insignificant. Mohammed and Tang (2000) estimated the determinants of aggregate import demand for Malaysia by using Johansen and Juselius cointegration technique over the period 1970-1998. The empirical results show that all expenditure components have elasticities less than 1 and have inelastic effect on import demand in the long run. Investment expenditure had the elasticity of 0.78
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with imports followed by final consumption expenditure with elasticity of 0.72. For expenditure on exports, it was found that it had the smallest elasticity of 0.38 with import demand. For relative prices they found a negative and inelastic relationship with elasticity of -0.69 with import demand. Tang and Nair (2002) re-investigated the aggregate import demand function for Malaysia using the bounds testing approach (Pesaran et al., 1996). This study used annual data from 1970 to 1998 as employed by Tang and Alias (2000). The result of the bounds test indicated that the volume of imports, real income and relative price were cointegrated. The empirical results show that the estimated income and price elasticities were 1.5 and 1.3, respectively. The positive sign of income elasticity shows that an increase in income leads to increased imports, but as it is elastic this means that imports are not regarded as necessary goods in Malaysia. The estimated parameter elasticities were consistent with those of Tang and Alias (2000). However, Tang and Alias (2000) found that import volume, real income and relative price were not cointegrated based on the insignificance of the estimated error correction term (see Kremers et al., 1992). Sinhas (1997) study found one cointegrating vector in Thailands aggregate import demand function using Johansens multivariate procedure for the period 1953 to 1990. The study found that Thailands aggregate import demand was price inelastic (-0.77) and cross-price inelastic (0.3) but highly income elastic (2.15). Bahmani-Oskooee (1998) estimated import and export demand equations for six developing countries (Greece, Korea, Pakistan, the Philippines, Singapore and South Africa) using a long-run approach (Johansensapproach). In this study, the volume of imports was related to relative prices, domestic income and the nominal effective exchange rate. The sample period covered quarterly data from 1973 to 1990. The study concluded that the Marshall-Lerner condition was satisfied and revealed that devaluation could improve the
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trade balances of these countries. The import demand for these countries was found to be price elastic except for Singapore (0.15, with incorrect sign). The real income variable was found to be elastic, but not in the case of Korea (0.31, and insignificant). The import demand for these countries was exchange rate inelastic (between 0.002 and 0.33) except for Singapore (-1.66, with incorrect sign). Mohammad et al. (2001) examined the long-run relationship between imports and expenditure components of five ASEAN countries (Malaysia, Indonesia, the Philippines, Singapore and Thailand) through the use of Johansen multivariate cointegration analysis (Johansen 1988; Johansen et al. 1991). Annual data for the period 1968-1998 were used for the countries (except Singapore, with a shorter period 1974-1998). The disaggregated model, in which the final demand expenditure is split up into three major components, is used. The results reveal that import demand is cointegrated with its determinants for all five countries. Min et al. (2002) estimated South Koreas import demand function using the Johansen and Juselius (1990) approach over the 1963-1998 period. They found evidence for the existence of a long run elastic (1.04) impact of final consumption expenditure on import demand and inelastic (0.49) impact of export expenditure on import demand. Both results were statistically significant at the 1 percent level. However, the impact of investment expenditure was found it to be negatively related with import demand, but it was statistically insignificant. Tang (2003) estimated Chinas import demand function using the bounds testing approach to cointegration. In the long run, he found expenditure on exports having the largest elasticity with imports (0.51), followed by investment expenditure (0.40) and final consumption expenditure (0.17). The relative price variable appeared with a coefficient of 0.6, implying that an increase in relative prices induces a 0.6 per cent fall in the demand for imports. Ho (2004) has estimated the import demand function of Macao by testing both aggregated and disaggregated import demand models with the components of aggregate expenditure using quarterly
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data over the 1970 to 1986 period. Using JJ-Maximum likelihood cointegration and error correction techniques, Ho (2004) found significant partial elasticities of import demand with respect to investment (0.1396), exports (1.4810) and relative prices (-0.3041) with their expected signs implied by economic theory in the disaggregated model. Narayan and Narayan (2005) applied the bounds testing approach to cointegration to estimate the long-run disaggregated import demand model for Fiji using relative prices, total consumption, investment expenditure, and export expenditure variables over the period 1970 to 2000. Their results indicated a long run cointegration relationship among the variables when import demand is the dependent variable. The results revealed long run elasticities of 0.69 for both export expenditure and total consumption expenditure respectively, followed by relative prices (0.38) and investment expenditure (0.17). III. The Model And Data In this study we follow the formulation used by (Abbott at el. 1996), according to which import demand function is as follows: M = f (CG, INVT, EXPT, ( Pm / Pd) ) . (1) Where M is imports at constant prices. The variable CG is the sum of private and public consumption expenditures; INVT is expenditure on investment goods including gross domestic fixed capital formation. EXPT is export expenditure. The variable Pm/Pd is the relative price ratio. Pm is the import price deflator defined as ratio of imports in current prices over imports in constant prices and Pd is an index of domestic prices measured by the GDP deflator. For export expenditure we use another variable Export as a capacity to import as proxy. We applied this model for Pakistan with a little modification in which we further decomposed total consumption expenditure CG into private and public consumption expenditure.
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This will show the partial effect on both components. Another important change in this study is that, EXPT is representing a new variable known as Export as a capacity to import. Export as a capacity to import equals the current price value of exports of goods and services deflated by the import price index. The reason for using this variable is that we want to know how much our export earnings contribute to aggregate import demand i.e. whether this has significant relationship with import demand or not. The model in logarithmic form in which all the variables are measured at constant prices can be expressed in equation as follows:
Ln M = 0 + 1 ln PCE + 2 ln GCE + 3 ln INVT + 4 ln EXPT + 5 ln( Pm/Pd) .. ( 2 ).
Where M is measuring the volume of imports at constant prices. The PCE is measuring private consumption expenditures at constant prices; GCE is the public consumption expenditures at constant prices; and INVT is expenditure on investment goods including gross domestic fixed capital formation at constant prices. The variable EXPT is measuring export as a capacity to import. The calculated data values for this variable are available and taken from the World Development Indicators of the World Bank. Pm is the import price deflator defined as ratio of imports in current prices over imports in constant prices and Pd is an index of domestic prices measured by the GDP deflator. The data used in this study is annual data in billion Rs. from 1970 to 2008. The values are based on 2000 = 100 prices. Data for macroeconomic components of expenditure is mostly taken from WDI 2009 and as well as from some issues of Economic Surveys. Data also collected from the Economic Survey 2008-09. Data for raw material, fuel, machinery and vehicle is taken from 25 years Statistics of Pakistan, various issues of Statistical Year Book of Pakistan, Monthly Billiton of Statistics, Statistics Division; and from various issues of Foreign Trade
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Statistics of Pakistan, FBS; Handbook of Statistics on Pakistan Economy, SBP Pakistan. IV. Results IV. 1. Long Run Behavior of Pakistans Aggregate Imports Using cointegration analysis, the import demand function can be estimated to show whether there exists a long run equilibrium relationship linking the import demand variable to the variables defined in the model in equation (2). For a long-run relationship to exist all the variables included in the model must form a unique cointegrating vector, which could be investigated by employing the maximum likelihood estimation technique developed by Johansen. We applied this technique sequentially. The first step in the cointegration analysis is to test the order of integration for each variable of the model. For this purpose we used the standard ADF test. The empirical findings of the ADF test are shown in Table 1. The ADF test provides strong evidence to reject the null hypothesis that the estimated residual has a unit root. This implies that the residuals are stationary.
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Table-1 Unit root test results for all variables.

Variables Volume of Import (M) ADF test at 5% 0.65775 (-2.941145) -5.131627 (-3.536601) -0.183370 (-2.943427) -5.688068 (-2.945842) -1.228889 (-3.536601) --1.487548 (-3.533083) -4.353280 (-3.536601) -0.319727 (-2.943427) -6.181654 (-2.948404) --1.575283 (-2.943427) --5.648813 (-3.548490) -0.737734 (-2.945842)
Private Consumption Expenditure (PCE)
PCE
Govt. Consumption Expenditure (GCE)
Exp on Investment ( INVT)
INVT
Exp on Export ( EXPT)
EXPT
Relative Price Ratio (PmPd)
PmPd
Raw Material Import ( RMAT)
RMAT
-8.187054 (-2.945842)
Fuel Import ( FUEL)
-0.007166 (-2.941145) -6.034673 (-2.943427) -2.029540 (-2.945842) -6.415746 (-2.945842) -2.520568 (-3.533083) -5.581319 (-3.536601)
FUEL
Machinery Import ( MACH)
MACH
Vehicle Import ( VECH )
VECH
Note: t-values are given in the parenthesis. ( )
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The null hypothesis in each case is that the variable in question is I (1): the 95% critical values are given in brackets and derived from Fuller. From the result of test it is clear that all level variables are integrated of order one, ~ I (1). i.e., first differencing is required to ensure a stationary process. ADF tests for each variable confirm that the first differences are stationary. After confirming that each variable in the model is I(1), we were in a position to carry out the cointegration tests with the use of the Johensen technique. The choice of lag length was based on the Schwarz Criteria and the optimal lag length was 2 years. Table 2 presents the results of the trace test derived from the Johansen maximum likelihood procedure. Here we proceeded sequentially, first testing for Ho: r < 0 , and than for r < 1 and so on, until the null hypothesis could be rejected, where r is the number of cointegrating vectors. Table 2: Result of JJ cointegration
Test Statistics Trace Statistics Null Hypothesis Ho : Ho : Ho : Ho : Ho : H0 : Ho : Ho : Ho : Ho : Ho : H0 : r=0 r1 r2 r3 r4 r5 r=0 r1 r2 r3 r4 r5 Cointegration Test Statistics 237.457 138.543 80.811 43.305 16.132 5.481 98.913 57.733 37.504 27.172 10.651 5.481 Critical Value at 5% 107.346 79.341 55.245 35.011 18.397 3.841 43.419 37.163 30.815 24.252 17.147 3.841
Maximal-eigenvalue Statistics
Note: According to the optimum model selection criteria, the JJ Assumption-5 is selected.
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Both tests indicate that there are four cointegrating vectors with respect to the variables defined in the model at 5% level of significance. Table 3 shows the long run coefficient estimates. Table 3 : Long Run Coefficients
Dependent Variable = M Regressors PCE GCE LINVT EXPT PMPD Coefficients 1.981 0.621 0.248 -0.471 -1.017 T-statistic 12.329 13.637 2.804 -9.149 -20.873
Table 3 above shows the values of long run coefficient estimates of each independent variable with their respective significant t-values. On the basis of this unique cointegrating vector, which also presents coefficient estimates normalized on aggregate imports, the equation representing the long run relationship between variables identified in the model is Ln M = 1.98158 Ln PCE + 0.62039 Ln GCE + 0.24813 Ln INVT - 0.47127 Ln EXPT 1.01758 Ln PmPd ( 3 ) Equation (3) shows the long run relationship between aggregate import and macroeconomic components of final expenditure. We see that all variables included in the model have coefficients with expected signs and with significant t ratios except for the variable EXPT, i.e. Export as a capacity to import. We used this variable to estimate exports contribution to import expenditure. This variable shows negative relationship with aggregate import demand. Furthermore, the long run relationship also indicates that both private and public consumption expenditure contribute to aggregate import demand, but private consumption expenditure is the major determinant of Pakistans aggregate PAKISTAN BUSINESS REVIEW OCTOBER 2011 500
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imports in the long run. It has positive elasticity value of almost 2 which indicates that an increase in private consumption expenditure leads to a relatively larger increase in import demand in the long run, compared to the increase in public expenditure. On the other hand, the elasticity coefficient for public expenditure is only about one third of that for private consumption expenditure. This leads to the very significant findings that an increase in public consumption does not have a large impact on the growth of the trade deficit. Similarly, the elasticity coefficient of the investment variable is extremely low one tenth of the value of private consumption import elasticity. Investment growth in Pakistan is thus not import dependent and is probably mainly domestically sourced this is again a very significant finding. The sign of price of imports to the prices of domestically produced goods shows a negative relationship with the level of imports in the long run. It is approximately unitary elastic with import demand. IV. 2 The Short Run Behavior of Pakistan Aggregate Imports The short run behavior of Pakistans aggregate imports can be studied by developing an ECM model. The general form of the ECM model is shown below. For this purpose the lagged residual error derived from the cointegrating vector was incorporated. The general short run dynamic model is represented as follow: Mt = o + 1i PCE t -i + 2i GCE t -i + 3i INVTt -i + 4i EXPT t -i + 5i PmPdt-i + 6i Mt-i + 7 ECM t-1 + error term (4)
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In the above equation all variables are the same as defined in equation 2 but here they are expressed in difference form and a lagged residual term is also included. Error Correction Model Results From the empirical results, we found that the short run ECM equation can be represented as Mt = - 0.054207+ 1.548805 PCEt + 0.424425 GCE t (5.114) (3.018) + 0.286773 INVT t - 0.022013 EXP T t (0.986) (-0.166) - 0.358296 PmPd t - 0.340994 ECM t-1 ( 5 ) (-3.050) (-2.015) R2 = 0.70 DW = 2.24
We see that in the short run private and government consumption expenditures are positive determinants of aggregate imports, but elasticity coefficients of both private and government consumption expenditure have been reduced in the short run. Furthermore, investment expenditure has no significant relationship to imports in the short run. Also export as a capacity to import has a negative sign of its elasticity coefficient and is insignificant in the short run. Relative import price variable also shows a negative sign and is significant over the short run. IV. 3 Disaggregated Analyses In this study we extended our findings to examine the long run relationship of aggregate imports of raw material, fuel, machinery, vehicle and the major macroeconomic components of final expenditure. The data for total imports of these categories is taken for the period 1970 to 2008 at constant prices of 2000.
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Disaggregate Models A. Raw Material Imports
For cointegration analysis, the empirical findings of the ADF test are shown in Table1. The ADF test provides strong evidence to reject the null hypothesis that the estimated residual has a unit root. This implies that the residuals are stationary. After confirming that each variable included in the model is I (1), we now carry out the cointegration tests with use of the Johensen technique. The choice of lag length was based on the Schwarz Criteria and the optimal lag length was 2 years. Table 4 presents the results of the trace test derived from the Johansen maximum likelihood procedure. Here we proceeded sequentially, first testing for Ho : r < 0, and than for r < 1 and so on, until the null hypothesis could be rejected, where r is the number of cointegrating vectors. Table 4 : Result of JJ cointegration for Raw Material
Test Statistics Trace Statistics Null Hypothesis Cointegration Test Statistics Critical Value at 5% 103.84731 76.97277 54.07904 35.19275 20.26184 9.16454
Ho : r = 0 169.5195 Ho : r 1 84.93969 Ho : r 2 54.00418 Ho : r 3 27.61599 Ho : r 4 12.36021 H0 : r 5 4.335075 Note: Trend assumption: No deterministic trend (restricted constant)
The cointegration results for long run relationship are shown below. Ln RMAT = Ln PCE + Ln GCE + Ln Expt + Ln INVT + LPmPd Ln RMAT = 1.093 LnPCE - 0.517 Ln CGE + 0.627 Ln Expt + (8.09) (-4.13) (4.93) 0.165 Ln INVT + 0.697 Ln PmPd .....(6) (2.01) ( 4.23) t-values in Parenthesis The above equation shows the long run relationship between import of raw material and macro economiccomponents
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of final expenditure. We see that the variables PCE (private consumption expenditure), EXPT (export as a capacity to import), INVT (expenditure on investment including fixed capital formation, PmPd (price of import to prices of domestically produced goods) have positive sign where as GCE (public consumption expenditure) has a negative sign. The long run relationship also indicates that private consumption expenditures contribute to aggregate raw material import demand and is the major determinant of Pakistans aggregate raw material imports in the long run. It has positive unit (1.1) elasticity value which indicates that an increase in private consumption expenditure leads to an equal increase in import demand in the long run. The elasticity coefficient of the investment variable, though positive is extremely low one tenth of the value of private consumption import elasticity. Investment growth in Pakistan is not significantly raw material import dependent. The sign of price of imports to the prices of domestically produced goods shows a positive relationship with the level of raw material imports in the long run and having the elasticity of 0.69. B. Fuel Imports
The empirical findings of the ADF test are shown on Table 1. The ADF test provides strong evidence that the residuals are stationary. It confirms that each variable included in the model is I (1). We now carry out the cointegration tests with use of the Johensen technique. The choice of lag length was based on the Schwarz Criteria and the optimal lag length was 2 years. Table 5 presents the results of the trace test derived from the Johansen maximum likelihood procedure. Here we proceeded sequentially, first testing for Ho : r < 0, and then for r < 1 and so on, until the null hypothesis could be rejected, where r is the number of cointegrating vectors.
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Table 5 : Result of JJ cointegration for FUEL

Test Statistics Trace Statistics Null Hypothesis Ho : Ho : Ho : Ho : Ho : H0 : r=0 r1 r2 r3 r4 r5 Cointegration Test Statistics 121.4798 72.04629 42.92568 24.69620 10.12278 2.700452 Critical Value at 5% 95.75366 69.81889 47.85613 29.79707 15.49471 3.84146
Note : Trend assumption: Linear deterministic trend
The cointegration results for long run relationship are shown below. Ln Fuel = Ln PCE + Ln GCE + Ln Expt + Ln INVT + Ln PmPd Ln Fuel = 1.44 LnPCE + 0.035 Ln CGE - 0.445 Ln Expt + ( 14.4) ( 0.35) (-4.45) 0.468 Ln INVT - 0.160 Ln PmPd (7) (4.25) (-1.33) t-values in Parenthesis The above equation shows the long run relationship between aggregate fuel import and macroeconomic components of final expenditure. We see that variables PCE, GCE, and INVT in the model have positive coefficients with expected sign, but GCE has insignificant t-value. The coefficient of EXPT is negative with significant t ratio. The long run relationship also indicates that both private and public consumption expenditures contribute to aggregate fuel import demand, but private consumption expenditure is the major determinant of Pakistans aggregate imports in the long run. It has positive elasticity value of 1.44 which indicates that an increase in private consumption expenditure leads to a relatively large increase in fuel import demand in the long run. GCE with elasiticity 0.035 indicates that an increase in government consumption expenditure leads to very low increase in fuel import demand in the long run. O n the other hand, the elasticity
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coefficient for public expenditure is only about 1/30 of that for private consumption expenditure. This leads to the very significant findings that an increase in public consumption does not make a large impact on the growth of trade deficit. Similarly, the elasticity coefficient of the investment variable is low (0.47) one third of the value of private consumption import elasticity. Investment growth in Pakistan is a little bit fuel import dependent and is mainly domestically sourced. It is again a significant finding. The sign of price of imports to the prices of domestically produced goods shows a negative relationship with the level of fuel imports in the long run. It is inelastic with fuel import demand. C. Machinery Imports
The empirical findings of the ADF test are shown on Table 1. The ADF test provides strong evidence that the residuals are stationary. It confirms that each variable included in the model is I (1). We now carry out the cointegration tests with use of the Johensen technique. The choice of lag length was based on the Schwarz Criteria and the optimal lag length was 2 years. Table 6 presents the results of the trace test derived from the Johansen maximum likelihood procedure. Here we proceeded sequentially, first testing for Ho : r < 0, and then for r < 1 and so on, until the null hypothesis could be rejected, where r is the number of cointegrating vectors. Table 6 : Result of JJ cointegration for Machinery
Note: Trend assumption: Linear deterministic trend
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The cointegration results for long run relationship are shown below. Ln Mach = Ln PCE + Ln GCE + Ln Expt + Ln INVT + Ln PmPd Ln Mach = 1.875 Ln PCE + 0.826 Ln CGE 0.965 Ln Expt ( 5.00 ) ( 2.39) (-9.08) + 1.677 Ln INVT - 0.728 Ln PmPd ..(8) (4.28) (-1.61) t-values in Parenthesis The above equation shows the long run relationship between aggregate machinery import and macroeconomic components of final expenditure. We see that all variables included in the model have coefficients with expected signs except the variable EXPT. This variable shows negative relationship with aggregate machinery imports. Furthermore, the long run relationship also indicates that both private and public consumption expenditures contribute to aggregate machinery import demand, but private consumption expenditure is the major determinant of Pakistans aggregate machinery imports in the long run. It has positive elasticity value of almost 2 which indicates that an increase in private consumption expenditure leads to a relatively large increase in machinery import demand in the long run. On the other hand, the elasticity coefficient for public expenditure is only about half of that for private consumption expenditure. This leads to the very significant finding that an increase in public consumption does not have a large impact on the growth of trade deficit. The elasticity coefficient of the investment variable is relatively high (1.67). This shows that investment is another major determinant of Pakistans aggregate machinery imports in the long run. Investment growth in Pakistan is machinery import dependent. The sign of price of imports to the prices of domestically produced goods shows a negative relationship with the level of machinery imports in the long run. It has the value of 0.72. 507 PAKISTAN BUSINESS REVIEW OCTOBER 2011
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D.
Vehicle Imports
The empirical findings of the ADF test are shown on Table 1. The ADF test provides strong evidence that the residuals are stationary. It confirms that each variable included in the model is I (1). We now carry out the cointegration tests with use of the Johensen technique. The choice of lag length was based on the Schwarz Criteria and the optimal lag length was 2 years. Table 7 presents the results of the trace test derived from the Johansen maximum likelihood procedure. Here we proceeded sequentially, first testing for Ho : r < 0, and then for r < 1 and so on, until the null hypothesis could be rejected, where r is the number of cointegrating vectors. Table 7 : Result of JJ cointegration
Note: Trend assumption: Linear deterministic trend
The cointegration results for long run relationship are shown below: Ln Vech = Ln PCE + Ln GCE + Ln Expt + Ln INVT + Ln PmPd Ln Vech = 0.578 Ln PCE + 2.10 Ln CGE + 0.84 Ln Expt (1.41) (5.38) (-11.34) +3.714 Ln INVT 2.328 Ln PmPd .(9) (8.18) (-4.79) t-values in Parenthesis The above equation shows the long run relationship between aggregate vehicle import and macroeconomic
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components of final expenditure. We see that all variables included in the model have coefficients with expected signs. Although the variable PCE ( private consumption expenditure) has positive elasticity coefficient (0.57). It has insignificant t ratio, which means that private consumption expenditures is not a major determinant of aggregate vehicle import. The long run relationship also indicates that public consumption expenditures, export as capacity to import, and investment expenditures contribute to aggregate vehicle import demand, but investment expenditure is the major determinant having an elasticity value of 3.7. This shows that investment growth in Pakistan is vehicle import dependent. The sign of price of imports to the prices of domestically produced goods shows a negative relationship with the level of vehicle imports in the long run. Two points may be made: Firstly, the small private consumption elasticity estimate may be explained by the fact that the consumption of people who buy vehicles as a proportion of total private consumption is very small since people who buy vehicle are very few. Secondly, it would make sense to include auto loans as a determinant of vehicle import. V. Summary and Conclusions The purpose of this study was to make empirical analysis of the determinants of import at aggregate and disaggregate level in Pakistan. For this purpose we carried out a multivariate cointegration analysis to examine the long run relationship. An ECM model was used for assessing the short run relationship between aggregate imports and the main components of final expenditure. We divide our study into an aggregated and disaggregated level. Our empirical investigation suggests that at the aggregate level there exists a stable long-run relationship between aggregate imports and the main components of final expenditure and the relative price term. Private consumption expenditure, in particular appears to be the major determinant of Pakistans aggregate imports. However, the exports expenditure for which we use a proxy varable export as capacity to import is not positively associated with aggregate imports demand. Also, both public consumption expenditure and aggregate investment have vey low import elasticities. In the short run, an error correction
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model also suggests that private consumption expenditure is the major determinant of import demand. At the disaggregated level, we developed an import demand model for raw materials, fuel, machinery and vehicles. Our findings show that, again private consumption expenditure is the major determinant except for vehicle imports. The variable public consumption expenditure is showing a negative relationship only with raw material import demand function. The variable export as a capacity to import is showing a negative relationship with fuel and machinery import demand function. The variable investment expenditure is showing a positive relationship with all the import demand functions, but has high elasticity value for machinery and vehicle import demand function. References : 1. Abbott,-A-J and H.R Seddigh, (1996), Aggregate Imports and Expenditure Components in the UK: An Empirical Analysis, Applied-Economics, September 1996; 28(9): 11191125. 2. Bahmani-Oskooee, M. (1998), Cointegration approach to estimate the longrun elasticities in LDCs, International Economic Journal, Volume 61, pp. 101-109. 3. Dutta, D. and N. Ahmed (1999), An aggregate import demand function of Bangladesh : A cointegration approach.. Applied Economics, Volume 31, pp. 465-472. 4. Dutta,-Dilip; Ahmed,-Nasiruddin, (2001), An Aggr ega te Im por t Dem a nd Funct i on for In di a: A Cointegration Analysis. Australian National University, Australia South Asia Research Centre, ASARC Working Papers, 2001; 12
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5. Ho, W.S, (2004), Estimating Macaos import demand function, monetary authority of Macao. 6. Hafeez Ur Rehman (2007), An econometric estimation of traditional import demand function for Pakistan. Pakistan Development Review Vol.45 No.2 pp 245-256. 7. Mohammad Afzal (2004), Estimating long run trade elasticities in Pakitistn- Cointegration Approach. Pakistan Development Review Vol.43 No.4.pp 757-770. 8. Mohammad Haji Alias & Tuck Cheong Tang, Sumber Pertumbuhan Sektor Pertanian di Malaysia: Satu Analisis Sebab-Menyebab, Semina r Dimensi Baru Dalam Pertanian Negara, Anjuran Fakulti Ekonomi, Universiti Kebangsaan Malaysia, October 6-8, (2000), Equatorial Hill, C. Highlands, Malaysia. Pascasidang,( 2003), p. 29-42 [Mohammad Haji Alias Presenter]. 9. Mohammad, H. A., T. C. Tang and J. Othman (2001), Aggregate import demand and expenditure components in five ASEAN countries: An empirical study. Journal Ekonomi Malaysia, Volume 35, pp. 37-60. 10. Mohammad, H.A and T.C Tang, (2000), Aggregate Imports and Expenditure Components in Malaysia: A Cointegration and Error Correction Analysis, ASEANEconomic-Bulletin. December 2000; 17(3): 257-269. 11. Min, B.S , H.A Mohammed (2002) , An analysis of South Korea import demand. J.Asia Specific Affairs, 4 : 1-17. 12. Narayan,-Paresh-Kumar; Smyth,-Russell (2005), The Determinants of Aggregate Import Demand in Brunei Darussalam: An Empirical Assessment Using a Cointegration
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and Error Correction Approach. Singapore-Economic-Review. October 2005; 50(2): 197-210. 13. Pakistan Economic Survey ( various issues). 14. Sinha,-Dipendra (1997), Determinants of Import Demand in Thailand.International-Economic-Journal. Winter 1997; 11(4): 73-83. 15. Sarmad,-Khwaja, (1989), The Determinants of Import Demand in Pakistan.World-Development, October 1989; 17(10): 1619-25. 16. Tang, T.C., and M. Nair (2002), A Cointegration An al ysi s of th e Mal aysian Import Dema nd Funct ion: Reassessment From the Bounds Test, Applied Economics Letters, 9, 293-296. 17. Tang TC (2003),An Empirical Analysis of Chinas Aggregate Import Demand Function, China Econ. Rev., 12 (2):142-63. 18. World Development Indicators (2009).
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Schizophrenia: The Exterminating Angel - A Deleuzoguttarrian Critique
SCHIZOPHRENIA: THE EXTERMINATING ANGEL A DELEUZOGUTTARRIAN CRITIQUE

S.M.Mahboob-ul-Hassan Bukhari Department of Philosophy University of Karachi, Karachi Abstract Deleuze thinks that capitalism functions immanently. Capitalism has provided liberation from traditional practices and bondage. People are not bound to their family, religion or land lord in capitalism. They are free to move as they please provided they can afford it. Deleuze points out the dual impact of capitalism. On the one hand, it prevents traditional forms of oppression; on the other hand it brings the liberated forms into the prison of capitalist order. When capitalism decodes it is liberating whereas when it recodes it enslaves. Schizophrenia, Deleuze and Guattari hold, is a way out. Capitalism decodes and deterritorializes, it reaches a limit at which it must artificially reterritorialize by augmenting the state apparatus, and repressive bureaucratic and symbolic regimes. The schizophrenic never reaches such a limit. It resists such reterritorialization, just as it resists the symbolic and despotic territorialization of the oedipalizing psychotherapist. Deleuze and Guatarri disagree with Jamesons argument that schizophrenia reinforces and contributes to the hegemony of capitalism. Instead Deleuze and Guattari see schizophrenic as capitalisms exterminating angel. The schizo is a radical, revolutionary nomadic wanderer who resists all forms of oppressive powers. Schizophrenic sensibilities can replace ideological and dogmatic political goals with a radical form of political desire. Desiring production marks the schizophrenic potential in everyone to resist the power of despotic signifiers and capitalist reterritorialization. 513 PAKISTAN BUSINESS REVIEW OCTOBER 2011
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The present paper seeks to evaluate the problem of the schizophrenics transcendence from capitalism. Can the schizophrenic survive without capital? Deleuze conceived schizoid as an expression of liberation from the oppressive structures of capitalism. For this he developed a new ontology and metaphysics of becoming-other or pure difference. This presumes immanence rather than transcendence. This paper is divided into the following sections: a. b. c. d. e. f. Becoming and Immanence Machinic Ontology Capitalism and Immanence Freedom and Becoming Schizophrenia: an exterminating angle Critical evaluation
The first section seeks to explore the rules of becoming which will lead to the formulation of machinic ontology in second section. The third will throw light on capitalism in the context of capitalism which will reinforce freedom. The fifth section will show the external limit of capitalism which will subsequently be critically evaluated. This will excavate the possibility of freedom in schizophrenic model which was absent in capitalism. Key Words: Coding, recoding, decoding, schizophrenia, Immanence, Body without Organs, Jel Classification: B30 a. Becoming and Immanence
Deleuze writes in Nietzsche and Philosophy, The idea of another world, of a supersensible world in all its forms (God, essence, the good, truth), the idea of values superior to life, is not one example among many but the constitutive element of all fiction (Deleuze 1983, p147). He is indicating the parameters of his philosophy of difference in the above mentioned statement. For him, transcendence is fiction and will not be the framework through which he will philosophize. Instead he chooses immanence. Being is not something other than the world we live in. It is that world which will be navigated through Deleuzean philosophy. Moreover,
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temporal thinking is yet another parameter. Temporal thinking can penetrate that world to show us what those appearances might be made of, and how they might become different. For Deleuze, to conceive living is to conceive both what is and what might be. In an ontology worthy of the name, the two are entwined. The world is more than we may realize. It is rich with difference. In mainstream philosophy, the project of ontology has always been to focus upon what is? So far as what might be has been ignored. Only at the margins, according to Deleuze, have there been figures that have offered a different vision. Spinoza, Bergson, and Nietzsche are among them, presenting us with concepts from which we might build a new ontology, one that does not reinforce a tired conformism but points the way toward a more open, vibrant conception of the world and of living in it (May2005,p71). Deleuze traces a new ontology, a new way of conceiving being, the world, or what there is. Instead of abandoning the questions of being that have been badly posed by so many of the philosophical ancestors, he chooses to raise them again, but to pose them differently. Being is not a puzzle to be solved but a problem to be engaged in. It is to be engaged through a thought that moves as comfortably among problems as it does among solutions, as fluidly among differences as it does among identities. The world as Deleuze conceives it is a living world, a vital world (May2005, p71). Deleuze is inspired by three philosophers to formulate an ontology of difference. These three thinkers are Spinoza Bergson and Nietzsche. He carries out experiments with their thought which would eventually lead him to liberation. Deleuze acknowledges that Spinoza is the Christ of philosophers, and the greatest philosophers are hardly more than apostles who distance themselves or draw near this mystery (Deleuze & Guattari 1994, p60). He draws immanence from Spinoza, duration from Bergson, and affirmation from Nietzsche. He sets these concepts as the standard for his ontology of difference. O ntology, according to Deleuze, becomes the first requirement of the ontology of difference. Philosophy can no longer
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function on the presumption of transcendence. Deleuze & Guatarri write We must draw up a list of . . . illusions and take their measure, just as Nietzsche, following Spinoza, listed the four great errors. But the list is infinite. First of all there is the illusion of transcendence, which, perhaps, comes before all the others (Deleuze & Guattari 1994, p49). Deleuze argues that transcendence requires two presumptions. First, the existence of at least two ontological substances. Second, one of these two substances be superior to the other. This superiority is presumed both in power and value. One substance gives rise to the other. The former provides life to the other. The transcended substance depends upon the transcending substance for its origin. The transcending power brings the world into full swing, liberating it from the prison of its incapacity and its impotence. The commitment to transcendence is to allow the universe to be explained in such a way as to privilege one substance at the expense of other, to reserve the superiority of certain features and to denigrate others. Todd May notes that what is important for Deleuzes thought is what is to be denigrated: the physical, the chaotic, that which resists identity. Physicality, chaos, difference that cannot be subsumed into categories of identity: all these must deny themselves if they would seek to be recognized in the privileged company of the superior substance (May 2005, p31). The commitments of transcendence, to two substances and to a privileging of one of them, lead us to the questions of the interaction between the two substances. Spinoza fascinates Deleuze as he had successfully changed the subject of transcendence by the concept of expression. According to Deleuze, emanation has an affinity with expression; they produce while remaining in themselves (Deleuze 1990, 171). However , this affinity of emanation with expression does not bring any important changes in the picture. In emanation what is transcended remains distinct and different from the creator. Moreover, the transcending substance enjoys privilege with regard to its creator. Deleuze expresses it as Emanation thus serves as the principle of a universe rendered hierarchical . . . each term is as it were the image of the superior term that precedes it, and is defined by the degree of distance that separates it from the first cause or the first principle(Deleuze 1990, p173). Hence emanation carries the two
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commitments of transcendence: the existence of two substances and the superiority of one of those substances to the other : the themes of creation or emanation cannot do without a minimal transcendence, which bars expressionism from proceeding all the way to the immanence it implies (Deleuze 1990, p180). Spinozas contribution lies, according to Deleuze, in the construction of an ontology of immanence. The ontology of immanence requires the univocity of being. Deleuze writes expressive immanence can not be sustained unless it is accompanied by a thoroughgoing conception of univocity, a thoroughgoing affirmation of univocal being (Deleuze 1990, p178). The substance of being is one and indivisible which amounts to be saying that all hierarchy and division is banished from ontology. By univocity of being , Deleuze means that the term being or Being is said in one and the same sense of everything of which it is said (May 2005,p34). By the introduction of univocity of being Deleuze is able to get rid of transcendence. According to him, it is only through the rigorous commitment to the univocity of being that an ontology can be created. The significance of Spinozism seems to me to be this: it asserts immanence as a principle and frees expression from any subordination to emanative or exemplary causality. . . . And such a result can be obtained only within a perspective of univocity (Deleuze 1990, p180). Univocity of being leads to equality of all beings. Substance expresses itself in attributes. Among the attributes accessible to human consciousness are the only two: thought and extension. Deleuze writes, Attributes are, for Spinoza, dynamic and active forms. And here at once we have what seems essential: attributes are no longer attributed, but they are in some sense attributive. . . . As long as we conceive the attribute as something attributed, we thereby conceive a substance of the same species or genus; such a substance . . . is dependent on the goodwill of a transcendent God . . .On the other hand, as soon as we posit the attribute as attributive we conceive it as attributing its essence to something that remains identical for all attributes, that is, to necessarily existing
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substance (Deleuze 1990, p45). Substance expresses itself in attributes. Attributes are not things that emanate from substance. Instead they are substance expressing itself. What do [attributes] attribute, what do they express? Each attribute attributes an infinite essence, that is, an unlimited quality (Deleuze 1990, p45). For Deleuze, Todd May writes, there are two differences between this picture of the relation of substance and attributes and Spinozas. First, substance is woven into the attributes that express it. Second, substance is not like a thing that gives birth to other things. It is more like a process of expression (May 2005, p37). According to Deleuze, substance has a temporal character. It is bound up with time. Substance must be seen as a process not as a finished product. May explicates Substance folds, unfolds, and refolds itself in its attributes and in its modes, to which it remains immanent. It is always substance that, in folding and unfolding itself, remains within these folds. Being is univocal: there is no distinction between layers, levels, or types of being. There is no transcendence, only immanence (May 2005, p38). Deleuze elaborates being as Being is said in a single and same sense of everything of which it is said, but that of which it is said differs: it is said of difference itself (Deleuze 1994, p36). Deleuze develops his conception of immanence through Spinoza. Three concepts allow Deleuze to philosophize immanence. They are: the univocity of being, immanence, and expression. Deleuze argues that to think in terms of univocity, immanence, and expression is to reject the division of being into natural kinds. This scheme of thought also opens up the horizon of a thought that embraces both its temporal fluidity and its resistance to rigid classification. Hence Deleuze makes submission, copying and judgment of to transcendent being unthinkable logically or metaphysically. This is what makes Spinoza, according to Deleuze, the Christ of philosophers. Deleuzes Spinoza speaks To be is to express oneself, to express something else, or to be expressed (Deleuze 1990, p 253). To explore the character of beings expression; Deleuze draws from Bergsons conception of time. He holds that the expression of being is temporal.
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Deleuze argues that Spinozas immanence and Bergsons duration can be brought together in constructing a philosophy that allows seeing living more vitally than ever before. Deleuze thinks that expression occurs temporal temporally. He needs a concept of time which facilitates his expression of being. His expression, he contends, cant operate with circular, linear, or existentialist conceptions of time. Linear conception of time is inconsistent, since it functions and operates at the model of transcendence. Linear time is regarded as a container (a spatial term) in which things take place. It serves as a narrative form through which modern life is organized. Circular view of times basic slogan is history repeats itself. Things once happened will occur and recur over and over again just like the repetition of the seasons. Expression may find its home in the existentialist view of time. What begins in the past expresses itself in the future through the present. The future becomes an expression of the past which is not mere repetition but that unfolds it, or folds it, or refolds it. Deleuze is uncomfortable with the existential conception of time. Because existential approach emphasizes or conceived at all or presumes the human. This approach is subjectively grounded . What provides the future its privilege as a dimension of time is that we humans, who are characterized by our aims, objectives, projects, by the goals and aspirations we (humans) place before ourselves. It is we the humans who are defined by our futures. This way of defining time is to put it in the salvage of human beings. The existentialist conception of time denies, according to Deleuze, the multiplicity of the one. It freezes the one into a humanistic model. Deleuze argues that this is not done by mistake but by design. He doesnt seek to create an ontology centered on human ambitions and perceptions or human orientation toward the world. He seeks to conceive temporality in a way that both captures the human living of time and does not subordinate and subsume all of temporality to human living. It is only to the extent that movement is grasped as belonging to things as much as to
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consciousness that it ceases to be confused with psychological duration, whose point of application it will displace, thereby necessitating that things participate directly in duration itself (Deleuze 1988, p48). This conception of time reinforces and extends the concept of immanence; it allows a way to comprehend how expression happens. If expression is temporal, then temporality requires to be conceived temporally rather than spatially. The concept of duration (duree) facilitates us to do that. Deleuze writes The past and the present do not denote two successive moments, but two elements which coexist: One is the present, which does not cease to pass, and the other is the past, which does not cease to be but through which all presents pass. . . . The past does not follow the present, but on the contrary, is presupposed by it as the pure condition without which it would not pass (Deleuze 1988, p59). The present passes. In order for this to take place, there must be a past for the present to pass into. The past must exist as certainly as does the present. The past does not exist in the similar way as the present. Bergson conceives it as existing in a very different way. He holds that it exists in virtuality, in contrast to the actuality of the present. Deleuze argues Strictly speaking, the psychological is the present. Only the present is psychological; but the past is pure ontology; pure recollection has only ontological significance (Deleuze1988, p56). Bergsons concept of the past is the ontological source from which psychological memory springs. There is one past, a single past in which all psychological memory participates. The past does not exist in the similar fashion as the present does. The present exists in actuality. The past, the ontological past, exists virtually. Deleuze thinks that virtual is as real as the actual. The distinction between the virtual and the actual is different from the distinction between the possible and the real. Deleuze draws two differences between virtual and possible. First, the possible does not exist, where as the virtual does. It is real. The virtual is real
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in so far as it is virtual. (Deleuze1994, p208) The second difference, according to him, is that the possible is a mirror of the real, while the virtual does not mirror the actual. Hence he concludes that the past is altogether different from the present. It is structured differently. Substance actualizes itself in attributes and modes. Its way of being as the virtual is not simply the representation or imitation of its way of being. This distinction (actual/virtual) facilitates Deleuze to distance himself from transcendent ways of thinking. The ideas of model and copy and of resemblance carry transcendence in themselves which leads to the denigration of existent things. Deleuze rejects this denigration of existent things. Deleuze seeks to create such an ontology which judges existence immanently without presuming any kind of transcendence. This distinction (actual/virtual) paves the way for this. The virtual is the part of the real in a very similar fashion as actuality is. To live is to comprehend a historically given world which is not of ones own making. The past exists in me in such a way that it appears at each moment of my engagement with the world. Here in this engagement with the world that the actualization of virtual occurs. The past and present are mingled. The past unfolds whereas the present creates and invents. Present always actualises the past. At every moment the past actualizes. In this way a psychological unconscious, distinct from the ontological unconscious, is defined. The latter corresponds to a recollection that is pure, virtual, impassive, inactive, in itself . The former represents the movement of recollection in the course of actualizing itself (Deleuze 1988, p71). The actualizing past exists ontologically and psychologically. Both the psychological and ontological are inseparable. It is a process in which substance expresses itself. The past is viewed and colored by things which logically had no connection with it. The past is not something which had happened or is over. Deleuze contends What characterizes duration is not logical connection; nor is it relation among similar elements, nor is it identification or imitation or resemblance. It is difference that characterizes duration: Duration is that which differs with itself (Deleuze1956 ,p88). The past which is duration,
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according o Deleuze, is characterized by a particular kind of difference, a kind of difference that is irreducible to the categories of Identity. The past is not composed of identical elements. Hence it has not any particular identity. The past differs with itself. Deleuze thinks of difference in terms of temporality. All differences like Hegelian oppositions or identity resemblances are spatial and hence are away from reality. Deleuze sometimes calls multiplicity for difference. He writes that there are two types of multiplicity. One is represented by space . . . It is a multiplicity of exteriority, of simultaneity, of juxtaposition, of order, of quantitative differentiation, of difference in degree; it is a numerical multiplicity, discontinuous and actual . The other type of multiplicity appears in pure duration: It is an internal multiplicity of succession, of fusion, of organization, of heterogeneity, of qualitative discrimination, or of difference in kind; it is a virtual and continuous multiplicity that cannot be reduced to numbers (Deleuze1988, p38). Deleuze highlights that the problem is People have seen only differences in degree where there are differences in kind (Deleuze 1988, p23). Hence the Bergsonian revolution is clear: We do not move from the present to the past, from perception to recollection, but from the past to the present, from recollection to perception (Deleuze 1988, p63). Deleuze urges us to think temporally rather than spatially because this will allow virtual differences to make more sense. The present is not simply an ideal now, but a surplus beyond what is directly experienced. The present is always more than it reveals to us. The virtual difference is immanent to the present. Ontology, for Deleuze, is not limited to the study of stable, frozen, fixed identities of things but extends to what unsettles and destabilize it. The present is more than what it appears to be. Virtual differences are immanent in it. His ontology illustrates the overflowing nature of reality. Deleuze usually states that one does not know what the body is capable of. It is not transcendence and spatiality that are the proper terms and adequate vocabulary for ontological thinking. It is immanence and temporality by which, Deleuze thinks, transcendence and spatiality can be overcome. PAKISTAN BUSINESS REVIEW OCTOBER 2011 522
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Deleuze admires Nietzsche as Marx and Freud, perhaps do represent the dawn of our culture, but Nietzsche is something entirely different: the dawn of counterculture (Deleuze 1977, p142). Deleuze uses another term from the history of philosophy: eternal return. This was earlier used by Nietzsche. Eternal return is not taken in usual context and meaning as Deleuze often does. He gives different meanings to the conventional terms. Eternal return doesnt mean the cycling back of the same things over the course of time. According to Nietzsche the eternal return is in no sense a thought of the identical but rather a thought of synthesis, a thought of the absolutely different . . . It is not the same or the one which comes back in the eternal return but return is itself the one which ought to belong to diversity and to that which differs (Deleuze 1983, p46). Return is the return of difference. He further elaborates it Return is the being of that which becomes. Return is the being of becoming itself, the being which is affirmed in becoming(Deleuze 1983,p24). According to Deleuze, becoming is real which is becoming multiplicity. Deleuze argues for there is no being beyond becoming, nothing beyond multiplicity; neither multiplicity nor becoming are appearances or illusions. . . . Multiplicity is the inseparable manifestation, essential transformation and constant symptom of unity. Multiplicity is the affirmation of unity; becoming is the affirmation of being (Deleuze 1983, pp23-4). Substance is not a constant and persistent identity that stands behind the modes and attributes. It is becoming and difference. Duration is difference. May elaborates It is difference, difference that may actualize itself into specific identities, but that remains difference even within those identities (May 2005, p60). Return is the being of becoming and difference. It is the difference that recurs or returns eternally. For Deleuze, the Past is never gone or over. He writes The passing moment could never pass if it were not already past and yet to come at the same time as being present (Deleuze1983,p48). Duration is unity of past, present and future. They are interwoven. What returns is the virtuality which is behind as well as within those identities. Deleuze explicates It is not being that returns but rather the returning itself that
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constitutes being insofar as it is affirmed of becoming and of that which passes. It is not some one thing which returns but rather returning itself is the one thing which is affirmed of diversity or multiplicity. In other words, identity in the return does not describe the nature of that which returns but, on the contrary, the fact of returning for that which differs (Deleuze 1983, p48). The future is full to overflowing. It is not empty and always recurs in the form of virtual differences. Todd May notes The past is duration; the present is actualization; the future is eternal return. But within all these, constitutive of them, is difference. Difference in kind constitutes duration. Actualized difference constitutes the present. The return of difference constitutes the future (May 2005, p62). Deleuze discusses the dice throw as the game has two moments which are those of a dice throw the dice that is thrown and the dice that falls back. . . . The dice which are thrown once are the affirmation of chance, the combination which they form on falling is the affirmation of necessity (Deleuze1983, p25-6). The future is the eternal return which is nothing but the return of difference. The future is virtual difference that is waiting to actualize itself into a particular present. This is the throw of the dice. It is mere chance. The future, too, actualizes itself in a present, as does the past. May writes The return crystallizes into identities. Pure temporality becomes also spatiality. We are faced with a particular situation that has emerged from the multiplicity that has returned. That is the combination, the dice that falls back. It is necessity (May 2005, p63). Necessity does not mean things had to happen in that particular way and not otherwise. The present is not guided by any transcendence to materialize any particular future. Deleuze intends to overturn this thinking that this particular future will become present and not otherwise.Todd May points out three faultsin it. First, it implies that the future is constituted by particular identities, instead of being a virtual multiplicity of the kind Bergson conceives. Second, it implies that that future exists as a possibility before it becomes a reality, whereas Deleuze contrasts possibility with virtuality. Third, it implies guidance, which seems to require transcendence rather than immanence. In immanence, there is folding, unfolding, refolding. But there is no guiding force, no invisible hand (May 2005, p63). PAKISTAN BUSINESS REVIEW OCTOBER 2011 524
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The eternal return is the throw of dice. They are always thrown, at every moment, at every instant. The future is always with us in a similar way as the past is. A pair of dice is thrown with the multiplicity which is duration. The dice fall back. They show a combination. The past is always a part of every present. The bad player counts on several throws of the dice, on a great number of throws. In this way he makes use of causality and probability to produce a combination that he sees as desirable. He posits this combination itself as an end to be obtained, hidden behind causality (Deleuze1983, p26-7). Deleuze urges to affirm chance and necessity. He thinks that bad players seek particular combinations. Good players do not seek particular future. He writes But, in this way, all that will ever be obtained are more or less probable relative numbers. That the universe has no purpose, that is has no end to hope for any more than it has causes to be known this is the certainty necessary to play well(Deleuze1983, p27). Good players do not play for a particular combination. They play knowingly that the combinations are infinite, and are not up to them. Deleuze writes To affirm is not to take responsibility for, to take on the burden of what is, but to release, to set free what lives. To affirm is to unburden: not to load life with the weight of higher values, but to create new values which are those of life, which make life light and active. There is creation, properly speaking, only insofar as we can make use of excess in order to invent new forms of life rather than separating life from what it can do (Deleuze1983, p185). To affirm, Deleuze argues, is to carry out experiments without any prior knowledge about the results of ones experimenting. In this way the virtual will be excavated. Deleuze argues that things are composed of forces: active and reactive. Every force which goes to the limit of its power is . . . active (Deleuze 1983, p59). An active force goes to the limit of what it is able to do. It does whatever is in its power and capacity to the extent of its ability. Active forces are creative and productive to make whatever can be made of themselves. All creativity is conducting experiment. Creativity may be channeled in undermined unexpected directions. One throws the dice without knowing what will fall back. Reactive forces
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proceed in an entirely different way they decompose; they separate active force from what it can do; they take away a part or almost all of its power (Deleuze 1983, p57). Reactive forces undermine active forces. They do not produce; they limit the creativity of active forces. We, Deleuze argues, are composed of forces which seek to go the limit of what they can do, and forces that seek to separate those forces from what they can do. His view is that Active forces affirm difference and lead to productivity. Deleuze urges that Good players of dice affirm active forces and affirm chance and necessity, the difference that is both past and future and the actualization of difference. To affirm the eternal return is to recognize a world of virtual difference which is behind and beyond the particularities of our present which will set free the active forces of creativity and productivity to refuse to separate those forces from what they can do. To sum up Spinoza, Bergson, and Nietzsche provide the three concepts which, after interpretation, allow Deleuze to formulate his dynamic, instable, temporal, immanent ontology. These three concepts are: immanence, duration, and the affirmation of difference. These concepts make the ontology of difference possible and bring its overflowing nature to the fore. This also makes the three concepts: submission, copying and judgment illogical and metaphysically impossible. b. Machinic Ontology
Deleuze conceives politics on the basis of a more fluid ontology, one that would allow for political change and experimentation on a variety of levels, rather than privileging one level or another. In their collaborative work Deleuze and Guattari offer a variety of starting places. One of the concepts they rely on the most is that of the machine. Everywhere it [what Freud called the id] is machines real ones, not figurative ones: machines driving other machines, machines being driven by other machines, with all the necessary couplings and connections. . . . we are all handymen: each with his little machines.(Deleuze & Guattari
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1977, p1). The concept of machines provide them ontological mobility, and through which they can overthrow the dogmatic image of political thought. Claire Colebrook writes In AntiOedipus and A Thousand Plateaus Deleuze and Guattari use a terminology of machines, assemblages, connections and productions. . . . An organism is a bounded whole with an identity and an end. A mechanism is a closed machine with a specific function. A machine, however, is nothing more than its connections; it is not made by anything, is not for anything, and has no closed identity (Colebrook 2002, p56). An organism is a whole which is self-regulating. Each of its parts supports others in such a way that in the harmony of those parts make whole. We should think of being as mobile machines that may connect to the environment in a variety of ways. There is no transcendent unit of analysis. To think machinically is to consider the relation of individuals to society as only one level of connections. There are others to be considered. One can also discuss pre-individual connections and supra-individual connections. These connections may be discerned in their fluidity. Machinic connections are productive and creative. Deleuze and Guattari compare machinic connections in AntiOedipus with psychoanalytic thinking. For psychoanalysis, desire is a lack. It is conceived in terms of lack. I desire what I want what I do not have. If I think of desire machinically, however, it will replace lack with creativity. Desire is a creator of connections, not a lack. To desire is to connect, create and produce with others. These connections can be formed sexually, politically, athletically, gastronomically, and vocationally. The breast is a machine that produces milk, and the mouth a machine coupled to it. The mouth of an anorexic wavers between several functions: its possessor is uncertain as to whether it is an eatingmachine, an anal machine, a talking-machine, or a breathing machine (asthma attacks) (Deleuze & Guattari 1977, p1). Machines create through connections but not in a pre-given fashion. Machines create in unpredictable and often novel ways. Machines are mobile creators of connections. These connections are irreducible to any one set of connections, any particular identity. Even when they are connected in a specific way they are capable of other connections and other functions. 527 PAKISTAN BUSINESS REVIEW OCTOBER 2011
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Machines are irreducible to their actual connections. There is a virtuality in machinic connections that inheres in any set of actual connections and that allows them to connect in other and novel ways. Todd May writes The virtual character of machines, their mobility as machines and the mobility of the concept machine , does not come from their transcendent character (May 2005, p126). The mobility of machines can not be upheld without their connectivity. Machines are no longer machines outside of its connections. It is perhaps within machinic connections that machines are capable of producing other connections. We define social formations by machinic processes and not by modes of production (these on the contrary depend on the processes) (Deleuze & Guatarri 1987, p435). There is no organizing element to desiring machines that dictates particular modes of connections from outside or above. The machine is a concept that can be developed to form a Deleuzian political ontology. This concept allows Deleuze to distance himself from the dogmatic image of thought which he believes structures liberal political theory. To accept the concept of the machine is to shift from a focus on the macropolitical to the micropolitical and to move from the molar to the molecular. This move is inevitable in order to apprehend how power works and how we are constructed. For this, however, we must turn from the grand scale to the smaller scale. Deleuze and Guattari write, the molecular, or microeconomics, micropolitics, is defined not by the smallness of its elements but by the nature of its mass the quantum flow as opposed to the molar segmented line (Deleuze & Guatarri 1987, p217). The terms molecular, microploitics must not mislead us. These terms are usually associated with smallness which is inadequate. A quantum flow is a virtual field. It is a machinic process. Genetic information is a quantum flow. Todd May notes Quantum flows: fluid identities that arise from a chaotic and often unpredictable folding, unfolding, and refolding of matter. Micropolitics is not an issue of the small; it is an issue of quantum flows. It is an issue of machines. To think machinically is to seek
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for what escapes them. It means that one seeks for what escapes from them and within them. What Deleuze calls a line of flight is not a leap into another realm; it is a production within the realm of that from which it takes flight (May 2005, p 128). Deleuze does not deny the existence of large entities like society. What he intends to establish is the primacy of the machinic. Everything is political, but every politics is simultaneously a macropolitics and a micropolitics. (Deleuze & Guattari 1987, p213). There is both a macropolitics and a micropolitics, but the micropolitics is primary and comes first. Take, for instance, the concept of social class: social classes themselves imply masses that do not have the same kind of movement, distribution, or objectives and do not wage the same kind of struggle. Attempts to distinguish the mass from the class effectively tend toward this limit: the notion of mass is a molecular notion operating according to a type of segmentation irreducible to the molar segmentarity of class. Yet classes are indeed fashioned from masses; they crystallize them. And masses are constantly flowing or leaking from classes (Deleuze & Guattari 1987, p213). He does not deny that there are sexes, national territories and ethnic groups. What he urges is that we must think of these as relative stabilities, as products of machinic processes. These are all constructed through the formation of connections and overspill them from within. If we start thinking machinically, we begin to see more than what macropolitics shows us. Machines produce connections not only to the state and the economy but also connections that will only be visible if we turn away from traditional political thought. Deleuze does not hold that traditional liberal thought is entirely wrong or self contradictory. The only thing he objects to is the inadequacy of the approach. This inadequacy can only be overcome by machinic metaphysics and rhizomtic epistemology. The liberal political theory ignores many layers. The first is that the transversal connections- connections that cut across traditional political identities. He writes imagine that
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between the West and the East a certain segmentarity is introduced, opposed in a binary machine, arranged in state apparatuses, over coded by an abstract machine as a sketch of a World Order. It is then from North to South that the destabilization takes place. . . . A Corsican here, elsewhere a Palestinian, a plane hijacker, a tribal upsurge, a feminist movement, a Green ecologist, a Russian dissident there will always be someone to rise up to the south (Deleuze & Parnet 1987, p131). These different connections which are called transversal connections are only conceivable through machinic thinking. There is another layer to which only machinic thinking will allow us access. We can look at some thing not only from one correct, a historical, transcendent perspective but from other perspectives. This will help us to see different things. The anti globalization movement is a particular type of imbalance cutting across ecosystems that tries to protect or restore particular types of balance among them or within them. The anti globalization movement is, according to Deleuze, a deterritorialization that will allow for a new type of reterritorialization. There are at least two insights we might get from providing an account that centers on the earth rather than upon individuals. First, it allows us to see that just as the environment is a political matter, politics is an environmental matter. Environmentalism is not only a movement of individuals in relation to the earth but also it is other than that. Since individuals are themselves part of ecosystems, environmentalism is not only a movement about ecosystems but also a movement within them. Introduction of the earth as a political category facilitates us to understand this. Second, the move from individuals to the earth allows us to get away from traditional political categories. It helps our thought to gain suppleness. This does not mean that we replace the category of the earth for that of individuals in understanding the anti globalization movement. It is not an either/ or situation. As Deleuze often writes in his later writings, it is and . . . and . . . and. We are not saying, No, its not about individuals, its about the earth. We are saying, Yes, it is about individuals, but no more about them than about the earth. The task is not one of substituting a single set of categories with another set but PAKISTAN BUSINESS REVIEW OCTOBER 2011 530
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to be able to create and move among various sets of categories, and even to cross between them. A political thought of difference recognizes that whatever categories we use, there is always more to experience. We need to be getting ready to switch perspectives in order to experience more. Deleuze and Guatarris machinic political approach permits us to open that question from different angles, to see different connections being made at different levels and layers. Rather than taking it for granted that there are particular individuals with particular needs or lacks that the engagement in politics seeks to fulfill needs or interests, political living might consist in the creation of connections within various actualized levels of difference: individuals, the earth. They do not seek to give all encompassing answer that one should live in such and such a fixed way. There is no general prescription. We have done with all globalizing concepts (Deleuze & Parnet1987, p141). It is not a question of how we should live but it is a question of how we might live which is possible in multiple connections. Machinic thinking is rhizomtic. It provides opportunities for multiple connections from a variety of perspectives that are not grounded in a single concept or macro concepts. Rhizomes operate differently. Todd May elaborates rhizomes as Kudzu is a rhizome. It can shoot out roots from any point, leaves and stems from any point. It has no beginning: no roots. It has no middle: no trunk. And it has no end: no leaves. It is always in the middle, always in process. There is no particular shape it has to take and no particular territory to which it is bound. It can connect from any part of itself to a tree, to the ground, to a fence, to other plants, to itself (May 2005, p134 ). Deleuze and Guatarri write The tree is filiation, but the rhizome is alliance, uniquely alliance. The tree imposes the verb to be, but the fabric of the rhizome is the conjunction, and . . . and . . . and . . . This conjunction carries enough force to shake and uproot the verb to be. Where are you going? Where are you coming from? What are you heading for? These are totally useless questions. . . . Between things does not designate a localizable relation going from one thing to the other and back again, but a perpendicular direction, a transversal
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movement that sweeps one and the other way, a stream without beginning or end (Deleuze & Guatarri 1987,p25). Traditional political thought, according to Deleuze, is arboreal which is structured like a tree. First there is the individual, then the state, then the laws that answer back to the interests of the individual. A tree has particular roots grounded in the soil at a particular place and gives rise to branches and then leaves in a specific way. Arboreal is a system of derivation: first the roots, then the trunk, then the leaves. The roots are rooted here and not elsewhere. The branches are indispensible to the trunk, the leaves to the branches. There is transcendence in this structure which is replaced it with immanent model of rhizome. c. Immanence and Capitalism
Deleuze and Guatarri after making machinic orientation talk of macro or grand scheme of things like individuals and of the state and of capitalism but. They contend that we are composed of lines. Whether we are individuals or groups, we are made up of lines and these lines are very varied in nature. The first kind of line which forms us is segmentary or rigid segmentarity . . .familyprofession; job-holiday; family and then school and then the army and then the factory and then retirement. (Deleuze & Parnet 1987,p124). They are composed of the categories we recognize. Traditional political theory operates with segmentarity lines. Deleuze denies the exclusive right of segmentary lines to determine our political thought. He contends that they are rigid. These lines are made of lines of flight. The nature of lines of flight is to overflow. What makes these lines frozen and rigid is not what they contain but what people think they contain. Lines of rigid segmentarity appear as rigid. Segmantery lines are more than what they may seem. The difficulty is to grasp this more feature of these lines.
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Deleuze names lines of rigid segmentarity molar. Other lines, he calls, molecular: we have lines of segmentarity which are much more supple, as it were molecular. . . . rather than molar lines with segments, they are molecular fluxes with thresholds or quanta. A threshold is crossed, which does not necessarily coincide with a segment of more visible lines. Many things happen on this second kind of line becomings, microbecomings, which dont even have the same rhythm as our history. (Deleuze & Parnet 1987, p124). Molecular lines allow cutting across the divisions of old political structure. A profession is a rigid segment, but also what happens beneath it, the connections, the attractions and repulsions, which do not coincide with the segments, the forms of madness which are secret but which nevertheless relate to the public authorities (Deleuze & Parnet 1987,p125). Under these lines, there is another set of lines: lines of flight. Lines of flight, according to Todd May have two roles to play in Deleuze and Guattaris thought. They determine both molar lines and other types of molecular lines, and they offer other political adventures and other political dangers (May 2005, p137). From the point of view of micropolitics, a society is defined by its lines of flight, which are molecular. (Deleuze & Guatarri 1987, p 216) Society is defined by a line of flight which is even more strange: as if something carried us away, across our segments, but also across our thresholds, towards a destination which is unknown, not foreseeable, not pre-existent (Deleuze & Parnet 1987, p 125).It looks like an escape, a movement away from something. This amounts to be saying that Deleuzes ontology is an ontology of lines of flight. Lines of flight are the pure differences that lie under the constituted identities of segmentary lines and the partially constituted identities of molecular lines. But they provide the stuff or raw that will be actualized into those identities. A territorialized line is one that has a specific territory or a code. It has been imprisoned in a particular identity. Territory needs to be identified. Statements need to be made. Identities need to be constituted. People have to live somewhere. It only
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becomes the enemy when we resist deterritorialization. Deterritorialization is the chaos under and within the territories. It is due to the lines of flight without which there would be neither code nor change in that code. Lines of flight are the immanent movement of deterritorialization that at once permits there to be a territory and destabilizes the territorial character of any territory. A Marxist can be quickly recognized when he says that a society contradicts itself, is defined by its contradictions, and in particular by its class contradictions. We would rather say that, in a society, everything flees and that a society is defined by its lines of flight which affect masses of all kinds (here again, mass is a molecular notion). A society . . . is defined first by its points of deterritorialization, its fluxes of deterritorialization. (Deleuze & Parnet 1987, p 135). It is not that there are first deterritorialized lines of flight and later settled territories which would subsequently be deterritorialised. There are always both of them at the same time: the nomads do not precede the sedentaries; rather, nomadism is a movement, a becoming that affects sedentaries, just as sedentarization is a stoppage that settles the nomads.(Deleuze & Guatarri 1987,p430) The primacy of lines of flight is nothing but material whether territorialised or deterritorialized. It is the primacy of lines of flight that provides the machinic character to Deleuzes political thought. These lines of flight are creative and productive. Lines of flight constitute our living together, a material that forms and reforms itself in our living. Lines of flight along with molecular and segmentary lines are the stuff of our being and the proper focus of political thought. In any case, the three lines are immanent, caught up in one another. We have as many tangled lines as a hand. We are complicated in a different way from a
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hand. What we call by different names schizoanalysis, micro-politics, pragmatics, diagrammatism, rhizomatics, cartography has no other object than the study of these lines, in groups or in individuals (Deleuze & Parnet 1987, p 125). Deleuze does not view the state as a referee or a mediator of the interests of individual. The state, according to Deleuze & Guatarri, creates resonances. The State . . . is a phenomenon of intraconsistency. It makes points resonate together, points that are not necessarily already town poles but very diverse points of order, geographic, ethnic, linguistic, moral, economic, technological particularities. (Deleuze and Guattari 1987, p. 433.).To create the resonance is to depend on something that precedes one. The state is parasitic and dependable for its existence. The state is parasitic on lines of flight, molar lines and molecular lines. It draws from the molar lines its nourishment. Deleuze & Guatarri view a state that resonates molar lines. Since these lines have identities and orders. Not only that but also there are abstract machines. Discipline, for instance, is an abstract machine. It brings together multiple and multilayered practices under a specific regime of power. Discipline overcodes the molar lines of a society. Overcoding is the taking of multiple elements of power to pull them together into a particular arrangement that is then applied on large segments of society. The state reinforces overcoding and allows spread it to all nooks and corners of society. If an abstract machine is built from the resonance of a variety of molar lines, the state allows develop and maintain that abstract machine. There are no sciences of the State but there are abstract machines which have relationships of interdependence with the State. That is why, on the line of rigid [that is, molar] segmentarity, one must distinguish the devices of power which code diverse segments, the abstract machine which overcodes them and regulates their relationships and the apparatus of the State which realizes this machine ( Deleuze & Parnet 1987, p 130). The state does not create abstract machines at all but merely realizes them.
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Deleuze and Guattari write The State is not a point taking all the others upon itself, but a resonance chamber for them all. (Deleuze and Guattari, 1987, p. 224.) Without the state, according to them, it is hard to imagine how an abstract machine could get hold of the variety of practices it does and could be installed in the midst of the complex relations of identity and difference that Deleuze and Guattari think are the material arrangements of any society. The state is a necessary feature of a society that anticipates to bring order through the imposition of uniformity across its surface. The state, Deleuze and Guattari contend, is essentially oppressive and a force for conformity. The state has enormous resources available in the service of a realization of the power of abstract machines and their oppression and conformity. The state maintains discipline. It creates the conditions beneath which abstract machines can reinforce the identity of molar lines and subject them to the same sorts of routines. The state is oppressive, powerful, and parasitic. The state, according to Deleuze and Guatarri, has a strange relationship to capitalism. Their position is ambivalent on capitalism. They ,on the one hand, credit capitalism for removing many past oppressions like overthrowing mechanisms of conformity in earlier European history. On the other hand, they hold, capitalism creates its own damages. As Deleuze and Guattari put it, the old codes that have ruled us have been swept away by capitalism. They have been replaced instead by an axiomatic. The difference between an axiomatic and the codes it has replaced is described by Deleuze and Guattari this way: the axiomatic deals directly with purely functional elements and relations whose nature is not specified, and which are immediately realized in highly varied domains simultaneously; codes, on the other hand, are relative to those domains and express specific relations between qualified elements that cannot be subsumed by a higher formal unity (overcoding) except by transcendence and in an indirect fashion(Deleuze & Guattari 1987, p 454). Codes are regulatory concrete principles that regulate particular peoples relationships with other specific people. An
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axiomatic is more abstract that regulates, but not through specific rules and not by means of specific relationships. Present day laborers in a capitalist economy are in a very different situation. Laborers can move as they wish provided they can afford it. This does not mean that they are free and liberated. Capitalism has its own specific ways of regulating behavior and interaction. The most prominent among these ways is the dominance of exchange value. Exchange value functions as an axiomatic rather than as a code. It regulates not by setting rules between specific people or among people. The axiomatic is a functional regulator of relationships among multiple people and things and their relationship. This is not, in Deleuze and Guattaris view, an entirely bad thing. Capitalism deterritorializes and decodes, clearing the ground for new ways of creating lives: capitalism and its break are defined not solely by decoded flows, but by the generalized decoding of flows, the new massive deterritorialization, the conjunction of deterritorialized flows.(Deleuze & Guattari 1977,p224). Todd May explicates that by deterritorializing previous territorialities, lines of flight are freed to travel to new territories, intersect with other lines of flight, engage in new experiments (May 2005,p145). According to Deleuze & Guattari Oedipus complex is one way of stifling flight. Oedipus is an abstract machine that operates under capitalism to imprison lines of flight and prevent them creating new ways of living. Desire is a line of flight which is capable of creating new ways of living. But if its energy is imprisoned by one way or another, its creativity will be blocked. It will be put in the service of the dominant order.In this particular case desire serves the axiomatic of capitalism. Oedipus turns desires towards family. Lines of flight are captured, inhibited from exploiting the deterritorialization that the emergence of capitalism affords. In that way, lines of flight can serve capital rather than freed to pursue other directions. Capitalism maintains its hegemony over the unpredictable adventures that might follow the deterritorialization it has helped foster.
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A Thousand Plateaus, the second volume of Capitalism and Schizophrenia was published after eight years of AntiOedipus : the first volume of Capitalism and Schizophrenia, Oedipus is no longer a figure in their thought whereas the abstract machine of discipline continues to be recognized as a powerful mechanism binding lines of flight. Deleuze begins to question near the end of his life, whether discipline is still effective as an abstract machine. He appears to be suggesting that we have moved from a society of discipline to a society of control, characterized not by the confinement and regulation of bodies but by ultra rapid forms of apparently free-floating control that are taking over from the old disciplines at work within the time scales of closed systems (Deleuze 1995, p. 178). The capitalist axiomatic is directly exploitative. It does not require an intermediary. Deleuze and Guattari write The four principal flows that torment the representatives of the world economy, or the axiomatic, are the flow of matter-energy, the flow of population, the flow of flood, and the urban flow. The situation seems inextricable because the axiomatic never ceases to create all of these problems, while at the same time its axioms, even multiplied, deny it the means of resolving them (for example, the circulation and distribution that would make it possible to feed the world) (Deleuze and Guattari, 1987, p. 468). All flows are submitted to the regime of exchange value, capitalism reterritorializes the lines of flight it has liberated from previous codes. An axiomatic binds all flows and keep them within the orbit of capitalism without requiring an outside force to intervene. The states, by implication, have more limited role than it it was in earlier regimes.What characterizes our situation is both beyond and on this side of the state.(Deleuze & Parnet 1987, p146). Perhaps the development of capitalism does not require the support of the state to the degree it did in the nineteenth century and in mid of the twentieth century. This does not follow that states will wither away. The state does overcode society in the service of capitalism. The state is not only in the service of capitalism; its overcoding touches on aspects of our lives that are irreducible to economics. And capitalism is not purely exploitative. The axiomatic that binds us to the market also sets
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us free from the oppression of traditional social codes. The objective before Deleuze is to mobilize the deterritorialization that capitalism unleashes in the service of new ways of living together. d. Schizoids and Freedom
Deleuze has offered us an ontology that manifests difference. He has carried that ontology into the realm of politics. In Anti-Oedipus, a distinction is drawn between subject groups and subjected groups. Both of them involve an investment of desire. However they involve very different investments. Each investment is collective; every fantasy is a group fantasy. This reflects a position of reality. But the two kinds of investment are fundamentally different, one bears upon the molar structures that subordinate the molecules, whereas the other bears upon the molecular multiplicities that subordinate the structured crowd phenomena. One is a subjected group investment . . . which socially and psychically represses the desire of persons; the other, a subject-group investment in the transverse multiplicities that convey desire as a molecular phenomenon .(Deleuze and Guattari, 1977, p. 280). Subjected groups act and think in terms of molar lines. Their world comprises solely of actualities, which has nothing to do with virtualities that might be actualized. This is pure Nietzschean reactivity. But what Deleuze held about philosophy. It is a question of someone if only one with the necessary modesty not managing to know what everybody knows. This is where subject groups begin. With subject groups every investment is collective. We are never alone, whether in our molar lines or in our molecular lines. Some among us manage to be ignorant what the rest of us know. Subject groups are ignorant about what others know. They do not yet know what their bodies are capable of. It is unmasking new possibilities, new formations and creating new connections. Every struggle is a function of all these undecidable propositions and constructs revolutionary connections in opposition to the conjugations of the axiomatic (Deleuze and Guattari 1987, p473). Machines, by their very nature,
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connect. They tend to create new connections with other machines. They seek to actualize new moments of the virtual. Deleuze draws a contrast between nomads with sedentaries. Deleuze sides with the nomads, with those whose restlessness sends them on strange adventures. Nomads are ignorant. They seek to connect infinitely. They tend to palpate the virtual in their work in order to unveil what can be connected to it. Minorities are nomadic adventures. To become minor is to connect with neglected movements in the social body. These connections may be parental, culinary, scientific, linguistic, vocational, artistic, or literary. To become minor is not to accept and side with a particular identity. Moreover it has nothing to do with how many are in the group compared with the number in the majority. Becoming-woman is a becoming minor, irrespective of the fact if there are more women than men. To become minor is to come out of chains of the majority identity in order to palpate new possibilities, new ways of becoming that are no longer bound to the dominant molar lines and their abstract machines. It is to unlock the virtual whose vision is quite often obscured by the molar lines of the majority. It is to break with identity, which is always the identity of the majority, in favor of difference as yet to be actualized. As Deleuze and Guattari say of Kafka, A minor literature doesnt come from a minor language; it is rather that which a minority constructs within a major language.(Deleuze & Guatarri 1986, p. 16).May elaborates that Nomadism and minorities are not the activities solely of particular individuals banding together. They may be that, but they do not have to be. Nomadism and becoming-minor can happen across groups or even at a pre-individual level (May 2005, p151). Deleuze and Guattari point to the ways of conceiving and acting upon our experience in the following quote. This is how it should be done: Lodge yourself on a stratum, experiment with the opportunities it offers, find an advantageous place on it, find potential movements of deterritorialization, possible lines of flight, experience them, produce flow conjunctions here and there, try out continuums of intensities segment by segment, have a small plot of new land at all times. . . . Connect, conjugate, continue:
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a whole diagram, as opposed to still signifying and subjective programs (Deleuze and Guattari, 1987, p. 161). What we are required to do now is think and act by means of them. We do not get any general prescription. There are only analyses and experiments in a world that provides us no guarantees, because world is always other and more than we can imagine. We roll the dice; we never know for sure what will fall back. Everything is played in uncertain games. . . . The question of the future of the revolution is a bad question because, in so far as it is asked, there are so many people who do not become revolutionaries, and this is exactly why it is done, to impede the question of the revolutionary-becoming of people, at every level, in every place (Deleuze and Parnet, 1987 p. 147). This allows Deleuze & Guattari to the kind of personality type that has been notoriously resistant Freudian Psychoanalysis-schizophrenic type- in order to show the nature of pre-oedipal, instinctual energies sort of human being. What the schizophrenic experiences, both as an individual and as a member of human species, is not at all any one aspect of nature, but nature as a process of production (Deleuze & Guattari 1977, p3). The schizo has his own system of co-ordinates for sustaining himself at this disposal, because, first of all, he has at his disposal his very own recoding code, which does not coincide with the social code, or coincides with it only in order to parody it. The code of delirium or of desire proves to have an extraordinary fluidity. It might be said that the schizophrenic passes from one code to the other, that he deliberately scrambles all the codes, by quickly shifting from one to another, according to the questions asked him, never giving the same explanation from one day to the next, never invoking the same geneology, never recording the same event in the same way (Deleuze & Guattari 1977, p15). Schizophrenia, according to Deleuze & Guattari, refers to deterritorialized desire which is generated by capitalism and acknowledged by Deleuzean philosophy of difference. They see schizophrenia in this sense not as an illness to be cured but as a value to be nurtured (Gutting 2001, p340). Gutting points
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out that the problem is that capitalism restricts schizophrenic desire to either its economized or its oedipal form. He further notes that those who try to live out non-economised desires in the public realm are violently repressed and lead the lives of terror and frustration that define what is generally termed schizophrenia. The horror of such lives is real, but it is the product of the capitalist system, not an inevitable feature of deterritorialized desire. Deleuze & Guattari, according to Gutting, offer a schizoanalysis of capitalism designed to expose and help eliminate the arbitrariness of its constraints, thereby freeing the creative power of schizophrenia (Gutting 2001, p340). e. Freedom and Becoming
French thought during the twentieth century has been concerned with individual freedom. Individual freedom as a concrete, lived reality has maintained the distinctiveness of French philosophy (Gutting 2001, p380). The post-structuralists rejected the very philosophical tool with which existential phenomenology had explicated freedom. They questioned existential phenomenological descriptive and ontological methods. Similarly they challenged their central commitment to individual freedom. Gutting writes that the very rejection expressed their commitment to individual freedom. The ethical and political goals of Deleuze flow from pre-philosophical commitment to individual freedom (Gutting 2001, p388). Deleuzes main objective is to unveil social conditions and attitudes that resists liberation. He is attempting to combat fascism, as Foucault writes Not only historical fascism but also the fascism in us all, in our heads and in our everyday behavior, the fascism that causes us to love power to desire the very thing that dominates and exploits us (Deleuze and Guattari 1977, p xiv-xv). Fascism is a force that terrorizes ,rigidifies, oppresses, robs one of ones personal territory, and silences. Deleuze conceives of the prevailing social system as fascist to the extent that it is repressive of desire. As things stand, every society is fundamentally repressive (Wicks 2003, p275).
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F ew post structuralists have been engaged in developing a positive philosophical understanding of freedom. They remain satisfied with a nave, pre-reflective commitment to the unquestionable status of transgression, novelty, plurality and difference as absolute ethical ideals. There is no inclination to raise difficult questions about the roots and limits of human freedom. The chief task is to expose and overcome all obstacles to its unrestricted expansion. So Deleuzes ontology endorses this view unquestionably without stopping to ask just what it would consist of and why it is so important (Gutting 2001,p389). He further elaborates Post-structuralism is an interlude rather than a decisive turning in the history of French philosophy. It has been important for its questioning of limits and especially for its rejection of traditional philosophical claims to ultimate truth. But once its critiques are acknowledged, it is easy to see that it remains the fundamental twentieth century project of articulating the individual as a locus of freedom (Gutting 2001, p390). Baudrillard stated in 1996 that: the great philosophical question used to be why is there something rather than nothing? Today, according to him, the real question is why is there nothing rather than something?(Baudrillard 1996, p2). The resurfacing of existential worry shows the limitations of the quest for freedom. A quest that one could call a negative quest to be free from oppressive forces (Wicks 2003, p297). Wicks notes that Deleuze wanted freedom from instinctually restrictive Freudian and Oedipal family constellations, and from too tightly organized, fascistically terrorizing social structures. Hence he was engaged in the negative project of freedom. All the quests for freedom are aimed to make the world a better place in which to be with oneself and with others in a self respecting way. This displays the biasedness of the inquiry rather than neutrality of it. Robert Wicks remarks that this quest is all fundamentally reactive to the given, foreground standing, oppressive situations, despite the contents of some of their visionary responses. He writes, Freedom from some dominating species of oppression is a weaker kind of freedom
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than the freedom to exert one self in a direction that is defined more autonomously from a position of inner strength and solid self-determination (Wicks 2003, p297). Hence Deleuzean project of schizophrenic world is negative and weak. f. Critical Evaluation
Deleuze had fantastic interpretive styles of thought. His vision of society was strong and unique. He developed his model of rhizomatic interaction at length. Wicks argues, however, that Deleuze may have fallen victim to his own intense vision. There are reasons to believe that society is not uniformly structured like the rhizome and people are not simply machine like aggregates. There are recognizable dimensions of systematicity, rationality and organic unity in our daily experience (Wicks 2003,p276). He is not the only French thinker of twentieth century subject to this kind of criticism. Deleuze takes the mechanical, alienated aspect of life to the extreme, and develops upon it a revolution friendly and liberation-aimed position. Wicks holds that What is paradoxical about Deleuzes antagonism to rigid thought structures, is the way his world of rhizome like structures is itself offered with a strong dose of dogmatic rigidity in its disregard for the systematic and organic aspects of experience (Wicks 2003, p 277). The Deleuzean quest for liberation, Wicks raises the question, conflicts with his model of society as an assemblage of desiring-machines. On Deleuzes model, he further explicates the problem, the self is decentered, which is to say that it is difficult to say who it is that is the subject of liberation and freedom from paranoia, and fascism which is so pointedly sought. Deleuzean ontology disintegrates the subject of experience into a schizophrenic and depersonalized set of desiring-machines. His picture of human being thus tends to render the notion of personal freedom almost absurd. This leads to another problem whether the quest for freedom and liberation is consistent with those theories that advance the idea of the decentered self. Deleuze highlights this problem in a clear-cut way, because he is
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straight forward about his conception of the human being as aggregate and as an essentially disintegrated and a non systematic kind of being. To be sure, one can romantically link the schizophrenic tendency toward shifting, movement, creativity and individuality with the idea of jazz improvisation, but there remains the question whether one can say meaningfully that anyone in particular is doing the improvising, since the sense of integrated personality has been so weakened and almost lost. Deleuzean analysis and assessment leads us into a triple bind where, if we do not believe self deceptively that we are organically unified and integrated personalities, we are left to gravitate into either paranoid fascism, or schizophrenic insanity. Wicks notes that whatever path we choose within the theories internal options, we end up at a dead end, and thereby in the very state of mental frustration that has been known to generate schizophrenic states. He concludes Deleuzes theory can therefore be seen as having itself been designed to drive us mad, so that we can experience what he regards as the truth (Wicks 2003, p278). References Baudrillard, Jean, The Perfect Crime, trans. Chris Turner,Verso London/New York,1996. Colebrook,clair, Gilles Deleuze, Routledge,2002. Colebrook,clair, Understanding Deleuze, Routledge,2002. Deleuze, Gilles. Bergsonism, tr. Hugh Tomlinson and Barbara Habberjam. New York: Zone Books, 1988 (first published 1966). .La conception de la difference chez Bergson, Les etudes bergsoniennes,vol. 4, 1956, p. 88. .Difference and Repetition, tr. Paul Patton. New York: Columbia University Press, 1994 (first published 1968). . Empiricism and Subjectivity , tr. Constantin Boundas.NewYork: Columbia University Press, 1991. . Expressionism in Philosophy: Spinoza , tr. Martin Joughin. New York: Zone Press, 1990 (first published 1968). . Foucault, tr. Sean Hand. Minneapolis: University of Minnesota Press,1988 (first published 1986). 545 PAKISTAN BUSINESS REVIEW OCTOBER 2011
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. Immanence: A Life, in Pure Immanence: Essays on a Life, tr.Anne Boyman. New York: Zone Press, 2001 (essay first published 1995), pp. 2533. . Kants Critical Philosophy: The Doctrine of the Faculties, tr. Hugh Tomlinson. Minneapolis: University of Minnesota Press, 1985 (first published 1963). . The Logic of Sense, tr. Mark Lester and Charles Stivale. New York: Columbia University Press, 1990 (first published 1969). .Nietzsche and Philosophy, tr. Hugh Tomlinson. New York: Columbia University Press, 1983 (first published 1962). .Nomad Thought, tr. David Allison. From The New Nietzsche: Contemporary Styles of Interpretation. New York: Dell, 1977 (essay first published 1973), pp. 1429. . Postscript on Societies of Control, in Negotiations 19721990, tr.Martin Joughin. New York: Columbia University Press, 1995. .Proust and Signs, tr. Richard Howard. New York: George Braziller, 1972.Deleuze, Gilles, and Guattari, Felix. Anti-Oedipus: Capitalism and Schizophrenia,tr. Robert Hurley, Mark Seem, and Helen R. Lane. New York: Viking Press, 1977 (first published 1972). . Kafka: Toward a Minor Literature, tr. Dana Polan. Minneapolis: University of Minnesota Press, 1986 (first published 1975). . A Thousand Plateaus, tr. Brian Massumi. Minneapolis: University of Minnesota Press, 1987 (first published 1980). . What Is Philosophy? tr. Hugh Tomlinson and Graham Burchell. New York: Columbia University Press, 1994 (first published 1991). Deleuze, Gilles, and Parnet, Claire. Dialogues, tr. Hugh Tomlinson and Barbara Habberjam. New York: Columbia University Press, 1987 (first published 1977). Gutting,Garry, French Philosophy in the twentieth Century, Cambridge University Press, 2001. May, Todd, Gilles Deleuze, Cambridge University Press, 2005. Wicks, Robert, Modern French Philosophy, One world Publications , Oxford, 2003 PAKISTAN BUSINESS REVIEW OCTOBER 2011 546
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Identifying Active Factors to Address the Excess Flash Problem
IDENTIFYING ACTIVE FACTORS TO ADDRESS THE EXCESS FLASH PROBLEM IN PLASTIC INJECTION MOLDING PROCESS
Ejaz Ahmed Muhammad Wajahat Ali College of Computer Science and Information Systems Institute of Business Management, Karachi Abstract A pivotal paradigm in injection molding is to produce the molded parts in good quality. Attributes like mechanical characteristics, dimensional conformity, and appearance defines the quality of molded parts. The quality is affected by many factors, the most important of which is determination of process parameters for injection molding. A most typical situation may involve one dozen of process parameters in context of injection molding. All of them are potent enough to affect the quality of molded parts. The primary objective of this paper is to implement Design of Experiment (DoE) in order to envisage causes of defects associated with injection molding processes during early phases of designing. Common quality problems that come from an injection molding process include but are not limited to void, surface blemish, excessive flash, short shot, sink mark, spruce sticking, bubbles and flow marks. Multiple sources, including preprocessing treatment of injection molding process, the selection of injection molding machine, experience of machine operator and setting of the injection molding process parameters are usually responsible for focusing quality problem. In this study, DoE was used to determine an optimal setting of machine process parameters, in a real life situation, to reduce the variation consequently resulting in a quality product. Taguchi orthogonal array was used and optimal combination was determined. Key Words: Factorial Experiments, Fractional Factorials, Taguchi Arrays, Orthogonal Arrays, Molded Parts, Plastic Injection. JEL Classification: C61; C91; C93; L21; Q55 547 PAKISTAN BUSINESS REVIEW OCTOBER 2011
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1.
Introduction
Design of experiment (DoE) is a well established statistical field with solid theoretical backup and multiple practical applications. Literature is full of DoE applications in versatile fields (see Box, et. al. 1979, Montgomery, 2007, for example). Molded parts are a common commodity with very sophisticated and complicated structures and recently researchers have discussed problems faced by manufacturers of molding parts. Statistical tools especially DoE has received much attention to address such problems. In this article we discuss a similar problem where extra flash in a molded part was identified as a major problem and we used a L16 orthogonal array to determine the optimum factor level combination. Factors responsible for extra flash were identified after extensive brainstorming sessions. A properly planned experiment was used and the amount of extra flash at each factorlevel combination was measured in extra flash was observed with optimal factor-level combination. In the next sections we will discuss some past studies that have addressed similar problems, details of the experimental run, analysis and results are reported at the end. 2. Molding Part Problems
In this competitive environment companies strive hard to improve continuously their performances with an ultimate goal of a satisfied customer. Proper use of Demings Plan-Do-CheckAct, PDCA cycle (see for historical background, Moen and Norman, 2010) can help companies to achieve targeted performances on a regular basis. DoE is an established branch of statistics that can be used effectively to apply PDCA cycle. Lin and Chananda (2003) used a designed experiment to identify factors creating excessive flash on an injection molding product. They used a 24 factorial experiment and identified three main factors and two 2-factor interactions significantly responsible for the excessive flash on their college mascot. Various authors have used DoE in different situations and came with fruitful results. Alagomurthi, Palaniradja and Soundrarajan (2006) used a Taguchi
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L4 array and traditional 23 designed experiment (12 runs in all) and studied the effect of surface roughness in a grinding process. Gijo and Ravindran (2008) used DoE to identify optimum combination of water and plasticizer to develop cement with better workability and strength. Since Gijo and Ravindran (2008) were measuring optimum combination to maximize workability and strength in addition to ANOVA they used goal programming technique. A local company manufacturing parts of motorcycles contacted the authors showing concern on multiple problems they were facing with the finished product- the headlight of CD 70 motorcycle of a specific brand. Prior to the formal study we surveyed different molding manufacturers at two major industrial sites of Karachi namely, SITE (Sindh Industrial Trading Estate) and KATI (Korangi Association of Trade and Industry). This survey revealed that an abundance of the managers rely on experience of engineers and machine operators while many of them apply trial and error procedures to find optimum setting of parameters. Setting these parameters is a highly skilled job and is based on the skilled operators knowledge and intuitive sense acquired through long term experience rather than through a theoretical and analytical approach. Our study also emphasizes on the importance of scientific approaches. 3. Purpose of the Study
Huge research work is available in literature in the domain of parameter setting for injection molding. The major objective of this research in injection molding is to produce the molded parts carrying good quality. Quality performances are affected by multiple factors and determination of process parameters for injection molding is one of the foremost objectives of our study. For instance, increasing both the holding time and holding pressure may reduce the sink marks, while decreasing the injection speed may eliminate the flow marks for the case of plastic polymer. Commonly process parameters of injection molding are determined by experienced molding personnel. Setting these 549 PAKISTAN BUSINESS REVIEW OCTOBER 2011
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parameters is a highly skilled job and is based on the operators knowledge and experience rather than the theoretical approach. The corresponding tested molding parameters with intuitive adjustments and modifications are used at the start for a new molding application. Unfortunately, the growing demand in industry for expert molding personnel is increasing and molding personnel need many years to become experts. In a competitive environment the trial and error approach is very expensive and time taking and cant be recommended. Traditional one-factor-at-a-time (OFAT) technique is used where one process parameter is varied at a time until the quality of the molded part is found satisfactory. This method ignores the effect of injections among the combinations of parameters. In fact, in injection molding process parameters are interacting with each other. Factorial experiments play a vital role to obtain the best combination (interaction) of parameters in injection molding process. Thus the Design of Experiment approach requires expert knowledge of both Statistics and Process Engineering while planning, executing or analyzing experiments. 4. Headlight Lens Problem
To discuss the problem in detail, the authors met a team comprising of floor shop workers and engineers of the company multiple times. It was told that excessive flash among void surface blemish, short shot, sink mark, bubbles and flow marks for this particular product (highlight lens of CD70 motorcycle) was the most acute and frequent problem. Figure 1 shows the product that we considered for this study. Excessive flash was causing wastages of material, time, delayed supplies, and loss of goodwill and trust. Brainstorming sessions were conducted and it was agreed that four factors namely, injection pressure, injection speed, melting temperature and back pressure were probably the main causes of excessive flash. Table 1 displays factors and levels selected for this study after detailed discussions with the team members. PAKISTAN BUSINESS REVIEW OCTOBER 2011 550
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Table 1 Process Parameters (Factors) and their settings (Levels)

Process Parameters Injection Pressure Injection Speed Barrel temperature Back Pressure Low Level (-) High Level (+)
90kg / cm2 50kg / cm2

190 0C
140kg / cm2 60kg / cm2

220 0C
20kg / cm2
50kg / cm2
Some of the selected parts with excessive flash are shown in Figure 2 for illustration. Removal of flash is a tedious job and results in wastages of resources, time, material and human efforts. Figure 3 is an illustration of how traditionally excessive flash is removed from the plastic molded part.
Figure 1 Reflector CD 70 Headlight Lens- Our selected Product
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Figure 2 Selected Parts with excessive flash
Figure 3 Removal of Excessive Flash
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Figure 4 Screw Type Injection Molding Machine JetMaster
5.
Experimental Protocol And Data Collection
To accommodate the above mentioned factors (Table 1) complete experiment was planned with three replicates. Orthogonal array, as shown in Table 2, of 16-run was used to conduct the proposed experiment. Experiments were run in a random order to minimize bias. Each experimental run was replicated three times. Vernier caliper and centimeter scale were used to measure excessive flash (in millimeters) around each headlight lamp. Molding Machine Jet Master (see Figure 4) was used to perform experiments as described in Table 2. At the end of each experimental run excessive flash attached with each molded part, so produced, was measured and is reported in Table 2. To maintain discipline and to minimize bias proper times were allowed between each run for the machine to settle down. MINITAB, a powerful statistical software was used for analyzing the collected data.
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Table 2 L16 Orthogonal Array used for experimentation and recorded observations
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Table 3 Average excessive flash as observed under each experimental run

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6.
Analysis
Analysis of Variance (ANOVA) is an established technique to answer two major questions in a study, How much variation is caused and what are the causes (and respective contribution) of variation? This finding (similar to the Pareto 80/ 20 principle) states that there are a vital few sources and trivial many and our goal is to identify vital few causing major problems and to remove those to reduce variation significantly.
The fitted model with interactions, given in Table 4, clearly indicates that main effects Injection Speed and Back Pressure are highly significant (P value < 0.005) while Barrel Temperature is moderately significant (P value < 0.10) whereas interaction Injection Speed *Barrel Temperature is significant (P value < 0.05). It has been observed that if barrel temperature is reduced to 1900C from 2200C then process may face a flow mark problem. Normal probability plot as shown in Figure 5 supports this conclusion and we observe a significant deviation from linear trend of the above mentioned two main effects and one twofactor interaction. Residuals behave very well and support the selection of model. We conclude, using the outcome of Figure 6, that residuals are not deviating from the assumption of normality (residuals fall on the linear line of normal probability plot), distributed independently (there is no specific pattern observed in Figure 6) and do not face the heteroscedasticity problem. The model is, therefore, satisfying basic assumptions and may be recommended for use. The main effect plot (Figure 7) shows the insignificant effect on excess flash by changing the levels of Injection Pressure. Other three main effects Injection Speed, Back Pressure and Barrel Temperature indicate a higher excessive flash on plastic molded parts when these factors are assigned higher settings (levels). Since our goal is to develop plastic molded parts with minimum flash the recommended settings for the four factors are given in Table 5. These recommendations were communicated to the manufacturing company with a request to produce the next few lots with these settings. The company informed us about the positive results they observed. A plastic molded part produced under the recommended factor level combinations is shown in Figure 8 for illustration. PAKISTAN BUSINESS REVIEW OCTOBER 2011 556
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Table 4 Fitted Model including main effects and 2-Facor interactions
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Figure 5 Normal Probability Plot of Effects of Model fitted in Table 4
Figure 6 Residual Plots
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Figure 7 Main Effect Plot Identifying Optimal Factor Settings
Table 5 Recommended Factor leve combination and average ecess flash noted
Figure 8 Molded part produced under suggested combinations- showing no extra flash
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9.
Conclusion
Plastic molded parts are quite common and are extensively in use. They are used in various situations such as , household, laboratories, automobiles, for example. In this article we discussed a very acute problem called the excessive flash problem. When melted plastic is placed in a predefined structure extreme care is required. Our main focus was to study factors most responsible for generating excessive flash on the head light of a specific brand of motorcycle. L16 orthogonal array was applied and four factors were selected after extensive brainstorming sessions with technical people. Our analysis identified a vital few factors and determined optimal factor level combination. The optimal factor-level combination was conveyed to the manufacturer who has communicated a significant reduction in molded parts with excessive flash. Acknowledgement The authors would like to thank an anonymous referee for valuable comments that improved the presentation of the article. References Alagumurthi, N., Palaniradja, K . and Soundararajan, V. Optimization of Grinding Process through design of Experiment (DOE) A comparative study. Materials and Manufacturing Process, 2006, 19-21. Azeredo, M.B., Da Silva, S. and Rekab, K. Improve Molded Part Quality. Quality Progress, July 2003, 72-76. Banda, H. Optimization an injection Molding Process. Quality Progress, ASQ. August, 2007, 30-37. Ben Cheikh, A. R., Campos A. R. and Cunha, A. M. Injection Molded Composites of Short Alpha Fibers and Biodegradable Blend. Polymer Composites, 2006, 341-348.
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John T., Grinde H., and Rostad, H. The use of a 12-run PlackettBurman Design in the Injection Molding of a Technical Plastic Component. Quality and Reliability Engineering International, 2006, Vol: 22, 651-657. Lin, T. and Chananda, B. Quality Improvement of an InjectionMolded Product Using Design of Experiment, A case study. Quality Engineering. 2003-04. Vol, 16, No1, 99-104. Cha. D.H., Kim, H.J., Lee, J. K., Kim. H. U., Kim, S. S. , and Kim, J. H. A Study Of Mold Grinding and Pressing Condition in the Molding of Aspheric Glass Lenses for Camera Phone Module. Materials and Manufacturing Processes. August, 2008, 23:(7),683-689. Gijo, E.V., Ravindran, G. Quality in the Construction Industry: An application of DOE with Goal Programming. Total Quality Management and Business Excellence. May 2009, 37-41. Monk, S.L., Kwong C.K. and Lau, W. S., Review of Research in the Determination of Process Parameters for Plastic Injection molding. Advances in Polymer Technology.1999. Vol. 18 (3), 225236. Yang, Y.K., Optimization of Injection-Molding Process of Short Glass Fiber and Polytetrafluoroethylene Reinforced Polycarbonate Composites via Design of Experiments Methods: A case study. Materials and manufacturing processes. October 2009.Vol:21, 915-921. Yusoff, S. M., Rohani , J.M., Hamid, W.H. and Ramly, E. Y. A Plastic Injection Molding Process Characterization using Experimental Design Technique, A Case Study. Journal Technology, December, 2004 Vol:41(A):1-16.
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Table 2 L16 Orthogonal Array used for experimentation and recorded observations
Run order 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Injection pressure + + + + + + + + -
Injection Speed + + + + + + + +
Barrel Temperature + + + + + + + +
Back Pressure + + + + + + + +
Excessive Flash around molded part X1 mm2 X2 mm2 X3 mm2 1.5 1.0 0 1.6 1.8 1.6 1.8 1.0 1.8 1.2 1.8 1.2 2.0 2.0 4.0 2.4 0 1.2 1.0 1.0 1.2 1.0 2.0 2.4 1.6 2.4 1.6 1.4 1.2 1.2 3.6 2.0 1.4 2.0 1.2 1.0 1.0 0 1.0 2.0 1.2 2.0 1.2 1.2 2.0 1.2 3 1.8
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Table 3 Average excessive flash as observed under each experimental run

Run order 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 Injection Pressure + + + + + + + + Injection Speed + + + + + + + + Barrel Temperature + + + + + + + + Back Pressure + + + + + + + + Average Excessive Flash around molded part mm2 0.96 0.80 0.73 1.2 1.33 0.86 1.6 1.8 1.26 1.86 1.53 1.26 1.73 1.46 3.53 2.06
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Table 4 Fitted Model including main effects and 2-Facor interactions
The Islamic Calendar Effect in Karachi Stock Market
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THE ISLAMIC CALENDAR EFFECT ON KARACHI STOCK MARKET*

Khalid Mustafa Department of Economics University of Karachi, Karachi Abstract This paper attempts to investigate the effect of Islamic months on Karachi Stock Market using the daily data for the period of December 1991 to December 2010 with the application of OLS technique. The conditional and unconditional risk analyses are used to investigate the Islamic calendar effect on the Karachi Stock Market. In addition, risk is allowed to vary across the month of Islamic calendar. Five models are used starting from simple model of Islamic calendar effect to conditional risk model. Different models produce different result. A Ramadan effect is found common in all models. It indicates that there is Ramadan effect in Karachi Stock market. However, it is also noted that Karachi stock market is relatively high risky market during the month of Ramadan. Key Words: Conditional and Unconditional risk, Islamic Calendar, Ramadan Effect JEL Classification: C 32, G 12
* This Paper has been presented at the 8th International Business Research Conference, on March 27-28, 2008 Crowne Plaza Hotel Dubai, UAE.
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1.
Introduction:
Calendar anomalies are one of the feature of financial market, which is against the efficient market hypothesis. Many researchers investigate the calendar anomalies, which are based on Gregorian calendar. However, different countries and societies also follow their own calendar, which are based on religion in addition to Gregorian calendar. For example, Jewish society follow Hebrew calendar, which is strictly based on luni-solar, the Christen society follows Gregorian calendar, which based on solar, Hindu and Chinese follow their own calendar. Muslim society follows the Islamic calendar, which is based on a lunar calendar, referred as Hijri calendar1. In these religious calendars, there are religious days and months, which these societies celebrate and observe e.g. Christen society, celebrated Christmas days, Deepavali by Hindu society, and Vesk day by Buddhist. Like these religious days Muslim society also observe and celebrate the religious months like Ramadan and Ashura and days like Eid-ul-Fitr and Eid-ul-Azha. Ramadan is considered as the Holy month in which most of the time is spent on Salt-ul-Nafil, Recitation of Quran, and participation in social services. Moreover, in the last decade of Ramadan people sit in AAITAKAF, to search LAILA-TUL-QADAR. All days and nights are spent with religious activity as a proof of their affiliation to Allah i.e. fear of Allah. Some people also visit Saudi Arabia to perform UMMARAH. Maximum efforts are undertaken to avoid sin and wrongdoing such as speculation and illegal practice. To honour peoples devotion to Allah, Muslim State gives relaxation in working hours. Muslim society celebrates Eid-ul-Fitr after the end of Ramadan. People purchase new clothes, and decorate their houses. It is observed that food prices, prices of the cloths and prices of othercommodities are increased during this month. The behavior
1
This calendar contains twelve months that start with the appearance of new moon. The average days in a lunar month contain only 29.53 days that is why Islamic year is approximately eleven days shorter than the Gregorian year.
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of the people during this month ultimately has impact on the financial market trading activity. It decreases the volatility of stock market in volume and stock returns in Pakistan (Husain, 1998). This phenomenon is not observed in Pakistans financial market only it is also observed in Saudi Arabia stock market, Seyyed, Abraham and AlHajji(2005). After celebration of Eid-ul-Fitar, the prices come down to normal. In the month of Zil-Hajj (Dhil-Hijja), people slaughter cattle like cow, camels and goat etc, to follow the Sunnat-e-Ibrahim. Some people go to Saudi Arabia to perform Hajj. It increases the consumption of people, which reduces the purchasing power hence saving depleted. Ashura come after Eid-ul-Azha, which is observed as a mourning month. It implies that the expenditures of Pakistanis society are very high from Shaban to Muharram. Due to such a peculiar change in these months as compared to other months, it is interesting to examine the behavior of trading activity under these situations. The purpose of this study is to investigate the impact of Islamic month on stock returns with and without risk factor. The rest of the paper is organized as such that the second section describes the review of literature, econometric methodology and related issues are described in section three. The empirical findings and interpretation are presented in section four. Section five contains the concluding remarks 2. Review of literature:
Though a lot of attention has been already given on calendar anomalies but a little attention is given on the religious calendar effect on stock markets. For example, religious holidays effect on S&P500 index and NYSE trading volumes Frieder and Subrahmanyam (2004). These holidays focused on the Jewish High Holy Days of Rosh Hashanah and Yom Kippur and the Christian holy day of St. Patricks. They showed that returns are negative after Yom Kippur (Solemn) however, positive after Rosh Hashanah (Joyful) and St. Patricks. They also reported that volume declined on Rosh Hashanah and Yom Kippur.
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There has been given little attention to the Islamic calendar effect. However, some studies are available on the impact of Ramadan on stock returns. Alper and Aruoba (2001) analyze various macroeconomic variables in Turkey, and show that the usual seasonal adjustment procedures based on fixed holidays often fail to remove all seasonality when the series are subject to moving holidays like Ramadan. However, they do not find any significant Ramadan effect in Istanbul stock market. Moreover, Husain (1998) analyzed the Ramadan effect in Pakistani stock market and demonstrated that volatility is significantly lower during the weeks of Ramadan. He does not find any significant changes in average returns during Ramadan. However, he does not compare the mean average return before and after Ramadan. Seyyed, Abraham, and Al-Hajji (2005) investigated the Ramadan effect in Saudi Arabian stock market. They analyzed several sector indices in the market and showed that volatility and trading activity disappeared significantly during Ramadan. Their findings are identical to Husains (1998) findings i.e. no significant change is found in average returns during Ramadan did not look at the stock returns before and after Ramadan. 3. Econometric Methodology and Data
The methodology of Ariel (1987), Lakonishok and Smidt (1988), Jaffe and Westerfield (1989) are used to investigate the Islamic calendar effects. However, some amendment has been proposed in this methodology. In this model the excess stock returns Rt are regressed on Muharram, Shaban, Ramadan, Shawwal, Dhil-Qada, Dhil-Hijja.
Ri 1D1i 2 D2i 3 D3i 4 D4i 5 D5i 6 D6i 1i (1)

Where D1i to D6i represent the dummy variables for Islamic month i.e. Muharram, Shaban Ramadan, Shawwal, Dhil-Qada, Dhil-Hijja2. The error term is assumed to be independent and identically distributed with a zero mean and constant variance.
2
(1)
Other Islamic months are ignored due to less importance from trading point of view.
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Equation (1) is the simplest test for Islamic calendar effects on stock market. Statistically insignificant estimated coefficients in equation (1) provide no evidence of Islamic month effects. There is no risk factor in this model. If risk factors3 are incorporated in this model, daily returns could be higher or lower before and after selected Islamic month because risk is higher or lower. Equation (2) explains turn of the Islamic month dummy variables and a market risk factor (RF), calculated by the excess returns on all share price index basis.
Ri 1D1i 2 D2i 3D3i 4 D4i 5 D5i 6 D6i i RFi 2i (2)

The risk factor is constant across the Islamic months in equation (2). This may be improved upon by adding slope interaction dummy variables that allow risk to vary across the selected Islamic months. After incorporating dummy variable in risk factor the equation (2) become.
6
(2)
Ri 1 D1i 2 D2i 3 D3i 4 D4i 5 D5i 6 D6i i Di RFi 3i (3)

i 1
(3)
Equations (1) to (3) are unconditional risk models where market risk is assumed to have a symmetric impact on emerging stock market returns. Another approach to examine for turn of the Islamic month effects is to use a conditional risk factor in equation (3). There may be an asymmetric relationship between stock returns and market risk where positive market returns have a different impact on stock returns than do negative market returns (Fletcher (2000), Pettengill, Sundaram and Mathur (1995). Equation (4) shows the conditional risk factor that relates to stock returns to market risk.
Ri 1D1i 2 D2i 3D3i 4 D4i 5 D5i 6 D6i p i RFi ni RFi 4i (4) (4)
where
p i is a positive risk factor and n i is negative risk factor. .
To incorporate the variability in return, the risk factor is incorporated. The reason is that the rate is high or low on different days which increase or decrease risk. The increasing or decreasing the return show the higher or lower risk which is termed as conditional risk
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6 i 1
R i 1 D1t 2 D 2i 3 D 3i 4 D 4 i 5 D 5 i 6 D 6 i p i D pi RF n Dn ni RF 5i
i i 1
(5)
where Dpi is a dummy variable takes on a value of 1 for positive risk factor and 0 otherwise and Dni is a dummy variable takes on a value of 1 for negative risk factor and 0 otherwise. Equation (5) is a conditional model relating excess stock returns to market returns that also includes slope interaction terms before and after selected Islamic months variables. This model allows conditional risk to vary across the Islamic months. The data used in this study is daily covered from December 1991 December 2010. The data for stock prices are taken from several issues of Daily Business Recorder. The return is calculated by the difference of two successive log stock prices. Ordinary least square technique is used for estimation purpose. 4. Empirical Findings
The result of simple Islamic calendar effects is exhibited in table 1. The result indicates that the average return in the month of Ramadan is smaller and significant, which indicates that there is Ramadan effect in Karachi stock market. However, the positive and insignificant average return is found in all selected Islamic months. It implies that there is no after Ramadan effect in Karachi stock market. The reason is that during Eid the consumption of people increases and they pay less attention to investment in stock market. After Ramadan and Eid, people concentrate to investment in stock market, as a result trading activity increases in the month of Shawwal, Dhil-Qada in Karachi stock market. Moreover, higher kurtosis and higher positive skewness are found in the month of Shawwal. That indicates that investors prefer to invest in this month.
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Table 1 Islamic Calendar Effect Table shows the result of regressions of Islamic calendars on stock returns with multiplicative dummies for each month without risk factor
Rt 1D1i 2 D2i 3 D3i 4 D4i 5 D5i 6 D6i 1i

Where Rt is the return and D1 to D6 are dummy variables from Shaban, Ramadan, Shawwal, Dhil-Qada, Dhil-Hijja, Muharram.
Days Sha'ban Ramadan Shawwal Dhil-Q'ada Dhil-Hijja Muharram Coefficient -0.0003 0.0028 0.0007 0.0011 0.0005 -0.0003 Standard Error 0.0008 0.0009 0.0009 0.0008 0.0009 0.0008 t-value -0.3689 3.3847 0.3653 1.2744 0.4069 -0.1332 p-value -0.3689 3.3847 0.3653 1.2744 0.4069 -0.1332 Skewness -1.181 0.897 4.6859 1.1109 -1.3683 -2.502 Kurtosis 53.8412 48.1211 273.7111 73.744 65.8244 59.1797
F-values= 2.0837(p=0. 0.0644) R2 = 0.0023
a b c
Significant at 1% Significant at 5% Significant at 10 %
With risk factor the coefficients of the average mean return in the month of Ramadan is significant and increases. Table 2 shows the same. Some additional Islamic effects are picked up i.e. the month of Dhil-Qada. Moreover, the coefficient of risk factor is negative, significant and more than unity; it indicates that Karachi stock market is relatively high risky market during selected Islamic month. However the average mean return in the month of Ramadan, and Dhil-Qada is also positive and significant
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TABLE 2 Islamic Calendar Effect and Market Risk Factor Table shows the result of regressions of Islamic calendars on stock returns with multiplicative dummies for each month with risk factor
Ri 1 D1i 2 D2 i 3 D3i 4 D4 i 5 D5 i 6 D6 i i RFi 2i

Where Rt is the return, D1 to D6 are dummy variables from Shaban, Ramadan, Shawwal, Dhil-Qada, Dhil-Hijja, Muharram and Ri Fi is the risk factor.
Days Sha'ban Ramadan Shawwal Dhil-Q'ada Dhil-Hijja Muharram Risk Factor
Coefficient 0.0002 0.0034 0.0009 0.0016 0.0009 0.0004 -3.2672
Standard Error 0.0008 0.0009 0.0009 0.0009 0.0009 0.0009 1.1186
t-value 0.2895 3.8762 0.9654 1.8362 0.943 0.4571 -2.9209
p-value 0.7722 0.0001 0.3344 0.0664 0.3457 0.6476 0.0035
F-values=3.1612 (p=0.0042) R2 =0.0041
a b c
After adding dummy variable in risk factor with Islamic months only Ramadan and Muharram effect are found. Table 3 shows the same. With and without risk factors the significant excess return is found in the month of Ramadan and Muharram only. Equations (4) and (5) are conditional risk factor models that point out the asymmetric market effects. Equation (4) is the extension of equation (3) in which positive and negative returns are added. The estimated result is given in table 4 which indicates the Ramadan and Muharram effect are present in Karachi stock market. However, the positive stock returns are statistically significant.
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Table 3 Islamic Calendar Effect and Market Risk Factor with Calendar Dummies Table shows the result of regressions of Islamic calendars on stock returns with dummies for each month with risk factor Where
5
Ri 1 D1t 2 D2i 3 D3i 4 D4i 5 D5i 6 D6i i Di RF 3i

i 1 i
Rt is the return, D1 to D6 are dummy variables from Shaban,

Ramadan, Shawwal, Dhil-Qada, Dhil-Hijja, Muharram and Ri Fi is the risk factor.
Days Sha'ban Ramadan Shawwal Dhil-Q'ada Dhil-Hijja Muharram Sha'ban Ramadan Shawwal Dhil-Q'ada Dhil-Hijja Muharram Coefficient Standard Error t-value -0.01 0.0058 -1.7176 0.02 0.0069 2.8999 0.0007 0.0059 0.114 0.0046 0.0061 0.7514 -0.0078 0.0071 -1.1048 -0.0128 0.0068 -1.886 Market Risk Factor with Month -0.001 0.0006 -1.6823 0.0018 0.0007 2.4909 0 0.0006 0.0588 0.0004 0.0006 0.5794 -0.0009 0.0008 -1.1683 -0.0014 0.0007 -1.8845 p-value 0.0859 0.0038 0.9093 0.4525 0.2693 0.0594 0.0926 0.0128 0.9531 0.5623 0.2427 0.0596
F-values=2.2484 (p=0.010) R2 =0.0539 a Significant at 1% b Significant at 5% c Significant at 10 %
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The estimated results from equation (5) depicted in table 5 which shows that some of the Islamic month have effects in Karachi stock market. Comparing across Tables 1 to 5, Ramadan effect is found prominent in Karachi stock market, which indicates that there is Ramadan effect in Karachi stock market. Table 4 Islamic Calendar Effect and Conditional Market Risk Factor Table shows the result of regressions of Islamic calendars on stock returns with dummies for each month with risk fac
Ri 1D1t 2 D2i 3 D3i 4 D4i 5 D5i 6 D6i p i RFi ni RF 4i
where Rt is the return, D1 to D12 are dummy variables from Shaban, Ramadan, Shawwal, Dhil-Qada, Dhil-Hijja, Muharram and R p Fi and R n Fi is the positive and negative risk factor
Days Sha'ban Ramadan Shawwal Dhil-Q'ada Dhil-Hijja Muharram Risk Factor (+) Risk Factor (-) Coefficient -0.0001 0.0018 0.0031 0.0031 0.0001 -0.0002 -0.8043 -0.0001 Standard Error 0.0009 0.0010 0.0010 0.0010 0.0009 0.0009 0.0189 0.0009 t-value -0.1333 1.7880 1.0508 1.2067 0.0539 -1.8211 -42.3754 -0.1333 p-value 0.8939 0.0740 0.1023 0.1114 0.9570 0.0832 0.0000 0.8939
F-values=76.45 (p=0.00) R2 =0.717 a b c Significant at 1% Significant at 5% Significant at 10 %
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Islamic calendar Effect and Conditional Market Risk Factor with Calendar Dummies Table 5 Table shows of regressions of Islamic calendars on stock returns with dummies for each month with risk factor
6 6 pi
R t 1 D 1t 2 D 2 i 3 D 3 i 4 D 4 i 5 D 5 i 6 D 6 i
i 1
RF
i
i 1
ni
RF 5 i
where Rt is the return, D1 to D12 are dummy variables from Shaban, Ramadan, Shawwal, Dhil-Qada, Dhil-Hijja, Muharram and R p Fi and R n Fi is the positive and negative risk factor. .
Days Sha'ban Ramadan Shawwal Dhil-Q'ada Dhil-Hijja Muharram Sha'ban Ramadan Shawwal Dhil-Q'ada Dhil-Hijja Muharram Sha'ban Ramadan Shawwal Dhil-Q'ada Dhil-Hijja Muharram Coefficient Standard Error t-value 0.0023 0.0022 1.0281 0.0018 0.0023 0.7604 0.0001 0.0019 0.0242 0.0026 0.0021 1.2295 0.0006 0.0023 0.2548 -0.0001 0.0021 -0.0533 Positive Risk Factor with Islamic Month 0.7974a 0.1484 5.3734 1.0354a 0.2041 5.0722 0.3065a 0.1056 2.9024 1.0999a 0.1472 7.4687 1.0084a 0.1878 5.3680 1.0941a 0.2077 5.2656 Negative Risk Factor with Islamic Month -1.0432 a 0.1387 -7.5207 -0.9614 a 0.1997 -4.8130 0.1235 0.0872 1.4163 -0.9203 a 0.1214 -7.5805 -0.9876 a 0.1939 -5.0933 -0.9542 a 0.1274 -7.4891 p-value 0.3040 0.4471 0.9807 0.2191 0.7989 0.9575 0.000 0.000 0.003 0.000 0.000 0.000 0.0000 0.0000 0.1569 0.0000 0.0000 0.0000
F-values=37.013 (p=0.00) R2 =0.285
a b c
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Conclusion
Using daily data of KSE-100 index from December 1991 to December 2010 this study investigates the Islamic Calendar effects on Karachi Stock Market. Both conditional and unconditional risk models are used to investigate the Islamic calendar effect in Karachi stock market. Moreover, risk is allowed to vary across the months of Islamic calendar. Five models are used starting from simple model of Islamic calendar effect to conditional risk model. Different models produce different results. Ramadan effects are found common in all models where as Muharram effect is found in all models except one. It shows that there is Ramadan effect in Karachi Stock market. However, it is noted that Karachi stock market is relatively a high risky market during the month of Ramadan which is against the findings of Ramadan. Seyyed, Abraham, and Al-Hajji (2005) and Husain (1998). References: Alper, C. and Aruoba, S.B. (2001), Deseasonali zed Macroeconomic data: a caveat to applied researchers in Turkey, Istanbul Stock Exchange Review 5(1), 33-52. Ariel, R. A. (1987), A Monthly Effect in Stock Returns, Journal of Financial Economics 18, 161-174. Basher, S.A. and Sadorsky, P. (2006), Day of the Week Effects in Emerging Stock Markets, Applied Economics Letters 13(10) 621-628 Fletcher, J. (2000), On Conditional Relationship between beta and Return in International Stock Returns, International Review of Financial Analysis 9, 235-245.
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Frieder, L. and Subrahmanyam, A. (2004), Nonsecular Regularities in Returns and Volume Financial Analysts Journal 60(4) 29-34 Husain, F. (1998), A Seasonality in the Pakistani Equity Market: The Ramdhan Effect. Pakistan Development Review 37(1) 77-81. Jaffe, J. and Westerfield, R. (1989), Is there a Monthly Effect in Stock Market Returns? Evidence from Foreign Countries A Note: Journal of Banking and Finance, 13 237-244. Lakonishok, J. and Smidt, S. (1988), Are Seasonal Anomalies Real? A Ninety-Year Perspective, Review of Financial Studies 1 403-425. Pettengill, G. Sundaram, S. and Mathur, I. (1995), The Conditional Relation between Beta and Returns, Journal of Financial and Quantitative Analysis, 30, 101-116. Seyyed, F. J. Abraham, A. Al-Hajji, M. (2005), Seasonality in Stock Returns and Volatility: the Ramadan Effect, Research in International Business and Finance, 19(3), 374-383.
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Stock Valuation: Hub Power Company
STOCK VALUATION: HUB POWER COMPANY*

Shazia Farooq, Dileep Kumar Maheshwari Rabbiya Ghulam Mohammad, Rafia Abdul Sattar, Sateesh Balani Department of Accounting and Finance College of Business Management, Karachi Highlights Attractive Return: We initiate coverage with a BUY rating on HUBCO on our DDM-based target price of PKR 47.13. The stock is currently trading at a P/E of 9.06x, offering a return of 41% on the price of PKR 36.72 as of 26 November 2010. Best Bet among IPPs: Unlike new IPPs, HUBCO has a UShaped tariff structure and its Project Company Equity (PCE) is indexed to both PKR devaluation and US CPI (while other IPPs only have exchange rate protected PCE). Furthermore, the Government of Pakistan backing for fuel supply to the company is expected to extenuate the shock of circular debt. Resolution of Circular Debt to Boost Investor Buoyancy: Complete withdrawal of the power subsidy through gradual increase in power tariff by 2.2% per month during the period November 2010 to June 2011, would ease HUBCOs counterparty risk. The move would brace expected dividend yield and payout, thereby, uplifting investor confidence in the stocks returns. Expansion to Augment Dividends: The company has entered into a growth phase with the Narowal expansion,, increasing its capacity by 20% resulting in an IRR of 15%.
*Report presented at CFA Institute Global Investment Research Challenge, Karachi in November 2010
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Table 1: M a rket Profile

52 Week Price Ran ge Average D ail y Volume B eta D ivid end Yield (Estim ated ) Shares Ou ts tand in g M arket Cap it aliz atio n B oo k Valu e P er Share D ebt t o To tal Cap it al R eturn o n Equity P KR 2 8.6 - P KR 37 .01 1.812 mn 0.703 13% 1,157 mn P KR 42,490 mn P KR 24 .13 3.48x 16%
Source: Karachi Stock Exchange
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Table 2: Valuation Summ ary fdgfgds 2009

Turnover (PKR mn) Net Profit (PKR mn) EPS (PKR) DPS (PKR) BVS (PKR) ROE PER (x) ROA
Source: Blaze Research
2010
99,694 5,557 4.8 4.49 23.98 19% 7.65 5%
2011E
101,369 4,692 4.05 4.62 24.13 16% 9.06 4%
2012E
123,568 6,281 5.43 5.97 23.69 22% 6.77 5%
2013E
126,826 7,010 6.06 6.47 23.56 25% 6.06 5%
2014E
129,573 7,182 6.21 6.46 23.79 26% 5.92 6%
82,784 3,645 3.15 2.35 24.05 12% 11.66 4%
Figure 2: Shareholding Structure of HUBCO
13%
17%
12% 35%
9% 14%
National power Individuals

Source: Company Data
Xenel FI
Fauji Fondation Others
Business Description
The Hub Power Company, the first private sector infrastructure project and the second largest Independent Power Producer in Pakistan, commenced operations in 1991 as a public limited company. The sponsors include UK based International Power, Xenel of Saudi Arabia, IHI of Japan and K&M of USA. The company is listed on Karachi, Lahore and Islamabad stock exchange. Its global depository receipts are traded on Luxemburg stock exchange.
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Ta bl e 3. Ca paci ty Mi x of HUBCO Installed Type of Plant Name Capacity Plant (in MW) Hub Na rrowa l La ra i b Energy Total 1200 *214 *84 1498 Thermal Thermal Hydel
*Narrowal COD expected i n Apri l 2010 *Lara i b COD expected i n June 2013
Source: Company Data
The company is mainly engaged in developing and operating power stations. It sells power to Water and Power Development Authority (WAPDA), its only customer, under a guaranteed minimum off-take contract. The company operates on the basis of four main agreements including Power Purchase Agreement (PPA) with WAPDA, Fuel Supply Agreement (FSA) with PSO, Operating and Maintenance Agreement (O&MA) with International Power and Implementation Agreement (IA) with the Government of Pakistan (GoP). The company originated with a thermal power plant, based on residual fuel oil (RFO). With a gross generation capacity of 1292 MW, the plant is located near Hub in the province of Baluchistan. Subsequently, it expanded power generation capacity by installing a 213 MW RFO power station at Narowal in the province of Punjab which is expected to come online by the third quarter of this fiscal year. In 2008, the company also established Laraib Energy Limited to construct an 84MW hydro power project near the New Bong Escape in Azad Jammu and Kashmir. HUBCO has a 75.5% controlling interest in Laraib which is the first private sector hydro project in Pakistan. The project is expected to come online in FY20.
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Figure 3: Supply and Demand of Electricity in Pakistan (MW)

45000 40000 35000 30000 25000 20000 15000 10000 5000 0
Expected Available Generation Demand (Summer Peak)

Source: PPIB
Industry Analysis
Factors Fueling Growth
Demand to Outpace Supply The power situation in Pakistan has been critical over the past few years and is expected to aggravate in the future. Demand has grown at a CAGR of 5.2% during the past ten years whereas the supply increased by 2.2%. This gap can mainly be attributed to deficit capacity building. Currently the electricity production per capita of Pakistan is 512 kWh which is very low when compared to the other countries in the region including Malaysia, Iran and Turkey, having a production per capita in excess of 2500 kWh. Although the government has made strenuous efforts in resolving the existing issues, the measures were adhoc and largely shortterm. A long-term well thought out strategy is desperately needed for an efficient resolution of the energy crisis in the country.
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Figure 4: Nominal Power Generation Capacity (MW)

2%
30%
68%
Thermal
Source: SOI Report 2010
Hydro
Nuclear
Heavy Reliance on Thermal Power Total nominal power generation capacity of Pakistan as on 30 June 2010 was 21,593 MW of which 14,576 MW (68%) was thermal, 6,555 MW (30%) was hydroelectric and 462 MW (2%) was nuclear. With a heavy reliance on expensive thermal capacity, Pakistan has been unable to improve its energy mix over the years. Frequent water losses due to limited storage capacity and depletion of gas reserves have compelled the country to resort to thermal based power generation. Although Pakistan has sufficient potential for alternate sources of energy like coal, wind and solar, no proper measures have yet been taken to initiate such projects.
Figure 5: Electricity Generation by Company 2008-2009
21%
9% 9% 52% 9%
WAPDA KAPCO KESC Other IPPs HUBCO
Source: Pakistan Energy Yearbook 2009
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Stakeholders Electricity production in Pakistan is mainly contributed by Water and Power Development Authority (WAPDA), Karachi Electricity Supply Company (KESC) and Pakistan Atomic Energy Commission (PAEC). The development of IPPs since 1994 has significantly contributed to power production capacity. WAPDA and KESC are integrated public sector utilities which are responsible for the supply of electricity to the country through 220 kV double circuit transmission lines. National Electric Power Regulatory Authority (NEPRA) is the power sector regulator managing the issuance of licenses for generation, transmission and distribution of electric power and determining of the tariff rates. PEPCO was the public sector distributor which, after 18 years of operation, was dissolved by the government in October 2010 on account of huge losses and management inefficiencies. Post closure of PEPCO, its nine distribution companies were made independent. Independent Power Producers Most of the IPPs are thermal based since set up costs of such plants are lower compared to hydel power units. Currently 19 IPPs with an installed capacity of 6,600 MW are operating in Pakistan, providing more than one third of total energy generation. Corporate Structure IPPs are established through public-private ownership for generating electricity and supplying to the sole buyer i.e. WAPDA. IPPs are operating under various project agreements with the government in addition to the power policies of 1994 and 2002. Capital Structure The minimum equity required for financing IPP in Pakistan is 20% of project capital cost with at least 51% equity
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held by founder shareholders for up to 6 years from commercial operation date. The government has also allowed 100% foreign shareholding. Tariff Structure The tariff structure of IPPs has two components namely; Energy Purchase Price (EPP) and Capacity Purchase Price (CPP). Both these components are measured in per kWh. The EPP deals with actual power generation and comprises of fuel and variable operating and maintenance (O&M) costs that are indexed to inflation and exchange rate variation. The CPP component is independent of the power generated and is based on base capacity utilization. It is subdivided into escalable and non-escalable charges where the former includes return on equity, fixed O&M and insurance costs (all indexed of inflation and exchange rate movements) and the latter accounts for debt servicing charges including both principal and interest payments. Lucrative Return Structure IPPs have a very well defined return structure shielded from rising energy prices, interest and operation costs backed by international and sovereign guarantees for fuel and energy & capacity (E&C)) payments. The returns of IPPs are denominated in US dollars based on a negotiated ROE with the government and assured cash flows over the project life. Government Support to Stimulate Foreign Investment The private sector has always received tremendous support from government in the form of various incentives for the development of power. This is one major reason why Pakistans power sector has always been eyed by foreign investors. Investors are guaranteed lucrative returns through the power policy, hedged against inflation and exchange rate movements, in addition to the government backing on trade debts.
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Figure 6: Tariff Structure

Figure 6: Tariff Structure
Revenue EPP: Fuel Cost +Variable Cost CPP: Fixed Cost + Project Company Equity(PCE) + Principle Repayments + Interest Expense(IE) Operating Costs Fuel Cost + Variable Cost + Fixed Cost Operating Profit PCE + Principle Repayment + IE Other Income Interest Income(I)
EBITDA PCE + Principle Repayments + I +IE
Non cash charges Depreciation + Amortization(A) EBIT PCE +Principe Repayment - A + I + IE Financial Charges IE
PAT PCE + Principle Repayment - A+ I

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Favorable Agreements and Tariff Power Purchase Agreement (PPA) PPA represents a contract between the IPPs and WAPDA whereby both the parties agree upon conditions related to plant operation and tariff charges. So far there have been two different PPAs signed in Pakistan with various IPPs under power policies of 1994 and 2002 respectively Implementation Agreement (IA) The IPPs sign IA with the government which guarantees the performance of WAPDA in terms of the conditions stipulated in the PPA. Fuel Supply Agreement (FSA) This agreement is signed between the IPPs and fuel contractors to ensure that fuel requirements of the IPPs will be met. Unlike the first generation PPA, the second generation PPA does not provide the guarantee of the government for fuel contract obligations. However, this does not affect the financial health of the IPPs as the risk is entirely passed on to the fuel supplier. Operation and Maintenance Agreement (O&MA) The O&M Agreement between the IPPs and their respective contractors ensures that the latter efficiently adhere to the operations and performance standards of the IPPs plants. Industry Threats Energy Price Hike Pakistans energy bill has surged due to escalating international oil prices coupled with rupee devaluation. Over the last five years, furnace oil prices rose by a CAGR of 29% from PKR 24,263/ton in 2006 to PKR 47,500/ton triggering an increase
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in electricity prices. Against this backdrop, the rising inclination of private sector towards the RFO based plants is not suitable for Pakistans economy in the long run. The cost of thermal energy has risen sharply due to which subsidy is provided by the government. The major threat facing the industry is the IMFs conditionality stipulating subsidy withdrawal.
Figure 7: Furnace Oil Prices

60,000 50,000 40,000 30,000 20,000 10,000 0
Furnace Oil Prices(PKR/Ton)

Source: PSO, Blaze Research
Table 4: Trade Debt Position of PEPCO

(bn PKR) PEPCO Receivable Private KESC Sindh Government Fed Government Tube well Others Source: SOI 2010 181 PEPCO Payable 93 IPPs 38 Oil Companies (PSO+APL) 20 Wapda Hydel 5 Rental Projects 26 Gas Companies (bn PKR) 211 111 27 45 9 20
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Circular Debt Pakistan faces severe internal liquidity crisis especially in the energy sector with almost every other company indebted to the government or consumer/supplier. Theft of electricity in the country is major cause of circular debt with likes of KESC having 57% collection ratio. Out of the 9 electric distribution companies in the country, 5 have high transmission and distribution losses. Transmission losses result in load shedding leading to low revenues for these companies which aggravates the issue of circular debt. One of the main causes for the inefficiency is the deteriorating distribution system which results in overload and tripping of main power grids. Net circular debt position has decreased by 16.9% in June 2010 from PKR 216bn in the corresponding period last year. This was mainly possible through issuance of TFCs worth PKR 80bn and PKR 82bn in March and September 2010 respectively. However, this proved to be a short term measure as the level rose to PKR 235bn in October 2010. Power Price Hike to Reduce Circular Debt Recently, the government has announced a gradual phase out of subsides through power price hike of 17.6% during November 2010-June 2011 to reduce the disparity between average cost of power generation and power tariff. We believe that this step will considerably alleviate the circular debt levels of IPPs. Healthy Payout despite Circular Debt Circular debt significantly raised receivable and payable levels of IPPs. Nonetheless, companies particularly HUBCO and KAPCO seem to be indifferent, maintaining healthy payout ratio in excess of 95%.
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Table 5: Risk Profile

RISKS RISK MITIGANTS Delayed payment by WAPDA Company continues with running causing financial constraints finance facility to meet working capital requirement Minimal exposure to credit risk GOP guarantee for recovery of company's trade debts and other receivables Volatilityin exchange rates PPA provides tariff indexationfor hinder ability to meet offcurrency depreciation on foreign debt shore lender debt obligations Volatilityin interest rates to Overcome with fixed lending rates result in higher debt servicing and hedging arrangements charges and reduced net cash flow Poor performance of plant resulting inpayment of penalties to WAPDA
O&M agreement with International

Power Plc
Delay in supply of fuel by PSO Liquidation damages paidto WAPDA leading to penalty charges to can later be flipped by liquidation WAPDA damages paid by PSO Management inefficiency to affect cashflows Competent management with a proven track record
Change In IPP's taxation policy Change inTaxation policy secured under the implementation Agreement Delay in COD of Narowal These charges to be passed to EPC causing payment of liquidation contractor,M AN diesel damages to WAPDA
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Risks
Possible Difficulty in Meeting Obligations Related To Financial Liabilities The CPP and EPP charges of the company are passed on to WAPDA. Therefore, any delay by WAPDA in this regard affects companys payment obligations, mainly fuel and debt servicing charges. The company manages its liquidity risk through running finance facilities which cover short term funding needs triggered by delayed payments from WAPDA. Payments to PSO are also delayed in case WAPDA does not pay on time. Possible HUBCO Default on Numerous Obligations The guarantee of GoP on the performance of WAPDA ensures the recovery of trade debts and other receivables which minimizes the companys credit risk to a great extent.
Exchange Rate Risk on FX Loans Volatility in exchanges rates and unavailability of foreign exchange hamper the companys ability to cope with its debt obligations particularly towards off-shore lenders. The PPA provides the company with the advantage of tariff indexation for any currency depreciation on the foreign debt element (along with other factors), thereby, mitigating the exchange rate risk. The government provides guarantee for the accessibility and the hedging of total foreign currency liability. Interest Rate Risk Fluctuations in market interest rates may require the company to pay higher debt servicing charges, thus reducing its net cash flow. This risk is mostly dealt with given the fixed lending rates on companys debt or alternatively through hedging arrangement at the preference of the lenders.
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Poor Performance of Plant Revenues are highly dependent on plant performance which is determined by various factors including heat rates, plant availability, dependable capacity and emissions. A deficiency in any of these factors may lead to payment of penalties to WAPDA or PSO. The risk of loss in revenues owing to poor plant performance is, however, low as the companys O&M contractor, International Power, is a well-reputed equipment supplier which is also a shareholder in the project. International Power is accountable as per O&M Agreement for penalties in case of non-performance and bonuses for efficiency. Delays in Fuel Supply HUBCOs fuel input remains contingent to timely delivery of supplies by PSO. Hence, any potential supply delays or bottlenecks will assume the added risk of paying penalty charges to WAPDA as per PPA. These penalty charges can later be recovered through payment of liquidated damages from PSO. Inadequate Management Control by the Company Any inefficiency on the part of companys management can lead to improper monitoring of the operators performance, affecting operating cash flows. This risk is mainly addressed by the current management structure consisting of highly skilled and experienced staff. Moreover, guarantees and liquidated damages can be called from O&M contractors on account of their poor performance. Political Risk Tax Rate Changes The company is exempt from all taxes and duties. Any change in this policy in future may reduce profitability. This contingency is also taken into account in the Implementation Agreaement. Source: Blaze Research 589 PAKISTAN BUSINESS REVIEW OCTOBER 2011
Case Study
Penalty on Delay in Narowal The company is liable for the payment of liquated damages to WAPDA on a daily basis by delaying the commercial operation date for Narowal project beyond September 2010. The risk is offset by passing these charges to the EPC contractor, MAN diesel.
Figure 8: Revenue Breakup (PKR mn)
160,000 140,000 120,000 100,000 80,000 60,000 40,000 20,000 0
Old Plant
Source: Company Data, Blaze Research
Narowal
Risk to the valuation EPC contractor MAN diesel Germany was unable to meet the contractual COD of Narowal and it was delayed twice initially. According to company sources, the project is now expected to come online in April 2011. HUBCO is bound to pay the penalty of delay to the WAPDA under the PPA, although it is almost offset by the liquidity claims made to the MAN diesel. Our calculations estimate that a further delay of three months in COD would reduce target price by PKR1.08/share.
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Figure 9: Return on Asset and Equity
0.07 0.06 0.05 0.04 0.03 0.02 0.01 0
0.35 0.3 0.25 0.2 0.15 0.1 0.05 0
ROE
ROA
Figure 10: Debt Mix
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%
Long term debt to total debt Current liabilities to total debt

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Financial Analysis
Buoyant Revenues With increased operational efficiency, HUBCO has become successful in reaching a revenue level of PKR 99bn (EPS: PKR 3.15) for FY10 in comparison to a turnover of PKR 82bn for FY09, a YOY increase of 20%. We expect the revenue to maintain an increasing trend through FY15, despite a conservative assumption for load factor of 75% for the existing plant. Expected growth in revenue is primarily attributed to Narowal project and indexation against rupee depreciation as well as inflation. Generation bonus that company receives due to operational efficiency and load factor improvement will also contribute to revenue. We have not incorporated this source of revenue in our projections due to a conservative approach. Strong Earnings Stream HUBCO reported a net profit of PKR 5.5bn for FY10, an increase of 52.5% over the preceding year. ROE has shown significant growth over the past 3 years, hovering in the range of 9%-19%. We expect a slight slump in the earnings for FY11 mainly due to increased finance cost on amplified short term borrowings. Going forward, earnings are projected to increase at a CAGR of 16% during FY12-15. A u-shaped PCE structure will contribute to earnings growth in future. Capacity Building to Enhance Balance Sheet Size HUBCO has so far incurred a capital expenditure of PKR 21bn in setting up Narowal plant and an additional PKR 2.7bn will be invested in this project during FY11. Furthermore, the company has invested PKR 2.6bn in Laraib Energy which will require another US$23.7mn in the next 2 years. We expect asset utilization to maintain an encouraging trend, increasing from 0.81x in FY10 to 1.04x in FY15.
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Liquidity The company has managed to maintain a satisfactory current ratio since the delay in accounts receivable due to circular debt has been offset to a large extent by increasing days payable. We expect similar trends to continue through FY15. Leverage Total debt to assets ratio of the company is expected to remain in the range of 78-80% during FY11-15. Short term liabilities will comprise 8 to 10% of total debt resulting from sharp increase in accrued accounts payable triggered by circular debt issues. We expect the issue to be resolved post FY15 based on a conservative approach. The company is compensated for any mark-up on accrued payables by WAPDA, hence nullifying the effect of such liabilities on interest cost. Furthermore, the debt position reflects the fact that despite aggressive expansion the company has managed to restrain the share of long term debt in total debt.
Investment Summary
We recommend a BUY on HUBCO based on strong revenue growth, healthy payout and attractive dividend yield. A U-shaped PCE and protection against US CPI inflation in addition to PKR devaluation will feature as key investment considerations. Ongoing capacity expansions will add further value to the stock.
Figure 11: Project Company Equity
30,000.00 25,000.00 20,000.00 15,000.00 10,000.00 5,000.00 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% -5%
Project Company Equity (in millions)
growth rate
Source: Company Data 593 PAKISTAN BUSINESS REVIEW OCTOBER 2011
Case Study
Inflation and Devaluation Cover: An Added Advantage HUBCOs tariff profile insulates its earnings against inflation and exchange rate devaluation. We have assumed an annual PKR//$ devaluation of 2.8% and US CPI at 2.4% as forecasted in the Labor Bureau of Statistics for FY11-20. Change in US CPI inflation and PKR devaluation will have a significant impact on our fair valuation for HUBCOs stock. A change of 50 basis points in our assumption of PKR devaluation and US CPI inflation will result in an approximately 2% and 1.5% change in the fair value respectively.
PCE in Growing Phase
Besides a hedge against inflation and exchange rates, earnings of shareholders are also supported by the in-built growth in PCE. The U-shaped PCE is currently in a growth phase and this upward trend will continue to support HUBCOs earnings over the entire life of the project. PCE will grow in real terms at a CAGR of 2.2% during FY11-FY15.
Figure 12: ROE and Payout
20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0%
2005 2006 2007 2008 2009 2010
180% 160% 140% 120% 100% 80% 60% 40% 20% 0%
ROE
Payout Ratio
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Robust Payout The company has maintained strong payout ratio in excess of 70% over the past, (in some years in excess of 100%). According to our estimates, the company will maintain an average payout ratio in excess of 100% through FY15. Expansion Endeavors to Fuel Growth The company has entered a growth phase with the Narowal project, increasing its capacity by 20%. Acquisition of 75% stake in Laraib Energy will add value to the company, although we have not incorporated it in our calculations. Surety of Payments from WAPDA HUBCOs cash flow streams are deteriorating due to delay in payments by WAPDA, which is a key consideration for investors eyeing for a dividend yielding stock. Payments from WAPDA are guaranteed by Government of Pakistan, thus easing the companys cash flow position and ensuring future consistency of dividend yields. Generation Bonus The PPA rewards the company with a generation bonus on a higher load factor (in excess of 60% base utilization). However, we have not incorporated the values of generation bonus in our earnings expectations. Given the growing trend of the load factor over the recent year, returns from production bonus are inevitable.
Valuation
We have valued HUBCO by using Dividend Discount Model on account of high payout ratio of IPPs. We discounted all the dividends of the company throughout the life of the project. The cost of equity is assumed at 17%, by taking 5-year PIB return of 13.75% as risk-free rate, a market risk premium of 5% and a beta of 0.703. Based on this discount rate, we have valued HUBCO at a fair price of PKR 44 per share showing an upside potential of 23% on the share price of PKR36.72 as of 24 November 2010. 595 PAKISTAN BUSINESS REVIEW OCTOBER 2011
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596
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Laraib will further add value to the price as Hydel project is providing an IRR of 17%. However, we have not incorporated this revenue in our valuation. Valuation of HUBCO is sensitive to discount rate, with every change in 50 basis point change in discount rate there is an approximately 3% change in the target price.
597
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APPENDIX
598
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599
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600
Particulars Period(n) Dividend Paid (PKR mn)
Table 5: Valuation Summary Jun11 Jun 12 Jun13 Jun14 Jun15 Jun16 .. 1 2 3 4 5 5,349.13 6,905.63 7,485.43 7,475.10 8,409.39 9,552.23 .. 4.62 5.97 6.47 6.46 7.27 8.25 ..
Terminal Value
DDM Value (PKR) Upside Potential Risk free rate Market risk premium Beta Cost of Equity
44.13 23% 14% 5% 0.703 17%
Case Study
A . Balanc e She e t ( PKR m n) A SSET S N ON CURREN T A SSETS P rope rty plant and e quipm e nt Intangible s S tore s and s pare s Inve s tm e nt in subs idia ry O the r as se ts ( Long te rm D epos its and P re pa ym ents) CU RRE NT A SSET S Inve ntory of Fue l oil T rade de bts A dvances , P repa ym ents and othe r re ce ivable s Cas h and bank Bala nc e s T OTA L A SSET S E QUITY A ND LIABILITIES S HA RE CA PIT AL AN D RESERV ES A uthorise d Is sue d subs cribe d and paid up Unappropriate d prof it
2 009
201 0
2011E
20 12E
2013 E
2014E
37,8 95.72 2.25 637.02 656.46 4.28 39,1 95.73 2,5 40.89 46,6 29.46 785.81 1,0 33.79 50,9 89.94 90,1 85.67
49,614 .60 8 .37 637 .02 2,610 .12 4 .13 52,874 .24 1,559 .88 66,712 .46 739 .63 809 .31 69,821 .28 122,695 .51
5 0,663.45 5.00 637.02 3,617.25 60.00 5 4,982.72 1,553.53 7 2,207.77 1,189.76 927.60 7 5,878.66 13 0,861.38
48,4 43.89 5.00 6 37.02 4,6 24.50 60.00 53,7 70.41 1,6 52.63 79,5 57.38 1,1 89.76 1,1 01.47 83,5 01.25 137,2 71.66
46,213 .50 5 .00 637 .02 4,624 .50 60 .00 51,540 .02 1,682 .61 81,654 .87 1,189 .76 1,129 .12 85,656 .36 137,196 .38
43,871.24 5.00 637.02 4,624.50 60.00 49,197.77 1,731.04 76,323.98 1,189.76 1,157.48 80,402.26 1 29,600.02
12,0 00.00 11,5 71.54 17,9 60.81 29,5 32.35
12,000 .00 11,571 .54 18,309 .73 29,881 .28
1 2,000.00 1 1,571.54 1 7,652.12 2 9,223.66
12,0 00.00 11,5 71.54 17,0 27.42 28,5 98.96
12,000 .00 11,571 .54 16,551 .86 28,123 .41
12,000.00 11,571.54 16,259.00 27,830.54
N ON CURREN T LIA BILITIE S Long Te rm Loans CU RRE NT L IABILITIES S hort term borrow ings T rade a nd othe r payable s Inte re s t/ m ark up a ccrue d Current m aturity of long te rm loans T OTA L EQ UITY A ND L IABIL IT IES
11,3 40.91 3,5 82.25 43,9 70.16 765.94 979.06 60,6 53.32 90,1 85.67
23,444 .52 6,743 .60 59,595 .33 1,317 .96 1,655 .93 92,814 .24 122,695 .51
2 7,591.98 5,779.85 6 5,711.80 1,331.14 1,222.95 10 1,637.72 13 0,861.38
26,3 59.64 7,0 06.58 69,7 45.69 1,3 44.45 4,2 16.34 108,6 72.70 137,2 71.66
25,538 .63 8,586 .09 71,361 .79 1,357 .90 2,228 .57 109,072 .97 137,196 .38
20,877.39 9,859.43 67,228.51 1,371.48 2,432.68 1 01,769.48 1 29,600.02
APPENDIX
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599
B. Income Statement (PKR mn) REVENUES OPERATING COSTS Fuel Cost Oper. & Maint. Insurance Misc. Narowal Operting Cost
2009 82,783.92
2010 99,694.26
2011E 101,368.60
2012E 123,567.85
2013E 2014E 126,825.65 129,573.26
71,894.69 2,360.43 409.80 330.27 74,995.18 7,788.74 342.94 7,445.80 1,706.72 5,739.08 2,094.50 3,644.58
86,246.92 2,707.22 542.27 812.36 90,308.78 9,385.49 367.73 9,071.02 1,720.18 7,350.85 1,793.59 5,557.25
84,389.50 2,340.15 549.03 548.93 4,932.09 92,759.71 8,608.89 383.38 8,225.51 1,880.57 6,344.94 1,653.43 4,691.51
86,330.46 2,434.81 555.88 565.03 20,260.99 110,147.18 13,420.67 426.57 12,994.11 2,678.04 10,316.06 4,035.13 6,280.93
88,402.39 90,524.04 2,535.71 2,641.21 562.81 569.83 580.20 592.29 20,830.75 21,420.62 112,911.85 115,748.00 13,913.79 13,825.27
Admin and selling Expenses EBITDA Depreciation Charge EBIT Finance cost PROFIT FOR THE YEAR
476.90 13,436.89 2,704.12 10,732.77 3,722.89 7,009.88
535.73 13,289.54 2,725.54 10,563.99 3,381.76 7,182.23
C. Cash flow Statement (PKR mn) CASHFLOWS FROM OPERATING ACTIVITIES CASHFLOWS FROM INVESTING ACTIVITIES CASHFLOWS FROM FINANCING ACTIVITIES BEGINNING CASH BALANCE ENDING CASH BALANCE
2009 15,113.85
2010 3,912.89
2011E 6,880.89
2012E 13,822.43 1,212.31
2013E 12,751.18 2,230.39
2014E 16,223.13 2,342.25
(6,330.65) (14,885.41) (2,558.62) (964.99) (9,217.77) (1,399.56) 6,437.80
(7,444.18) (12,349.79) (12,929.59) (12,919.26) (9,056.19) (6,371.25) (6,371.25) (4,319.28) (4,319.28) 1,326.85
(1,399.56) (5,934.29) (5,934.29) (9,056.19)
Case Study
Book Review
Taha Turabi (ed 2009) Turabiyat
TAHA TURABI (ED. 2009) TURABIYAT ALLAMA RASHEED TURABI MEMORIAL TRUST KARACHI
Javed A.Ansari College of Business Managment, Karachi
Allama Nasirudin Raza Husain Rasheed Turabi (19081973) was the greatest Pakistan rhetorician and orator of the twentieth century. He was a disciple of another great orator Nawab Bahadur Yar Jung who dominated Muslim League politics for several decades. Another great Indian orator of the period Netaji Subhas Chander Bose often acknowledged Nawab Bahadur Yar Jungs preeminence in this field. But Allama Turabi was much more than an orator. He was a scholar of fiqh, tafseer and above all kalam. He was a student of Aqai Burejardi, Ayatullah Hakeem Tabatabai, Ayutullah Khoi and Ayatullah Shariat madar and obtained ijaza from these luminaries to serve as an authentic interpreter of the Islamic intellectual tradition. The discipline of kalam has remained comparatively neglected in the Indian tradition of Islamic learning. Thus the texts of Imam Ghazali, Imam Muhammad (of the Sahibain), Imam Ibn-i-Tayymiyah and Imam Ibn Khuldun are not included in the Dars-i-Nizami. It is due to this neglect of kalam by our traditional ulema that when a revival of kalam was attempted by Shibili and Iqbal kalam was submerged in an alien intellectual tradition (phenomenology in the case of Shibli and empiricism in the case of Iqbal). Islamic discourse, as developed by Shibli and Iqbal justified rupture with Islamic history and a reinterpretation of Islamic thought within the context of Enlightenment epistemological discourses. In Iran Ali Shariati (and to a lesser extent Jalal Al-e-Ahmad) followed a similar trail.
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The distinguishing character of Allama Turabis kalam is its immersion in Islamic history Turabi is well aware of modernist discourse (he obtained an M.A in Philosophy from Allhabad in (year) but he is neither a Modernist nor a Post Modernist. He asserts the relevance of Islamic history as the sole authentic source for legitimating current Islamic theory and practice. In that specific sense he is a co-worker of the great twentieth century revivalists and traditionalists Syed Qutb, Baba Samarqandi, Abbasi Madani, Hasan Nasrullah, Ayubullah Montazari, Maulana Maududi and Imam Khomeni (may Allah exalt their status in Paradise). Allama Turabi is a mujahid battling for Islamic supremacy in all walks of life. Unfortunately this book contains one piece of Allama Turabis writing (spread over only three of its 144 pages). In this piece Allama Turabi argues for the universality of Islam and defines ijtihad not as an attempt to accommodate Islamic practice within. Modernism but as an attempt to derive universal principles of conceptualization and practice on the basis of the sole criteria of Islamic texts and their historical interpretation, nass (P.16). He asserts that the interpretations of the nass present in the orthodox schools of fiqh are authentic and non subjective. Turabis conception of rationality (al-Aql) reflects Imam Ghazalis understanding of the scope and limitations of mans rationality Turabu writes (Reason) is an instrument for seeking Allahs acceptance and (in that sense) reason and the sharia do not conflict and the commands (ahkam) of the shariah explicate the maxims of reason and (seek) the well being (falah) of mankind although the rational faculty lacks the capability to comprehend this correspondence.1 (p.17). The derivation of practical maxims in all ages thus depends exclusively on articulating the discourses of the classical Islamic knowledges tafseer taweel-i-hadith, fiqh, rijal etc. In Imam Turabis view ijtihad must be taqleedi once again our Imam is following the definition of ijtihad developed by Maulana Imdad-Allah Muhajir Makki.2 It must be based on usul tafseer, usul al din and fiqh as articulated in the classic Islamic tradition. Ijtihad cannot be undertaken on the basis of Enlightenment epistemology. It cannot be undertaken on the basis of the principles underlying the physical sciences, economics,
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political science, psychology or jurisprudence etc. Imam Tutabi remains totally uncompromising on this issue in all his writings. Our imam wrote twelve books. Five of them Kanz-iMahkfi, Muqaddas Qanun, Takweem, Dastur and A Great Historic Document explicate the implications of the practice of taqleedi, nussusi ijtihad with regard to contemporary issues. Allama Tuabis style is obscure, laden with Arabic and Farsi tarakeeb and relatively unknown intellectual and social references.3 This makes these works inaccessible to the those Muslim intellectuals who have no grounding in Islamic epistemology. One gets the impression that Turabi is in his writings addressing only a select group of ulema and not the lay Muslim intellectual. In his speeches on the other Imam Turabi is addressing the masses. His chosen technique here is use the key reference of Iman Husain (radi Allah tala anha) to assert the universality of Islamic principles. Imam Husain (radi Allah tala anha)s struggle is indeed a key reference and as several imams Imam Muhammad (of the Sahibain) Imam Abul Yala, Imam Mawardi and Maulana Abdul Huq Muhaddis Dehlavi for example have argued the continuing struggle for the establishment of Islamic government (khilfati-rashida) derives its ultimate legitimacy from Imam Husains (rade Allah tala unha) epic struggle. Revolt against un Islamic rule is always legitimate and contemporary Islamic revivalist movements are Husaini in that fundamental sense. Imam Turabi was a soldier of Husain (radi Allah-o-tallaanha)s army because he believed in the universality of Islam and in the validity of its claim for universal hegemony. Despite his roots in Shia traditions and learning he was never the partisan of a sect. He unfurled Husains (radi Allah ho tala anha) banner and called all Muslims to rally around. It Imam Turabi was an ambassador of Shia-Sunni unity and several articles in this book testify to this non sectarian character of our Imams message. Rasheed Turabi was a true followers of those who gave him ijaza Ayat ullah Borojardi, Ayatullah Tabatabai, Ayatullah Hakim, Imam Shariat Madar none of whom was a sectarian and all of
603
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whom stood unflinchingly for Shia-Sunni unity and for Islams universal dominance. The Shia segment of the contemporary Islamic revolutionary movement has developed this line of thought and gone from strength to strength specially in Iran, Labnan and Iraq4 in the twentieth century. I have said little about this book because it contains so little of Imam Turabis own words. Imam Turabi does not need any ones praise he has returned to his Lord who has insha Allah showered him with the blessings Imam Turabi deserves. It is the Islamic revolutionary workers who need to benefit from Turabis precious heritage. I have two specific requests to make to the governors of the Allama Rasheed Turabi Memorial Trust. Prepare an anthology on Islamic and the Challenges of the Modern World based on the material in Kanz Mahkfti, Muqdus Qanun, Takween, Dastoor and A Great Historic Document. This anthology should be an easily accessible rewrite of passages in these books using a contemporary diction and style in (say) ten chapters. The book may be published in both Urdu and English. It should be a collaborative effort between an Alim and a lay Islamic intellectual. Publish a book Arguments for Shia-Sunni Unity on the basis of material selected from the recordings of Allama Turabis speeches. Here rewriting will probably be minimal but careful selection, collation, thematisation and editing will be required. This book should be prepared first and published in Urdu only.
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Notes
1.
This is a complex passage and its comprehension requires a clear differentiation between the Ghazalian and the Kantian conceptions of rationality. In Ihyaal-Ulum-ul- Deen Imam Ghazali sees rationally as an instrument for obeying God as He says He should be obeyed. In the Critique of Pare Reason Kant sees rationality as an instrument for deriving universalisable maxims which enable an autonomous will to obey its own self. Imam Turabi (R.A) is arguing that we should understand rationality as a faculty for obeying Allah (not our own desires) and the well being of man is the obtaining of Allahs approval. The nass tells us how to obtain Allahs approval. Thus there can be no contradictions between the maxims generated through what Imam Turabi calls a search for nussus and the maxims of reason as understood by Imam Ghazali and Imam Turabi and not as understood by Kant and Habermass In Mulfuzat (ed. Maulana Abul Hassan Qasadi; Dar-ulMaarif Hyderbad (n.d). This is true of almost all major twentieth century traditionalists with the notable exception of Maulana Maudude. But not in Pakistan where the Shia presence in the Islamic revolutionary struggle is minimal and Allama Ibn-i-Hassan Jarchavis works have been sadly neglected
2.
3.
4.
605
Seminar on MBA in Educational Management Programme
Conference Conference Report Report
STRONG LEADERSHIP STRONG INSTITUTIONS: ITS A MATTER OF CHANGE REPORT ON SEMINAR HELD ON FEBRUARY 26, 2011
Nasreen Hussain Department of Educational Management College of Business Management, Karachi Introduction A seminar was organized by the Education Department on Strong Leadership Strong Institutions: Its a Matter of Change. It was attended by over 40 participants that included renowned educationists, IoBM faculty, prospective participants and presently enrolled students. The four main speakers were: 1. 2. 3. 4. Prof Zakia Sarwar Abbas Husain Ms Qamar Safdar Mr Aziz Kabani
Prof Zakia Sarwar discussed the importance of Continuing Professional Development (CPD). She contended that CPD was the conscious updating of professional knowledge and the improvement of professional competence throughout a persons working life. It was a commitment to being professional by keeping up to date and continuously seeking to improve. She further stressed that a manager could become a leader if s/he acquired the 3Gs: i) Grow yourself, ii) Groom others, and iii) Go. She then motivated the audience by sharing personal learning experience. PAKISTAN BUSINESS REVIEW OCTOBER 2011 606
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Seminar on Pakistan: Challenges and Aspirations
Ms Qamar Safdar presented a paper on Leadership and Systems. She reiterated that change cannot be implemented by changing part of a system. Unless all people think and work together no one can come to a correct solution. She further clarified the notion by giving examples and sharing her experiences. The main point stressed was that finding causes of academic and professional problems was more important than solving them at a superficial level. In conclusion, she shared the importance of self questioning and ended her presentation by sharing the acclaimed seven habits of highly effective people and five disciplines of a learning organization. Mr. Abbas Hussain in his presentation said that the education system of Pakistan faced a shortage of intellectual leaders and the time was ripe for the teachers, educationists and the government to develop and nurture leaders for the betterment of learning organizations and society at large. He argued that individual thinking is meaningless and unjustified; Pakistan needed think tanks who could think unitedly or in clusters for effective implementation and long lasting change. A very different perspective was presented by Mr. Aziz Kabani. He explained that the world had become a global village and it was impossible to survive within the assigned boundaries. It was imperative for teachers to interact with others in order to find their position in the global village. It was time for them to evaluate their position in the world and then to work for achieving their identity. Mr Kabani concluded by stressing that change should be brought about by nurturing motivated and dedicated leaders in the area of education. Dr Nasreen Hussain, Head, Department of Education discussed the scarcity of educationists in Pakistan and dug deep into the social, economic and environmental factors responsible for creating such a deplorable situation. She also briefed the 607 PAKISTAN BUSINESS REVIEW OCTOBER 2011
Seminar on MBA in Educational Management Programme
Conference Report
participants of the scope of educationists and the positive role they could play to upgrade the mental faculty of the future leaders of the country. Dr Hussain was of the opinion that effective and strong leaders have a vision, develop and support teachers, and strengthen institution milieu. They also share and distribute leadership roles among teachers and other staff, particularly to re enforce and enhance instructional leadership capacity. She proposed that leadership undoubtedly is a catalyst to teaching institutions improvement; therefore, the environment of the learners, teachers and leaders should be one in which the only constant element will be change. Dr Hussain then introduced the MBA in Educational Management programme formally and shared the aims, objectives, salient features and the course structure. The Dean, Dr Javed Ansari supported the programme and reiterated the importance of developing educational managers to run the institutions effectively. He also stressed the point that such forums should be called on frequent basis to share different perspectives and promote quality education in the country. Mr. Abbas Hussain in his presentation said that the education system of Pakistan faced a shortage of intellectual leaders and this was the time for us to find the treatment of intellectual leaders. That is a lack of capacity to think which could be rectified by thinking together. He emphasized that all educators should unite and work to bring the required change. A very different perspective presented by Mr. Aziz Kabani. He explained that the world had become a global village and it was impossible to survive within our boundaries. Teachers have to interact with others to find their position in the global village. It was time to evaluate our position in the world and then to work for achieving our identity.
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Dr Nasreen Hussain shared a presentation to introduce the MBA in Education Management programme offered by Institute of Business Management (IoBM). She discussed the scope for educationists in the future and the scarcity of them in Pakistan and all over the world. Then she introduced the programme formally. The programme consists of 24 courses for a two- year programme and 36 courses for three years programme which includes three electives. Moreover, each student needs to submit a research thesis which will be equivalent to 4 courses. Then she discussed the aims, salient features, and structure of the programme. Contribution by the Dean The Dean of Iobm supported the programme and reiterated the importance of developing education managers to run educational institutions effectively. He also stressed the point that such forums should be called on frequent basis for sharing different perspectives on education. Furhermore, the Dean stressed that group should meet often to work together for the betterment of promoting quality education. Conclusion In the end, the seminar was wrapped up by stressing that change should be brought about by nurturing motivated and dedicated leaders in the area of education.
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Seminar on Pakistan: Conference Report Challenges and Aspirations
Conference Report
OVERSEAS CHAMBERS OF COMMERCE AND INDUSTRY SEMINAR ON PAKISTAN: CHALLENGES AND ASPIRATIONS APRIL 2011
Syed Maqbool-ur-Rehman Department of Accounting and Finance College of Business Management, Karachi The objective of the Seminar was to take stock and prepare policy recommendations. This seminar was divided into three segments: Segment 1 covered the external environment highlighting the relationship of Pakistan with its immediate neighbours, United States and NATO. Former Ambassadors Mr. Jamsheed Marker and Najamuddin Shaikh spoke at length about Pakistans fragile and strained relationship with the U.S and its repercussions on other relationships. Dr Akmal Hussain, quantified the financial impact on Pakistans economy in the event Pakistan fails to comply with Americas demands with regard to its war on terror. The second segment aimed to solicit focused views on issues such as health, education and energy. Prominent speakers Dr. Shams Kassim Lakha, Mrs. Nasreen Mehmood Kasuri, Mr. Hussain Dawood, Mr. Farooq Rahmatullah and Mr. Aziz Bilgrami made presentations on the above subjects. Mr. Hussain Dawood spoke on CNG/LNG supply, demand and the pricing structure. He recommended that CNG prices should be brought in line with petrol prices which would not only correct the market imbalances but also pave way for the import of LNG at market prices. Mr. Farooq Rahmatullah and Mr. Aziz Bilgrami made a joint presentation covering the oil and gas sector. They showed the current energy mix and the forecasted rise in the cost of oil imports in 2025 at $200/barrel to be a whopping $125 billion from the current level of $9 billion. They proposed a drastic change in the energy mix by including other sources such as coal/wind and PAKISTAN BUSINESS REVIEW OCTOBER 2011 610
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altering the ratios of the existing sources of energy. The proposed changes as claimed will reduce the import bill and produce a favourable impact on the economy. Speakers also said that the up gradation of the existing plants will add about 25,000 mega watts to the energy starved nation. The third segment was on the economy of Pakistan. Dr Ishrat Hussain, said that the present revenue stands at Rs. 1500 billion with a gap of about Rs. 700 billion. He suggested some short term measures to improve upon the economy. Dr. Akmal Hussain proposed major structural changes in order to correct the imbalances and direction of the Pakistan economy. His first suggestion was to utilize the 2.5 million hectre cultivable land with the government presently unutilized by distributing it in 5 acre plots on ownership basis among those farmers who do not have any land of their own. He also suggested the formation of an agricultural corporation to provide one window operation to the farmers. Secondly, he wanted that SMEs be linked to big corporations by a government corporation created for this purpose so the output of SMEs can be used as input by the big corporations. He wanted the poor and the middle class to be included in the rebuilding process and gave example of Amul India, the largest dairy farm products firm in the world owned by 700,000 peasants and managed by professionals and Grameen telecom, a service provider owned by women stockholders and managed by professionals. Mr. Yusuf Abdullah, Ex- Chairman FBR, apprised the audience that in the year 2000, major projects to improve FBR operations were initiated. Notable among those were electronic e filing, concept of data warehouse etc. Mr Shabbar Zaidi presented a workable plan to collect the shortfall in revenue of Rs.700 billion. He proposed to bring into the network untaxed segments; aarhtees (brokers) in mandis, doctors etc. He was critical of academia for the lack of research by provoking questions such as what do we know about Jodia Bazaar? How do they work? He emphasized the need to have carefully researched facts about the segment before FBR consider bringing it to the tax net. He also talked about revaluation of properties and asserted that all of us are involved in converting our well earned money into black by under invoicing the sale /purchase proceeds. He claimed to have given the proposal of advanced wealth tax. In short, all 611 PAKISTAN BUSINESS REVIEW OCTOBER 2011
Conference Report
the proposals were practical but required political will for implementation. M r Paul Ross, Resident Representative of IMF explained the working of IMF to the audience. He did not comment on Pakistans relationship with IMF (which was his supposed topic). According to him, IMF performed three types of basic functions; Global surveillance, Regional surveillance and Institution building. Mr. Gareth Aicken spoke on issues in bilateral aid. He was section head for Pakistan in DFID a UK government agency.
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PBR ISSN 1561-8706

PAKISTAN BUSINESS REVIEW

INSTITUTE OF BUSINESS MANAGEMENT

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Ei 0 1bi1 2bi 2 ... k bik ( I I I )

Ei = Return on the risky asset i

0 = expected return on asset with zero systematic risk risk free

k = the risk premium related to each of the common

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