Focus

A Begging Bowl in Hand

By Meekal A Ahmed
he Pakistan delegation to the spring meetings of the IMF and the World Bank have arrived, begging bowl in hand or bowel as one leading Pakistani English-language newspaper spelt it conjuring up all sorts of interesting images and possibilities, looking dapper in their business suits as they emerge from the fleet of bullet-proof limousines hired by the Pakistan embassy in Washington DC. The spring meetings are generally a small affair with much fine dining and socialising, compared to the annual meetings in October. The delegations are typically small. However, Pakistan has, Allah be praised, sent a full contingent of worthies. And why not? Our prime minister, in a stirring show of genuine austerity, recently took only 50 people to watch a cricket match. There is much speculation in the Pakistan press over what is likely to happen. To start with, the Pakistan delegation will meet with US officials. There they will explain to their incredulous audience that, because of our ground realities, we cant do much on the economic policy front. Nevertheless, they will ask the US authorities to lean on the IMF to go easy on us. What a deal! An easy-going IMF with no policy commitments on our part. Or at least none worth the paper it is written on and signed off on with great solemnity. As the Americans say, It does not get any better than this! What could be a worse manifestation of moral hazard? What could be a worse example of rewarding economic failure? Of course, our delegation will have a little smugness and swagger about them with soaring exports on the back of rising global unit prices and mysteriously surging remittances which, taken together, have resulted in a record level of gross foreign exchange reserves. Thus, Pakistan does not have an immediate balance of payments need. Furthermore, if some of the plans to issue convertible bonds in international capital markets bear fruit, there may be further room to continue with our feckless economic policies, starting with a pro-poor-people-friendly-relief budget for 2011-12 which, shorn of its verbosity, and looking past the obfuscation, lies and spin, will, in reality, have nothing to do with the poor or the people. An IMF mission is expected to visit this coming May. The Pakistani press portrays this visit as a terrific break-through. It is, they hint, the recognition by the US and the IMF (words used interchangeably in Pakistan) of our international standing and undiminished nuisance value. Of course, they dont put it that way. But the reality is that there is nothing untoward about a May visit. The IMF always turns up in May each year to assess our budget proposals. Both during and after their visit, the Pakistani media will insist that the IMF is preparing our budget for us. In the 17 years that I was associated with this IMF-Pakistan business, the IMF has never prepared the Pakistani budget. The IMFs budget proposals and Pakistans budget proposals are usually poles apart in terms of credibil-

ity, structure, financing and needed policy actions. It is true that there is some convergence as talks proceed with the IMF doing much of the converging, which may go some way towards explaining the mess we are in. When I asked a mission chief some years ago about the widely-held Pakistani view that the IMF was preparing our budget, he laughed and said, I wish we were! Will there be another programme? The truth is I do not know. However, even if there were no follow-on programmes, IMF rules require that a member country with large exposure to the IMF has to submit to post-programme monitoring which includes, inter alia, six-monthly economic reviews. Of course under this noprogramme-no-financing scenario, the IMFs influence on Pakistan, limited as it is, will be hugely diminished. They will have no leverage over the direction and content of our economic policies. The real question, however, is whether another programme will make a difference. In our long and chequered association with IMF-financed programmes, Pakistan has never completed a programme, save once. That was during the Musharaff regime when not only did Pakistan complete the programme; they declined the last tranche and sent the IMF packing back to Washington and their country club. How that programme was implemented, given our unblemished track record of programme failures, remains a mystery. Mr Shaukat Aziz was no economic magician but 9/11 was manna from heaven. But more to the point, Mr Aziz was surrounded by some notable, wily cookers. I suspect strongly, therefore, that the data was cooked to show compliance with programme targets. My suspicions, expressed long ago, evoked an angry response from the former governments economic spokesperson, who said my remarks were political in nature and therefore lacked credibility. Moreover, he said disingenuously, our data had been approved by the best experts in the IMF, other multilateral organisations and, above all, the international rating agencies. Given the track record of especially the last-mentioned during the recent global financial crisis when they were assigning AAA+ ratings to worthless sub-prime mortgage-backed securities, one can only marvel at the naivety of such a view. In conclusion, a follow-on programme, if implemented as shoddily as the last one, will only add another chapter to the depressing litany of failed programmes. Yet, Pakistan will muddle through as it has over the past 40 years, missing every target, seeking waivers for non-compliance and getting the targets reset to some distant date. No programme will yield the desired benefits if the timeline of adjustment is constantly pushed out. Reforms need to be implemented in a front-loaded manner for maximum impact. With elections looming and election-related spending set to soar without hope of genuine tax and expenditure reforms to get the budget under control, Pakistans outlook will remain shrouded in uncertainty with the balance of risks tilted on the downsiden The writer has served in the Planning Commission and with the IMF.

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Focus

Pakistan with a Begging Bowl

By Ikrammullah here is no difference of opinion about Pakistans failing economy. Indeed, it is the mother of all crises facing the country, including inflation, energy and gas loadshedding, lawlessness, etc.

said: You can keep mining gold and it will never end, resulting in a complete turn over of Pakistans economy

For the record, the first contract for mining gold, copper and other minerals in Balochistan was given by Prime Minister Shaukat Aziz to an Australian firm BHP Billiton at a meagre We are neck-deep in debt and losses. Perhaps, the governprice of $3.3 billion with 75 percent shares to the mining comment is even depending on foreign aid to pay the salaries of pany, while Pakistan only had the remaining 25 percent. Subgovernment officials next month, let alone development and sequently, both parties sold their shares after due profits. Billigrowth in any sector. Unfortunately, it seems as if the political ton sold its shares, in 2006, to two different firms Antofagasta leadership has compromised on the nations sovereignty. (Chilean) and Barrick Gold (CaBut in this most difficult time, Chinadian) with 3.5 percent share nese Premier Wen Jiabaos visit Pakistans first major project in the each, while Balochistans shares to Islamabad truly falls in line with were sold for $200 million, howmining sector was initiated by a the old adage, a friend in need, is ever, there are many facts that rea friend indeed. Pakistan and main unknown. Chinese firm at Saindak. For the China, reportedly, have signed execution of this project, a new Moreover, Pakistans first major 35 agreements and memoranproject in the mining sector was dums of understanding (MoUs), department named Resources initiated by a Chinese firm at worth $35 billion, on cooperation Saindak. For the execution of this in economy, energy, banking, seDevelopment Corporation was project, a new department named curity and technology. More than that the Chinese Premier has as- established in Pakistan, in 1974, with Resources Development Corpoin Pakisured that Beijing would never the technical and financial assistance ration inwas established technical stan, 1974, with the give up on Pakistan. Certainly, and financial assistance of the this is a cool breeze for the peoof the Metallurgical Construction Metallurgical Construction Corple of Pakistan just when they Corporation (MCC) of China. poration (MCC) of China. But it is were gasping for fresh air. But it is unfortunate that even after extennot enough to cure the myriad ills sive planning, the project ended facing the Islamic state. Pakistan without much success solely due to the incompetence, mishas to stand up on its own feet to attain a place of honour in the management and corruption of government functionaries. Now comity of nations. There will be no need for our leaders to carry a new opportunity has emerged with Dr Mubarakmands apa begging bowl, if we, as a nation, resolve to keep digging pointment as Chairman of the Board of Directors of the Reko straight down until we discover the still virgin and unexplored Diq project. But he has not yet taken over because of Balochisresources, and eventually emerge as one of the richest nations tan governments delay in issuing the notification. However, he on earth. said that if he is asked to undertake the project, he would acAgainst this backdrop, Pakistan has the distinction of possesscept the challenge without any hesitation, since he already had ing worlds largest copper and gold reserves, which are hidden a team of trained manpower with complete expertise in extractin Balochistan and Waziristan; South Africa and Australia being ing and refining all types of minerals, including copper, gold and the other two countries with the former having 400 tonnes and other minerals in the mining sector. the latter 260 tonnes per year yield of gold. As against this curSo, if the PPP-led government is sincere in throwing away the rent international gold deposit situation, Pakistan has an estibegging bowl and to boost the nations economy, it is the necmated capacity of producing 450 tonnes per year for the next 25 essary that decisions about exploring our mineral wealth be acto 30 years, only if the projects are undertaken seriously corded top priority in the best interests of Pakistan. That would through indigenous control. also help resolve the current crisis in Balochistan. At the same The gold-copper deposit in Reko Diq is four times larger than its time, it is hoped that the Supreme Court would look into the neighbouring Saindak deposit in Balochistan. Reportedly, acmatter of issuing licences to foreign companies and decide in cording to Dr Samar Mubarakmand, a renowned nuclear scienthe interest of Pakistann tist and member of the Planning Commission of Pakistan, only The writer is the President of the Pakistan National Forum. a part of it is worth $270 billion. While talking to the media, he Focus Section 12 Management Accountant, Jul-Aug 2011

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Pakistan: Living without Foreign Assistance

By Shahid Javed Burki an Pakistan live without foreign assistance? This question has begun to be debated after a statement by Mian Shahbaz Sharif on May 12 when he said his province, the most populous and prosperous in the country, will make a serious attempt to forego foreign assistance with conditionalities. The aim is admirable but the real question is whether it is achievable within a reasonable period of time. The only way to reflect on this issue is to take emotions out of it and build a case for or against aid by looking at the numbers. We should begin this investigation by deciding on what should be the countrys rate of economic growth and that of its several provinces. Pakistan is doing poorly compared to its South Asian neighbours. Bangladesh once the much poorer part of this country which was doing much less well compared to its western wing has seen its economy grow at around six per cent a year in recent times. This is almost three times the current rate of economic growth in Pakistan. Several serious Bangladeshi economists believe that they can see their country sustain a rate of growth of more than seven per cent per annum for many years. The Indian annual growth rate has averaged 8.5 per cent over the last six years. Its ambition is to achieve double digit growth rates in two to three years and sustain them for decades. This seems feasible looking at the current trends. The rates of savings and investment are high enough to make a 10 per cent rate of increase in GDP feasible. If India achieves that rate it would have become one of Asias miracle economies. Some of the empirical work done at the World Bank has shown that for a country such as Pakistan not to have an increase in the incidence of poverty, gross domestic product must grow at a rate twice the rate of increase in the work force. Although Pakistans population growth rate is said to have declined to less than a two per cent a year we will only have firm numbers once the on-going census has been carried out and its results tabulated the rate of increase in the workforce continues to be three per cent per year. The reason why this is so much larger than the rate of increase in population is because of what demographers call demographic inertia. It takes times

before fertility declines begin to translate into declines in the rate of increase in the workforce. For Pakistan not to see any further increase in the already large incidence of poverty, the GDP must increase by at least six per cent annually. For a decline in the incidence of poverty, the rate of increase in the GDP must be more than six per cent a year say seven or eight per cent. This is one reason why the Planning Commission, in setting its sights for the future, would like to see the economy expand by at least seven per cent a year. Is this feasible?

Pakistan does not have an efficient economy. There are many reasons for this. The technological base of the economy is poor; the work force is poorly trained and not well educated; supporting physical infrastructure (for instance availability of uninterrupted supply of electricity and gas) is below the level required by a growing economy; the state, mostly unwittingly, has placed many hurdles that entrepreneurs must cross; and rampant corruption increases the cost of business transactions.
Pakistan does not have an efficient economy. There are many reasons for this. The technological base of the economy is poor; the work force is poorly trained and not well educated; supporting physical infrastructure (for instance availability of uninterrupted supply of electricity and gas) is below the level required by a growing economy; the state, mostly unwittingly, has placed many hurdles that entrepreneurs must cross; and rampant corruption increases the cost of business transactions. My guess is that in Pakistans case the incremental capital ratio is of the order of four. This means that the country must invest at least four per cent of the gross domestic product to produce one per cent increase in domestic output. For the economy to grow at between 7- 8 per cent a year, it must invest between 28 and 32 per cent of the GDP. This is more nearly twice the current rate. This could happen other countries do it, India has 13 Management Accountant, Jul-Aug 2011

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surpassed this level in recent years but it will need a great deal of effort. According to Pakistan Economic Survey, 2009-10, the average rate of investment in the five year period between 2004 and 2008 was 18.9 per cent. It was higher in the earlier years but declined in recent times. About three quarters of the investment was financed by domestic savings, the remaining one-quarter was provided for by foreign savings which includes external assistance. Without foreign aid, even the low level of effort being made currently to generate growth would become difficult. To raise it to the levels needed would be virtually impossible without sizeable foreign capital flows, including foreign assistance. If we look at external accounts, the most interesting and unexpected development in recent years is the sharp rise in the level of remittances. In March this year, the flow of capital from this source increased to $1 billion. If this volume is sustained, an amount of $12 billion would be received this financial year. It is not clear why the remittances are increasing when there is so much uncertainty concerning Pakistans economic future. There must also be a negative impact on the earnings of the members of the diaspora as a result of the economic slowdown in countries where these people are located. Given this, one would expect a decline in the level of remittances rather than an increase. However, this is not to suggest that the policymakers should not seek to become self-sufficient and aim to generate domestic resources needed for financing development. But this can only happen if both the people and the ruling establishment are prepared to reduce the level of current consumption in favour of

larger amount of savings. The citizenry must also be prepared to pay a larger share of its income to the government as tax. At this time the people dont seem to be prepared to that and the government lacks the political will to collect a larger share of national income as tax. What is clear is that to climb out of the current economic slump and to put the economy on a trajectory of growth on which the neighbouring countries are moving, the rate of investment need to be significantly raised. The additional resources needed for that to happen will have to come from the outside. Even with a concerted effort by the government and display of political will that the present set of rulers seem to lack, the transition to a higher growth path will have to be financed from abroad. The talk of dispensing with external capital flow will remain just that talk by politicians unless they can come up with a credible plan for increasing domestic savings and tax-to-GDP ratio. This brings me back to the statement by the Chief Minister of Punjab. If he and his government are serious about reducing if not altogether eliminating their provinces dependence on external capital flows that come in the form of assistance they should take advantage of the enormous opportunities that have opened up as result of the adoption of the 18th amendment to the constitution. The amended constitution has not only transferred new functions to the provinces, it has also given them the authority to mobilise resources from within their borders. Up until now, the provinces have relied on federal transfers for more than 90 per cent of their expenditures. This proportion needs to decline. Only if that were to happen, will Punjab be able to wean itself away from external crutches?

74 Percent think Pakistan Can Survive without IMF: Survey

Almost three fourth or 74 percent of all Pakistanis believe that Pakistan can survive without taking loans from the International Monetary Fund, a survey revealed. Gallup Pakistan, the Pakistani affiliate of Gallup International, carried out the survey earlier this month. It took a sample of 2,754 men and women in rural and urban areas of all four provinces of the country. Around 25 percent of the respondents said taking loan was essential for Pakistans survival and one percent remained mum on the issue. A balance of payment crisis compelled Pakistan to seek $11.3 billion IMF loan in 2008. Strings attached with the loan invited harsh criticism from the political parties and business groups. The three-point reform agenda requires implementation of reformed sales tax, reduction in budget deficit and end to government subsidies. While several politicians and associations censure IMF conditions, they remain clueless on what alternatives the country has in store to support the ailing economy. Daily The News

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IMF Members Vow to Confront Crisis, Prevent Escalation

IMF Survey online

etermined to prevent the global economy worsening further and plunging into stagnation, IMF members vowed collectively to do whatever it takes to tackle a precarious situation and restore both confidence and financial stability, Singapore Finance Minister Tharman Shanmugaratnam said. Although the epicenter of the current instability was in the euro area, the world faced a combination of financial risks with a weakening global economy, and contributing to that is a problem of a lack of confidence, in particular, a lack of confidence in the credibility of policy actions to arrest the crisis, said Tharman, who is chairman of the IMFs main policy-setting body, known as the IMFC. We face a confluence of sovereign debt and banking risks, with the epicenter of that being the euro area. But it is underpinned and complicated by the fact that we also face a weakening global economy, especially in the advanced economies, including the United States, and there are signs of that already having effects in the rest of the world, Tharman told reporters. IMF Managing Director Christine Lagarde said she was struck by the common recognition and shared diagnosis of the problems, and the determination to act decisively. There was no denial, no finger pointing, it was about recognition and support. She stressed that IMF members needed to move more quickly to officially approve previously agreed changes in IMF quotas and representation that would give greater say in running the institution to dynamic emerging markets.

Rising Risks
The annual meetings have been dominated by market nervousness about difficulties in Europe over sovereign debt and banking risks. Financial stability risks have risen sharply in recent months, as slower economic growth, market turbulence in Europe, and the credit downgrade of the United States have weighed on the global financial system, according to the IMFs latest Global Financial Stability Report, released ahead of the meetings. The IMF presented a Consolidated Multilateral Surveillance Report (CMSR), the first time that it pulled together all its work on surveillance and global prospects. The path to recovery has narrowed, but the path is still open, if action is taken now, the report said. Countries must adopt comprehensive action across all policy levers, and implement them in a globally-coordinated way. This is what is needed to secure strong, sustainable, and balanced growth.

Advanced Economies at Center of Response

The International Monetary and Financial Committee (IMFC), which represents the Funds 187 member countries, said in a communiqu that the global economy had entered a dangerous phase, calling for exceptional vigilance, coordination, and readiness to take bold action from members and the IMF alike. We are encouraged by the determination of our euro-area colleagues to do what is needed to resolve the euro-area crisis. We welcome that the IMF stands ready to strongly support this effort as part of its global role, it said. Advanced economies were at the core of an effective resolution of current global stresses. The strategy is to restore sustainable public finances while ensuring continued economic recovery, it said. Critical is implementation by the euro area of a July 21 decision to increase the flexibility of the European Financial Stability Facility, maximizing its impact, and improve euro-area crisis management and governance. Lagarde, attending her first IMF-World Bank Annual Meetings since becoming Managing Director last July, said the key to resolving the current difficulties in Europe, and particularly the Greek crisis, was implementation, implementation, implementation. She presented an IMF action plan to help build up the worlds defenses and buttress stability in the face of flagging global growth.

Pledge to Act Decisively

Tharman said members were prepared both to confront the current crisis and to take the medium-term steps needed for fiscal and structural reforms to put the world on a firmer footing. What we know is that no-one is going to be immune from problems in any one part of the world. Problems of the euro area in particular are problems that will affect all of us. We are not a decoupled world, he added. Lagarde said the world was at a critical juncture, but a lot had been done to tackle major problems, including improved financial regulation, better crisis management, tighter governance of the euro area, and strengthening bank capital. So we are half way there. It is a question of pushing hard to get to the other siden

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A Leadership Role for Asia in Reshaping the PostCrisis Global Economy

By Dominique Strauss-Kahn,
Former Managing Director of the International Monetary Fund

e find ourselves at a pivotal moment in history. The last two years have revealed deep fissures in the global economic and financial framework, making it abundantly clear that the world of tomorrow cannot achieve long-term success based on the rules of yesterday. A fundamental reset is neededacross economic sectors, and across economic regions. We now have a historic opportunity to lay the foundations of a safer and more stable economic and financial framework. In my address today, I wish to explore some of the changes needed to achieve this objective. I will focus on three priorities in particular: achieving a healthier balance of demand across countries; strengthening the international monetary system; and managing better the risks posed by financial institutions. Achieving these will depend in large part on how well countries work together. In this regard, I am greatly encouraged by the emergence of a more inclusive, and thus stronger, global governance framework. I believe that Asia should play a leadership role in guiding the global economy to a new, more sustainable path for growth. This is not only appropriate, given Asias economic weight in the world, but also necessary, since Asia is such an important part of the solution. And so I will begin my remarks with some observations on the opportunities and challenges that Asia faces as we move into this new, post-global crisis era.

Asias GDP growth to pick up to 5 percent next year, compared to only 3 percent for the global economy. But to ensure continued success for generations to come, Asia will need to adapt to the new challenges presented by the post-globalcrisis economy. This imperative is widely recognized by Asian policy makers, who are moving rapidly to identify the key elements of a new developmental model that can deliver sustained economic growth. In particular, they realize that because there are limits to the pace of export growth, domestic and regional demand will need to play an increasingly important role in underpinning Asias growth. Long-term success will also depend critically on Asias active participation in international efforts to build a stronger global economy. As Asias economies have risen in global stature, so too has their voice on the international stage. At the G-20, Asia is represented by six countries. And at the IMF, Asias quota is rising as our governance reforms move ahead, bringing the regions economic voice in line with its weight in the global economy. Now is the time for Asia to use its stronger voice to contribute to global efforts to reshape the economic and financial landscape. What is the global context facing Asia now? While I am hopeful that the global economy has turned the corner, the recovery remains fragile. Policy makers should therefore keep supportive measures in place until a recovery is firmly established and conditions for unemployment to recede are in place. In some emerging markets, including a few in Asia, the recovery is further along, and crisis support policies may need to be unwound sooner rather than later. But in other regional economies, where the recovery is less firmly established, policy stimulus should be maintained for longer. Regardless of the extent of economic recovery, it makes sense for policy makers in all countries to start planning their exit strategies now. This applies to monetary policy, fiscal policy, and financial sector support. Such early planning will help the eventual unwinding of exit policies and ease the transition to more normal economic conditions. In economies that face serious concerns about fiscal sustainability, it will be particularly important to identify the longer-term reforms needed for eventual fiscal consolidation. These concerns are greatest in the advanced G-20 economies, where gross public debt is forecast to reach an average of 118 percent of GDP in

I. Asias Challenges and Opportunities in the Post-Global Crisis Era

Over the last decade, Asia has become an even bigger player on the economic world stage. Thanks to sound macroeconomic management and far-reaching structural reforms, growth over the last ten years has averaged a remarkable 6 percent per year, raising Asias share in the global economy to about one third. Rapid economic growth has boosted living standards and lifted millions out of poverty. The strength of Asias economies has helped them weather the global financial crisis, and today the region is leading the world into economic recovery. Thanks to strong fundamentals and quick and forceful policy responses to the crisis, Asia has performed considerably better than other regions of the worldand has thus played an important role in supporting the global recovery. We expect

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2014. Fiscal reforms that advance consolidation but do not slow the recoveryfor example, entitlement reform and strengthening fiscal frameworksshould be implemented now. The resurgence of capital flows to emerging markets, including several in Asia, is presenting policy challenges. This resurgence reflects the favorable outlook for the region, but also a renewed appetite for higher-risk assets as financial conditions normalize. While capital inflows are generally beneficial, they can raise risks of rapid and potentially destabilizing movements of currencies and asset prices. Policy makers have several tools to mitigate the effects of these inflows. They include exchange rate appreciation, tighter fiscal policy, and, where appropriate, lower interest rates. In addition, macro-prudential instruments can limit the risk of asset price bubbles. Market-based controls on capital inflows can help reduce the volatility of such flows. But these measures are costly and tend to lose effectiveness over time. A final point here. A particular challenge for all of us, particularly the externally-oriented Asian economies, is the risk of protectionism with unemployment still rising in the advanced economies. As we go forward, we must all work together to contain this threat and its potentially damaging effects on growth.

I am therefore greatly encouraged by the central importance that the G-20 has given this issue. At their Pittsburgh summit, the leaders of the G-20 adopted a Framework for Strong, Sustainable, and Balanced Growth, which sets out a mutual assessment of policies and their implications for global growth. This shows commitment at the highest political level to ensure that global imbalances are addressedand also reflects a shared understanding that all nations must do their part to secure strong, sustainable and balanced growth going forward. As requested by the G-20, the IMF will lend analytical support to this effort, contributing our deep experience with cross-country analysis and policy assessment. Now, what can be done to rebalance global demand in a lasting way? In economies that have run large current account deficits, national saving needs to increase. In many of these economies, including the United States, fiscal consolidation must take priority. And in those that have experienced asset price busts, financial sector repair will be essential for a lasting recovery. In economies that have run large current account surpluses, domestic demand needs to be stronger. In euro area economies and Japan, competition in product and labor markets should be increased. What about emerging Asia? Rebalancing in these countries will imply increasing domestic demandinvestment in most countries, but in China notably, consumption. I would like to elaborate on the implications for Asia. But at the outset, let me emphasize that openness must remain an essential element of Asias growth model. The regions strong outward orientation, as reflected in the high ratio of trade and financial flows to GDP, has been a key factor in its remarkable economic performance. Singapore is a good example of the benefits of openness. Its economy is extremely opengross capital flows are roughly the same as GDP, while exports and imports together account for about four time GDP. This openness, combined with pragmatic macroeconomic management, structural reforms, and a businessfriendly environment, has been a cornerstone of Singapores economic success, raising real income per capita five-fold in a generation. Rebalancing therefore does not mean that Asia should become inward looking and reduce trade. Rather, it means reinvigorating domestic demand and boosting intraregional trade through structural reforms aimed at boosting rates of return for investments in domestically-oriented sectors and removing impediments and bottlenecks to domestic spending. Such a recalibration of Asias growth model is very much in the regions self-interest. In particular, it would reduce the regions dependence on demand from outside Asia. With some notable exceptions, including China and India, investment in Asia has shown broad-based weakness during the last ten years. At the same time, however, Asia has significant long-term development needs. Governments in the region should therefore step up their public investment programs, where there is fiscal space to do so. They should also accelerate efforts to create a regulatory environment that provides the right incentives for pri-

II. Priorities for Reshaping the Post-Global Crisis World

I would now like to discuss three important priorities for reshaping the post-global crisis economyand the role for Asia in meeting them. A. Global Rebalancing The first priority is to achieve a more stable distribution of demand across the world. As you all know, global imbalances widened significantly in the run-up to the crisis. By this I mean that current account deficits in some countries, and current account surpluses in others, had become very large. Now imbalances are not necessarily bad. They may reflect differences across countries in the rate of return on investment, or difference in the degree of risk or liquidity of different assets. But there are several reasons why imbalances can be bad. Large imbalances may reflect domestic problems or distortions, which could lead to potentially painful adjustment problems over time. They could result from problems with the international monetary system and exchange rate regimes, which could cause potentially systemic problems later on. In the IMFs view, a large part of the imbalances before the recent crisis reflected such problems and distortions. Addressing these remains essential for reducing imbalances. And in fact, while global imbalances have declined during the crisis, they remain large and could widen again as the global economy normalizes. Thus, resolving this issue is essential for securing a sustained global recovery.

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vate investment, including those related to public-private partnerships. Investing in infrastructure holds tremendous promise. While Asia has some of the most modern infrastructure in the worldas we can see by looking around Singaporethere are still large gaps in transport, energy and communications. Closing these gaps will require a lot of resourcesthe ADB, for example, estimates that Asia Pacific countries need to invest about $8 trillion over the next decade. Such investment would not only boost productive potential, but would also help in the fight against poverty, by improving access to basic services such as electricity and clean water. Investing in education also remains a priority in many Asian countries, and could help alleviate the shortage of skills that constrains investment in some industries. And finally, investment in low-carbon, or green growth would also be worthwhile. Technological innovation is key to managing climate change at a reasonable cost. And innovation in Asia is already making major contributions. In the case of China, with its large external surplus, the government is committed to boosting private consumption as the way to rebalance its economy. I agree that this is the right way forward. Improving social policiesparticularly healthcare, pensions, and educationis needed to make more funds available for consumption. Developing financial markets to ensure a better allocation of capital, providing saving vehicles that raise household income, and expanding the availability of insurance products would also help. To free up resources that have become tied up in rising corporate savings, corporate governance should be strengthened. And to ensure that these structural boosts to consumption do not lead to overheating, policy makers will need to continue keeping a close watch on credit and other asset markets. Let me make one final observation on rebalancing, which relates to exchange rates. For the world to succeed in its rebalancing efforts, exchange rates must be allowed to reflect medium-run fundamentals. Based on our analysis, many Asian currencies are still undervalued related to those of their major trading partners, while the euro is somewhat overvalued on this basis. So long as this remains the case, the price signals sent about the returns from tradable goods compared to those from nontradable goods will continue to be skewedthus delaying the rebalancing across countries, and more specifically the necessary recalibration of Asias growth model. In my view, the region should not resist a gradual appreciation of its exchange rates, which I consider an important prerequisite for long-term rebalancing. B. Strengthening the International Monetary System Moving now to the second priority, I see strengthening the international monetary system as an important complement to demand rebalancing. The recent experience has demonstrated that fast-paced and hard-hitting financial crises can lead to an extraordinarily large demand for official resources. In some countries, such resources are needed to address underlying balance of payments problems. And in others, such demand may purely result from global liquidity shortages that have no relation at all to domestic conditions. For countries that have been building up precautionary reserves as a

form of self-insurance, there have been costsprimarily the missed opportunity to invest in domestic projects with a high social rate of return. For all these reasons, I see a clear need for global financial insurance. I believe that the IMF has the potential to serve as an effective and reliable provider of such insurance, as long as we are able to reduceand at the end get rid ofthe stigma associated with the IMF in some parts of the world, while dealing with the moral hazard problem. In doing so, we can also provide a framework for harmonizing global and regional safety nets. The international community has already given a strong endorsement of the IMF as the key institution for meeting the financial needs of our members. Our lending resources have been tripled, to $750 billionincluding about $172 billion in contributions from our Asian members. This has allowed us to provide critical financing to a broad array of countries hit by the crisis. However, to serve as a truly dependable global lender of last resort, the Fund will need considerably greater resources. But it is not just the amount of our resources that mattersit is also how we deploy them. This is why we have overhauled our general lending framework to make it better suited to country needs. An important component has been streamlining conditions attached to loans. We have also introduced the Flexible Credit Line, the socalled FCL, through which the IMF now offers a pre-emptive insurance facilitywithout any conditionalityfor members with strong policies. We continue to seek ways for our resources to better meet our members needs. One possibility is to build on the success of the FCL and enhance predictability of access to IMF crisis financing. A specific option here would be to make consideration of FCL eligibility an automatic part of regular surveillance. And for members that do not qualify for the FCL, we could consider designing alternative contingent instruments that also have an element of automaticity. But even more important than our resources and our financing modalities will be the confidenceand the trustof our member countries. Without these, we will be hard pressed to succeed in our efforts to strengthen the international monetary system. Addressing valid concerns about our governance is a critical priority in this regard. How can Asia contribute to strengthening the international monetary system? Asias regional reserve pool already plays an important role in the provision of global financial insurance. With $120 billion in pledged reserves from its Asian members, the Chiang Mai Initiative provides an important complement to IMF financing. We should think about ways in which such these regional resourcesas well as those in other regionscould be combined with our FCL to make this instrument even more effective. C. Creating a safer and more stable financial system Let me now address a third priority, namely to make the financial system safer and more stable. The crisis has revealed weaknesses in the regulatory and supervisory frameworks in many countries, failures in risk management systems of large financial institutions, and a breakdown in market discipline. Reforms are

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needed on many fronts to address these weaknesses, so that we can protect the financial system against future crisis. While I have been encouraged by the international reform effort, I am very concerned that time is running out to adopt the sweeping changes needed to truly reshape the global financial system. As financial markets recover and banks become profitable again, memories of the crisis have already begun to faderaising the risk that the political momentum needed to push through significant reforms will dissipate. Markets already seem to be sensing this, and a worrying return to business as usual may already be taking place in financial institutions. We must make every effort to ensure that we do not lose our focus or our determination to implement deep and lasting reforms. What is the relevance of all this for Asia? Broadly speaking, Asias financial systems and institutions are facing considerably less pressure for financial restructuring and regulatory reform than those at the epicenter of the crisis. Thanks in part to the significant structural changes made in Asias financial sectors following the 1997/98 crisis, the regions financial systems proved resilient to the most recent crisis. The fact that corporates were relatively low leveraged was also a major factor. But Asia must not let down its guard, as new risks will continue to emerge within and across borders. It will be essential to maintain a strong supervisory regime going forward, including by building up risk assessment capabilities and adopting a macro-prudential approach to supervision. Regional policy makers should also ensure that as new global standards emerge, their regulatory and supervisory frameworks are made consistent with new norms. In addition, they should play an active role in international efforts to design a coherent framework for cross-border crisis management. I also hope that Asia does not draw the wrong lesson from the crisisnamely that financial development inevitably causes crises, and therefore should be put on the back burner. I agree with Minister Tharman, who noted recently that the basic direction of travel in the emerging world has to be towards continued, gradual opening up and further diversification of their financial systems. Moving ahead with the development of Asias financial markets, and in particular its capital markets, will be critical for making the best use of the regions significant savings in support of domestic demand.

Governance reforms at the IMF are an important part of creating a more inclusive, and hence stronger, global governance framework. Under the quota reforms agreed in 2008, underrepresented countries in Asia stand to gain nearly 3 percentage points in quota share, raising Asias overall IMF quota to about 19 percent. The region is likely to gain even more under the recent agreement to shift 5 percent of quotas toward dynamic emerging markets and developing countries. I am hopeful that this shift will be completed by early 2011. We look forward to our Asian members support as we seek to meet the new responsibilities given to the Fund at our Annual Meetings in Istanbul. We will be reviewing our mandate, such that it is sufficiently broad to encompass the whole range of macroeconomic and financial sector policies that affect global stability. We will also be assessing how the IMF could provide better insurance against volatile capital flows. As I noted earlier, weve been asked to provide support the G-20s mutual assessment of policies. We have also been tasked with assessing options for how the financial sector could help shoulder the costs of government interventions to repair the banking system. We in turn seek to deepen our engagement with Asia. We must strengthen our channels for hearing views from the region. This morning, for example, we held the inaugural meeting of a new advisory group of eminent persons from various Asian countries. We look to this group to provide insights into developing issues and priorities in Asia, and how the IMF can best help in meeting those challenges. We also seek ways to strengthen our links with regional groups, such as ASEAN and EMEAP, which have become important fora for discussing near-term challenges and devising longer-term development strategies for Asia. Finally, as I discussed earlier, the redesign of our lending facilities is allowing us to match the conditions in borrowing countries better. New IMF-supported programs in Sri Lanka and Mongolia are providing critical financing to address balance of payments pressures.

IV. Closing thoughts

We are meeting at a truly momentous time in historywith the opportunity to make momentous decisions that will benefit many generations to come. A changed world order is upon usas Minister Mentor Lee Kuan Yew said a few days ago in Washington. A change most certainly for the better, with a more inclusiveand thus strongersystem of global governance. For Asia, a change that brings tremendous opportunities to contribute to the reshaping of the post-crisis global economyand indeed, carries a responsibility to help craft the global solutions needed to secure strong and sustainable growth for the long term. And for the IMF, a change that will allow us to become more legitimate in the eyes of our members, and hence more effective. Let us not waste this opportunity to build a better tomorrow Mr. Dominique Strauss-Kahn, Managing Director of the International Monetary Fund delivered this lecture at Monetary Authority of Singapore on November 13, 2009

III. A New Global Governance Framework

Let me turn now to the importance of strengthening international collaboration. The emergence of a new global governance framework has lent critical support to international efforts to tackle the crisis and secure a sustainable recovery. With the G-20 taking on a central role in fostering the international policy dialogue and in advancing reform initiatives, we now have a much broader set of countries sitting at the decision-making table. And thanks to Asias strong representation at the G-20, the region has a solid platform from which to make valuable contributions to reshaping the global financial architecture. Next year, Asia will be hosting the G-20, with a leaders summit planned for November in Korea. The worlds attention will be very much focused on Asiawith high expectations for the region to lead the global economy into a new period of sustained and strong growth.

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Focus

IMF: What should Pakistan Do?

By Anjum Ibrahim

nformed sources in the Ministry of Finance have begun referring to the possibility of the government allowing the International Monetary Fund's (IMF) Stand-By Arrangement (SBA), stalled since May 2010, to lapse and instead seek a new assistance package from the Fund of around 3.5 to 5 billion dollars. The question is if this is good thinking? The remaining amount of the SBA is around 3.2 billion dollars so first off one would be compelled to assume that seeking up to 5 billion dollars maybe premised on either a sharp deterioration in foreign exchange reserves, which is simply not the case at present, or seeking a higher amount to allow the government considerable latitude in negotiations with the Fund. This, if reflective of the economic team's thinking, is inappropriate to put it mildly for three major reasons. First, the IMF team is going to play the numbers game to its own satisfaction. Or, in other words, the federal government would have to provide the IMF an entire set of numbers that satisfy the team before any loan agreement is signed. In case of the IMF dissatisfaction with numbers, either in terms of revenue generation or in terms of expenditure, the deal is unlikely to go through. The recent major faux pas by the Federal Board of Revenue (FBR) with respect to net collections on the last day of fiscal year 2010-11 has, without doubt, raised the level of IMF mistrust with the figures estimated by the economic team. This, no doubt, would be a key element in determining the success of the talks whenever the government submits targets/claims to the Fund as a prerequisite to begin negotiations on either a new package or indeed to reactivate the stalled SBA. Second, the stalled SBA is a reflection of the government's failure to comply with the agreed programme conditions. That conditions are definitely going to be considerably harsher in the case of a new programme stands to reason. And given the IMF mistrust, it is very likely that the IMF team may focus on a large number of preprogramme conditions, whereby implementation would be prior to the loan agreement and release of a tranche. And finally, with the economic meltdown in several Eurozone countries leading to a growing number of economies with unsustainable budget deficits seeking assistance from the IMF global resources to bail out the Pakistan economy once again, given major governance issues both in terms of tax collections and expenditure, is unlikely. Additionally the US had played a critical role in successfully persuading the Fund to support Pakistan during the last three fiscal years, however, with strained relations it is unlikely that the US will use its clout in the IMF to ensure support for Pakistan. But, the economic team may well argue, Pakistan is entitled to IMF assistance, which is premised on our quota. According to the IMF website Pakistan's quota is 1,033.7 billion SDRs (0.43 percent of total) with one dollar equivalent to 0.67734 SDR. There is therefore no deterrent for Pakistan to receive more assistance from the Fund based solely on its quota. The deterrent, however, is a growing mistrust between what the Pakistan economic team promises -

promises/commitments as incorporated in the policy documents, including the budget which have consistently proximated towards IMF conditions - and what it has delivered and by that logic is able or willing to deliver in the future. So where does economic salvation lie for Pakistan? If the economic managers are going to seek yet another package, thereby allowing the existing SBA to lapse, then one would urge the economic team to place the draft agreement with the Fund in parliament. It is critical that any future IMF programme be debated in parliament and voted on, so that the team can legitimately inform the Fund staff that the country's entire parliament is behind it. Short of that it is now clear that the Fund staff are unwilling to accept promises/commitments especially those contained in the budget for 2011-12 because of the following: (i) the FBR Chairman, for at best not verifying that the figures he presented in his press conference were gross and not net and, at worst, being complicit in overstating revenue figures in an attempt to appease the IMF concerns that revenue generation has been better than expected; (ii) inaccurate information on external resources in 201011 as provided in the current year's budget, the prerogative of the Economic Affairs Division; (iii) failure to impose the value-added tax to the extent agreed; and (iv) failure to eliminate the intercircular debt as promised by the Finance Ministry in its Letter of Intent submitted to the IMF. However, in case the economic team opts for the better option namely to stay with the SBA then too it is advisable to lay the details of the SBA loan agreement with the Fund in the parliament. True, the agreement has already been signed and committed to by the government, even though the Finance Minister and the State Bank governor who signed on the dotted line on Pakistan's behalf are long gone, yet if parliament's voting results reveal that those against certain tenets of the remaining conditions of the agreement are in the majority then too the government would be in a stronger position to renegotiate the stalled SBA terms than it is now. Pakistan is a perennial borrower from the Fund and the PPP, the PML (N) as well as military strongmen have all borrowed from the Fund when in government. There is no doubt that the country remains economically fragile due to (i) the tendency of governments (civilian or military) to overburden those already taxed rather than to tax the rich and the influential, (ii) utilities are priced progressively higher rather than government departments/ministries compelled to clear their bills, (iii) current expenditure is never slashed in the event of an unsustainable budget deficit while development expenditure that creates jobs and thereby disseminates wealth is, (iv) accountability remains the prerogative of the centre that continues to be lax in going after the corrupt - be they politicians, bureaucrats or military men; and last but not least (v) mega-scandals are left to the courts to pursue and in case of involvement of government loyalists the investigation that would lead to a guilty verdict is compromised. There is a solution to all these issues however they appear insurmountable because of a complete lack of political willn

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Meritorious Article

Human Governance: Bringing the Meaning of Integrity in the Life of Professional Accountants
By Arfah Salleh, PhD, FCPA, Aziuddin Ahmad, PhD, Universiti Putra Malaysia
This is one of the Articles of Merit, judged as such under Professional Accountants in Business - Articles of Merit Programme 2009, for distinguished contributions to Management Accounting, established by the Professional Accountants in Business Committee (PAIB), (under its former name of FMAC) of IFAC.

ntegrity as a manifestation of ethics and values has been synonymous to the image of the accounting profession. However, corporate events of the last decade have abridged this goodwill so that reputational risk now stands among the risks that the accounting profession faces today. The findings of the International Federation of Accountants (IFAC) 2008 Global Leadership Survey only reaffirm the concern among professional accountants globally of the need to restore stakeholders confidence of the integrity of the profession and its commitment to serve the public interest. We offer some critical thoughts and responses to this issue through questioning the mould of reality and the lens of seeing the model of the world in order to bring back meaning to the profession. Models work well only when their assumptions represent reality.

ing of life itself.1 What was exceptional was their willingness to let go of legacy to the extent of considering even ideas which appeared radical against the then accepted norm. By the end of the 20th Century, earlier defined general scientific tenets had been replaced with a new set of a scientific body of law. The following table summarises some of the fundamentals of todays science.

Table 1: Tenets of science

Classical Cartesian/Newtonian (specific case) The universe is a collection of objects (objects in the universe can stand alone since oneness or interconnectedness is not the underpinning of the universe) Matter is made up of things Einsteinian Quantum (general theory) The universe is a web of relationships (the oneness or interconnectedness of universe is real)

In Search of a New Meaning - The Reality

Einsteins advice in solving a problem is to find solutions from a dimension higher than where the problem was created. By truly living to this adage, the quantum physicists fraternity managed to solve many centuries-old phenomena otherwise unresolved using the laws of classical science following Cartesian-Newtonians four hundred years thinking tradition. A new world view of reality founded upon the interconnectedness and non-separability between subject and object of the universe was arrived at and Newtons law was discovered to be only an approximation of the actual workings of the universe. This unearthing however did not come by without unexpected challenges. For instance, it was almost inconceivable when entangled atoms that were separated were still found to influence one another despite no longer being in physical contact. The reality of this non-locality and non-causal effect phenomenon became a fundamental grounding for further quantum breakthroughs yet, it remained one that Einstein himself could not comprehend as making sense during his life time. While the phenomenal contribution by quantum theorists has made its way to the annals of human civilization, there is much that the accounting fraternity can emulate with respect to the approach that the scientists have adopted towards making meaning in life, both of theirs and others. Evidence abounds in scientific documents of the quantum physicists strong conviction to a higher cause in being meaningful to humankind by questioning the mean-

Matter represents bundles of energy in relationship to each other The world is a clockwork machine The world is a great thought and is objective, hence we count (presence of consciousness) and only what can be measured is subjective, hence we measure what counts We understand things by taking We understand things by looking them apart (reductionism & at the whole (non-reductionism & fragmentation) non-fragmentation) Knowledge is seamless (siloKnowledge comes in pieces (hence silo-thinking is an accepted thinking provides a non-realistic view of the world) norm) Observer and the observed are Observer cannot be separated separated from the observed A phenomenon happens through A phenomenon is non-causal effect and the following principles causal-effect and the following apply: principles apply: o non-linearity o linearity o uncertainty o certainty o indeterminacy o determinable o both/and o either/or o wholism o duality: (wrong/right, good/bad) Only empirical/ observable Experience (including the nonphenomena count towards observable) is data and a source scientific data of scientific knowledge

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Despite the developments in science, social science including accountancy has remained within the domain of the classical Cartesian/Newtonian science foundations, till today. With regard to the accounting profession, the unending incidences of accounting scandals and corporate misdeeds including the current credit crisis has made it imperative for a shift in the paradigm of thinking in order to bring back meaning to the profession. By bringing back meaning, we mean the profession re-actualizing its intended purpose for existence framed against the actual reality of the universe. The etymology of to account as to explain denotes clearly the element of discharging the original duty as a steward or custodian of public trust. It is enhanced public trust that will be able to bring back value in the long-term to the profession for the worth of the accounting profession can only be judged by the party using its services. In order to effectuate sustained ethical behaviour among accountants, it is the motivation for such behaviour that needs to be addressed for human behaviour is only a shadow of their essence.

Figure 1: The Visible Light Band

Questioning the Tradition

On the basis of the tendency to remedy unethical behaviour with more stringent rules and regulations through the corporate governance mechanism, observers cannot be faulted for surmising that the approach has been reactionary and externally driven. Notice how the Sarbannes-Oxley Act came into existence in reaction to Enron? Likewise, more legislation is expected to be imposed to regulate the financial market in response to the credit crisis. It is this lens of viewing the human as controllable through an external mechanism that we posit needs a revisit. Against the backdrop of the likes of Madoff and other cases of degradation of human values, the continued use of the same lens to motivate accounting professionals and to formulate the education model for future professional accountants in discharging their duties to society seriously needs re-examination. Obviously it does no harm to consider solutions from a higher dimension as reminded by Einstein or to actualize real thinking out of the box. The public at large cannot be assumed to have continued faith in the profession if all that can be offered is more of the same thing. But how did such a perception of humans as being motivated by an external influence come into the thinking of accountants in the first place? This has its roots in the same earlier classical CartesianNewtonian science whose laws quantum physics managed to debunk. Modern-day accountancy, being a human discipline is much influenced by the social science thinking of Comte. When Comte first established a new discipline of the human and social science in the mid 19th Century, quantum theory had not made its mark. Although Goethe had begun questioning the fundamentals of classical science in the late 18th Century, the mainstream thinking prevailed especially in light of the successful scientific endeavours which gave rise to the industrial economics. It must however be borne in mind that the scientists community at that time never imposed their way of thinking about the behaviour of atoms on to the social science mindset. Rather, it was the social and human scientists who were obsessed with wanting to be scientific in order to create a sense of respectability and an aura of intellectual respectability. The phenomenon to adopt en-bloc the physical laws for inanimate objects to create science-based laws to explain human

Source: NASA (2009)

behaviour is what scientists termed scientism. Comte meanwhile, introduced positivism as an ideology towards entrenching the essence of the Enlightenment about the positive role of humans in understanding the world phenomenon. Positivism was intended as a human-based religion where the role of spirituality and consciousness was removed. Humans subsequently became social atoms or social animals within the fabric of society. Upholding to the foundation of the universe as being only of the material, scientism and positivism have determined the development of human behavioural theories. Despite quantum theory demonstrating the oneness or interconnectedness and nonlocality of the universe, social scientists and accountants alike continue to model their reality on a fragmentized, causal-effect perspective. Any non-observable phenomenon is to be removed from the knowledge domain due to its non-verifiability. It is an assumption too, that humans, as the observer of a phenomenon in the universe, must be separated from the observed in order to be objective: hence removed of their values lest biasness remains. Following this underpinning, gradually, the human-as-machine model became the keystone to the theory of human behaviour. Humans are viewed as devoid of feelings and emotions or other nonobservable quality, in other words, removed of spirit and dynamism while success in terms of material achievements becomes the yardstick. The progress that ensued the industrial era further rati-

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Table 2: Traditional vs. New Perspectives on Humans

Traditional View Humans are viewed as machines/ social atoms and behave like inanimate objects Humans follow command-control rules and human behaviour is predictable Humans are value-free hence non-biasness can be achieved Humans are viewed as resources similar to other assets Decision-making is about judgment and exclusion Order comes from having structure and conformance Equilibrium is the target New Thinking Humans are sentient being with spirit and consciousness Humans do not conform to command-control rules and human behaviour is not predictable Humans are value-laden/non-value free and cannot achieve non-biasness Humans are viewed as potentials having emergent qualities unique to oneself Decision-making is about perception and making choices Meaning comes from freedom of information and goes beyond conformance It is the edge of chaos that is the target

fied this conveyor-belt thinking of the need for standard operating procedures and a high degree of standardization and control for the purpose of mass production in the name of efficiency and maximization of shareholders value. To emphasize the value-free humans, the non-observable traits of humans became known as the soft side of human skills as opposed to the hard or the main. This is where the reality of the flaws of the lens sets in. While on one hand, humans are to assume machine-like controllable properties in order to achieve efficiency, on the other, humans are expected too, to be ethical through a disclosure culture. But it is a fact that machines are devoid of spirit, and with machines too, any defects could only be known through discovery and not disclosure! The caveat emptor rule that transfers the onus of discovery to the buyer is another impediment to the much sought after transparency and disclosure ethos. So how could this paradox be reconciled? First, we investigate the perception of reality that is founded upon materiality. For this purpose, we offer the following diagram that depicts the spectrum of light demonstrating the proportion between that which is visible and non-visible. The preceding diagram illustrates that the physical eye is only sensitive to a narrow band of light, the visible light between 400 to 700 nanometres (NASA, 2009). This is extremely minuscule compared to the entire electromagnetic spectrum which spans from 106 nanometer which is about the diameter of a hydrogen atom to beyond one hundred kilometres. While the width of the visible light is 300 nanometres, the width of a human hair is in the range of tens to hundreds micrometres meaning that the capacity of the physical sense to observe the material is very limited. Given that the unobserved part or b lind spot is far enormous and is real, despite not being able to be detected by the physical sense, rejecting the nonobservable means that the picture about any phenomenon is incomplete. Imagine making decisions just based on the observable! The universe is not a collection of objects but a web of relationships. Yet, a model of reality typically framed by accountants usu-

ally is about the material only, with the non-material and nonobservable omitted in the name of objectivity. Observable too, became equated with measurable. But should this lens of reality prevail now that quantum theory itself has been proven as a reality of the workings of the universe? Although history shows that until the 20th Century, many of the social science models have worked well, we cannot be certain of the future. In view of the evidence in science establishing that the nonmaterial part makes up more than 95% of the universe (Rosenblum and Kuttner, 2006) and that consciousness is a reality, we strongly call for a change in the mindset of accountants. The blind spot needs to be made visible!

Overcoming the Blind Spot

In cognizance of the fact that the human eye is not capable of seeing radiation with wavelengths outside the visible spectrum, scientists have resorted to using other special apparatus to take up and illuminate the blind spot. Likewise, in the context of accounting, accountants must learn to move on to a different device to address the shortcoming of limiting to only one decision-making tool. Accountants need to appreciate that as humans, they are endowed with three faculties: the sense perception (eye of flesh); the intellection (eye of mind); and contemplation (eye of heart). Steeped in the tradition of materiality and objectivity, accountants tend to overly emphasize the physical sense perception and intellection. To sense the non-material attributes of humans, accountants should move to the use of contemplation or the eye of the heart, given the limitation of the physical eyes of flesh and intellection as the mode of knowing. We illustrate this point through an analogy of the fishermans net designed to catch fish from a lake. A fisherman equipped with a net of 5 cm2 mesh would only be able to capture fish larger than 5 cm in size. Can the fisherman now conclude that the fishes in the lake

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are all larger than 5 cm? After all, it is only this phenomenon that his physical sense perception could confirm. His intuition may say that there are obviously smaller-sized fishes but in the absence of any verifiable evidence, he has to reject this probability. Let us ponder the parallel of the fishermans case and the accountants view of reality. First, accountants, like the fisherman, must recognize that a tool designed for a particular purpose usually would not be able to perform well if not completely failing to perform other tasks it is not meant to. Like the net which is meant to catch fishes rather than extrapolate the size of fishes, the sense perception and intellection faculties are devices to sense and address the material and physical only. Accountants thus are called to find an additional new lens to rectify their inability to view a more complete representation of the bigger picture of the universe. The non-material needs to be included to provide for wholeness of the accountancy world in which ethics and integrity are of primacy. Otherwise, based on logic and reasoning, ethics, values and integrity cannot be among the expected attributes of accountants for these elements cannot be captured by the accountants current material net. Another fundamental underpinning of thinking that accountants need to revisit is the world view of what is means to be human. Given that the development of science has profound impact on human and social sciences, that the tenets of new sciences are now the accepted general rules of science means that accountants should not ignore this established fact. Based on the work of quantum physicists especially of Pauli2 and Stapp (1985; 1995; 2009), the pioneering work of Wheatley (2006), and the earlier thinking of Goethe,3 we share a new perspective of thinking about human and organizations vis--vis the traditional with accountants. It is only with a new thinking order that the challenges and vagaries of the 21st Century knowledge economy can be addressed. It is timely too that accountants move up in their plane of thinking to accept the significance of the non-material and the importance of viewing the interconnectedness of subjects in shaping the world. Likewise, in respect to integrity, we wish to emphasize that integrity is not an object but a relationship between subjects which results in a perception. The lens that we use to develop and nurture integrity, if akin to the 5 cm2 mesh net, then needs to be supplemented, for otherwise, integrity would not emerge. Therefore, until and unless integrity is accepted as a non-material, non-controllable reflection or shadow of the internal or essence of humans, integrity cannot be expected to be part of the accountants trait equation. Integrity is about doing the right thing even when no one is looking. The business world has seen how the efficacy of the current lens which views integrity as one that can be actualized through a governance structure dominated by material reward or deprivation is found to be non-sustainable. The quintessence of integrity as a manifestation of ones values, ethics and governance paradigm needs to be better comprehended by using this new perspective of thinking. In light of professional accountants having a significant role in challenging conventional assumptions of doing business; redefining success; and in encouraging and rewarding the right behaviours among others as identified by IFAC (IFAC, 2009), what could be a more fitting opportunity than to begin by challenging the underpinning of reality itself. It is only when the assumptions of reality are reflected in the model of thinking that the model becomes applicable.

The Bigger Picture of Governance

As far as governance as a mechanism to oversee the conduct of accountants and body corporate is concerned, the issue of it being a rule-based box-ticking device has been much debated. The fact that Enron passed the test of corporate governance reinforces such thinking. But is such belief justified? When governance is presented in the form of a checklist of processes that needs to be adhered to, would it be wrong for the governed to focus on meeting the requirements of performing the processes rather than the spirit of conducting the processes? After all, the source of a noncompliance report is the omission of some procedures identified in the roll. For as long as governance is treated as a process4 rather than a moral compass guiding the internal behaviour of human, the mindset of box-ticking a checklist is hard to be removed. According to Kay (2009), based on his experience, members of the board could become more concerned with finding an answer that would stand up to external challenge as encapsulated by the process rather than finding the right answer. Emphasis on procedure over substance meant that an opportunity to exercise skill and judgment drained away. The danger with process too is that it can never end. There is always someone else who might be consulted, always some additional consideration that might be relevant (Kay, 2009, p.1). So is governance all about process? If good governance is about taking actions in order to actualize accountability at once to the three strands of the self; community and the universe and its people, then governance as a process cannot encapsulate this essence of decision-making. A process-based governance structure cannot but promote a compliance-to- rules mindset. A higher dimension of purpose to behave with rightnessof-action which is internally-driven and self-governed is sorely needed. But for such a phenomenon to take place, the focus on governance cannot remain on the corporation. Although corporation is legally a person, corporation is not a human person with the essence of a sentient being. Corporation itself is without spirit. As a body that is brought into existence through the passing of the rule of law, corporation is to observe the letter of the law. Yet, good governance is about substance, not form and observing the spirit of the law rather than letter only. Therefore, against the backdrop of the discoveries of new sciences where consciousness has gained centrality, it is the humans within the corporation who provide the soul of the corporation are those who need to be governed. The next section, underscores the reason how this human-centric frame of governance which we termed human governance can make meaning and create value and sustainability for the profession.

From Corporate Governance to Human Governance - Towards Value Creation and Sustainability
We believe by now, the reasons to move along the paradigm of thinking into one where its assumptions do reflect the reality, have been established. Just how would human governance bring meaning to the profession and how different is it from corporate governance?

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On the latter, briefly, human governance is an internal, inside-out and values-based conviction to guide the human as the sentient being to behave whereas corporate governance is an external, outside-in rules and regulations to legislate the behaviour of corporation, as a legal person. Human governance looks at the axiology, encompassing the traits of values, religion, belief system, culture, and ethics in order to foster a culture based on trust where human within the organization is viewed as the soul of the organization. The belief is that rightness-of-action by an individual is not about being right according to some codified rules or man-made laws but benchmarked against the primordial and innate nature. Hence, human governance when actualized by professional accountants, allows for the emergence of high ethical values and moral conduct. To act towards upholding public trust through accountability for the self; community and universe would become second nature.

Table 3: Corporate Governance vs. Human Governance

Corporate Governance (For the Legal/Artificial Person) o Discovery o Translucent o Conformance o Caveat emptor o Dead o Symbol o Label o Form o Rule-based o Legal enactments o Rules & compliance Corporate Governance (For the Legal/Artificial Person) o Newtonian classical o Fragmented o Outer-in o Letter of law Human Governance (For the Sentient/Spiritual Being) o Disclosure o Transparent o Beyond conformance o Edico venditor o Emergent o Meaning o Essence o Substance o Principle- & values-based o Innate nature (fitrah) o Good conduct & beyond Human Governance (For the Sentient/Spiritual Being) o compliance o Quantum science o Wholeness o Inner-out o Spirit of law

A human-centric governance framework transcends organization type and structure because the unit of analysis is at the level of the individuals within the organization. Regardless of the work setting, a human-based, internal mechanism of governance will always have human values as its guiding principle. This means that professional accountants will be guided by the same values structure irrespective of the business outfit they are working in. In the presence of this principle-based governance, attempts to design separate governance codes for the corporation, enterprise or public sector become housekeeping. However, the focus of human governance to bring about accountability beyond the self and a work culture beyond compliance means that the best in a professional accountant can be brought out. Likewise, when guided by the conviction to be accountable at once to the self; community and the universe and its people, professional accountants would believe in the need to integrate sustainability into the objective, strategies, management, and definitions of success of their organizations. The need for an external mechanism to enforce sustainability becomes less significant. When behaviour is solely guided by a deep sense for rightness-of-action, the lure of material rewards to compromise values also appears less attractive. It is only with ethical conduct too, that public trust of the accounting profession can be brought back. With public trust, comes public confidence which is translatable into value creation.

characteristics of ethics and moral values are accepted by accountants that a governance structure to address them can be formulated. Any amount of codification of the dos and donts for ethical conduct would be futile in the absence of an internal personal belief system for ethical behaviour. Ethical conduct should be the result of a true conviction which emanates from the heart: it is neither about logical rationality nor only for reason to meet the external requirement. That accountants need to move from the atomistic classical science paradigm of thinking to the quantum physics web of life now becomes a prerequisite. In the image of the larger universe, this means that rather than being obsessed with the planets as the objects for instance, it is the space within the planets that needs attention too. Precisely, this thinking paradigm has led to the discovery of the expansion of the universe over time. When human governance as an internal moral compass is being practiced, integrity can be observed. But because integrity is only a symbol of the inner state of values, in order to encourage integrity, it is the shaping of the internal character that needs to be nurtured. Towards this end, we argue for a holistic approach in tackling integrity, just as the etymology of integrity suggests. Integrity which originates from Middle English integrite and Latin integritas from integer denotes wholeness or completeness. Unlike the current tendency to differentiate and fragmentize between religious and moral values; culture; belief system; and legal codes following the Enlightenment episteme, the way forward to allow for the emergence of integrity is to reintegrate all the components. Integrity must always be taken as the output of the integration of all the above. In short, not only must a professional accountant possess the relevant technical knowledge, he or she must also be able to at once internalize and actualize an internal conduct that promotes integrity. Johnson, in questioning a basic principle of human, wrote

While the adoption of human governance holds much promise for a more sustained ethical behaviour among professional accountants, the issue of how to inculcate human governance remains pressing. We begin by calling for serious recognition of the necessity to view the universe as a web of relationship among its parts and between the parts and the universe whole. If reality remains a collection of objects and observables equated to measurable, then we cannot place non-objects and non-measurable traits like values and ethics into the equation. Moral values for instance cannot be measured but can only be meaningful against or in relation to some frame of reference. Likewise, ethics is a perception that arises out of a relationship in a set of network. It is only when this relational

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that, Integrity without knowledge is weak and useless, and knowledge without integrity is dangerous and dreadful (Johnson, 1759, Ch. 41). And to ensure that integrity becomes the pillar of behaviour, sole reliance on legal codes as the enforcement mechanism has to be reduced. Codes, rules and legislation are merely reminders to complete the integrity wholeness. To facilitate this reintegration, accountants need to get familiar with the descriptive relevant to both the corporate and human governance ethos in moving from a legal person frame of mind to that of the sentient being. We list some of the relevant ones in Table 3. Each descriptive should be seen as forming a continuum between on one end, meeting the legal requirement and the other, as a human person of sentient origin. What is hoped for is that accountants begin to identify the position they are currently in with respect to the spectrum and embark there on, on a journey towards reaching the human governance pinnacle. Since human governance is human-centric and values-based, the journey too is peculiar and special to each individual for it is shaped by ones milieu, much influenced by religion, culture and belief system, among others.

3 4

In the work of Bortoft (1996) For instance, the definition by UNESCAP on good governance states that governance is the process of decisionmaking and the process by which decisions are implemented.

References
Atmanspacher, H. (1996). The hidden side of Wolfgang Pauli: An eminent physicists extraordinary encounter with depth psychology. Journal of Consciousness Studies, 3(2): 112-26 Bortoft, H. (1996). The wholeness of nature: Goethes way of science. Edinburgh: Floris Book IFAC (2008). 2008 IFAC Global Leadership Survey on the accountancy profession Summary of results. IFAC IFAC (2009). IFAC Sustainability Framework. IFAC Johnson, S. (1759). Rasselas. Retrieved 1 August, 2009 from: http://www.wwnorton.com/college/english/nael/noa/pdf/johnson_s.pdf Kay, J. (2009). Box-tickers should not be the ones making decision. Financial Times, 29 April. Retrieved 1 July, 2009 from: http://johnkay.com/in_action/607 NASA (2009). What wavelength goes with a color? Atmospheric Science Data Centre. Retrieved 6 April, 2009 from: http://eosweb.larc.nasa.gov/EDDOCS/Wavelengths_for_Colors.html Rosenblum, B. & Kuttner, F. (2006). Quantum Enigma Physics encounters consciousness. Oxford: Oxford University Press Stapp, H.P. (2009). The role of human being in the quantum universe. World Futures: Journal of General Evolution, 1556-1844, 65(1): 7 18 Stapp, H. (1995). Values and the Quantum Conception of Man (LBL37315) Paper presented at the Unesco Symposium, Tokyo, September Stapp (1985). Conscious and values in the Quantum Universe, Foundations of Physics, 15(1): 35-47 UNESCAP (2003). What is good governance? United Nations Economic and Social Commission for Asia and the Pacific Wheatley, M. (2006). Leadership and the New Science: Discovering order in a chaotic world. 3rd Edition. San Francisco: Berrett-Koehler Publishers.

Conclusion
On the basis of the goodness that human governance could bring to the profession, the way forward is for professional accountants to begin to accept the culture of human governance as the core guiding principle for professional conduct. Despite our conviction in the ability of this values- and principle-based governance to bring back the meaning of integrity in the life of professional accountants, we do not posit for an abandonment of corporate governance. Corporate governance, enterprise governance, public governance or any other governance structure which focuses more on the processes could now play a role as the back stop. Through this approach, a more holistic governance framework will be put in place so that ethical behaviour as originally meant to be in the realm of the accounting profession can be re-actualized to create value and preserve sustainability

End-Notes
1 2 Such as by Schrodinger (1944) in his work titled, What is life?" Such as that cited by Atmanspacher, H. (1996)

Arfah Salleh, PhD, FCPA, Aziuddin Ahmad, PhD, Universiti Putra Malaysia.

Mr. Zahid Anwar, FCMA Climbed the Mount Kilimanjaro

Mr. Zahid Anwer, a Pakistan national born in Multan, a Fellow of Cost and Management Accountant of Pakistan (from Institute of Cost and Management Accountants of Pakistan), who was awarded gold medal in February 2000, and Chartered Accountant from Institute of Chartered Accountants of Pakistan, a member of Adventure Foundation Pakistan, having keen interest in Skiing, Camping and Trekking, Rafting, Scuba Diving and Paragliding, was motivated by Mr. Nazir Sabir, who climbed the Mount Everest, to climb the Mount Kilimanjaro in Tanzania. Mr. Zahid Anwar is the first Pakistani, who had the honour and distinction of climbing the Mount Kilimanjaro (5895 meter high peak, which is also known as UHURU PEAK, one of the seven summits in the world, Africas highest peak and the highest Free Standing Mountain in the world) in May this year. It was also singular honour for him that he hoisted the flag of Pakistan on the top of the Summit. Mr. Zahid Anwar completed this expedition in 06 days by using Coca Cola route and traversed 98 km distance. By doing so, Mr. Zahid Anwar has not only brought a distinction for him as a Pakistani but also promoted soft image of Pakistan in Tanzania.

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Article

Seizing Opportunities, Pursuing Our Goals

By Gran Tidstrm, President IFAC
ince the last edition of IFAC News, IFAC has continued to seize opportunities, speak on behalf of the profession, and partner with other organizations to enhance the relevance and stature of the global accountancy profession. In May, I was personally gratified to be present at the launch of the Pan-African Federation of Accountants (PAFA)/Fdration Panafricaine des Experts-Comptables (FEPEC)a regional organization composed of 37 professional accountancy organizations from 35 countries. The formation of PAFA has been supported by IFAC for a number of years and is a historic event for the accountancy profession, and for Africa. We expect PAFA to play a key role in enhancing collaboration, developing the profession, and supporting emerging economies within Africa. In June, we co-organized a very successful CReCER in Buenos Aires. On the day preceding the event, IFAC organized a meeting with the presidents of the Latin American and Caribbean professional accountancy organizations. It was an extremely productive meeting, and it was gratifying to see how the links between IFAC and the Latin American and Caribbean member bodies have become stronger over the yearsas well as how vibrant the profession is in this region of the world. You can find more details on these events on page 6. Also in June, IFAC submitted the Private Sector Taskforce of Regulated Professions and Industries (PSTF) interim report to the French Ministry of Finance, for consideration by the G20 deputies. The PSTFwhich is comprised of private sector representatives from professions and industries subject to regulation, including accounting, auditing, investment, banking, insurance, and related areasaims to facilitate economic stability in the worlds capital markets. The report, Regulatory Convergence in Financial Professions and Industries, emphasized that international standards are essential for a sound and stable global economy; they provide comparability and consistency for investors, regulators, and market participants, and are a critical issue for capital markets. A final report will be submitted in September 2011. In July, we responded to consultation papers on the IFRS Foundation Trustees Strategy Review and the European Commissions (EC) Green Paper on the EU Corporate Governance Framework. We consider these comment letters to be valuable opportunities for IFAC to raise our profile and the profile of the global accountancy profession, and will continue to respond to consultations where our views are relevant. More details on IFACs responses can be found on page 9. Also in July, we met with the Monitoring Group (MG) to review our progress in addressing the recommendations in the Review of the IFAC ReformsFinal Report. This was our first meeting under new MG chairman Fernando Restoy, and we were pleased that the discussions continued to go well and that the MG expressed satisfaction at the actions we have taken and those we have planned. We are very proud of the improvements IFAC has made, and continues to make, and remain committed to enhancing diversity, transparency, and accountability in the public interest. At this

meeting, we also discussed the ECs signals that it is considering the best way to introduce ISAs into national laws; needless to say, we welcome this consideration. As the year progresses, IFAC continues to spotlight our strategic focus areas, including sovereign debt and public sector finance. Ian Ball, IFAC CEO, has made a number of key speeches on this topic in recent months, and the IPSASB has increased outreach activities and is developing new tools and resources to communicate the value of IPSASs and accrual accounting. We will continue to advocate in this area, as well as to comment on the evolving situation in Europeand its impact on both the public sector and the private sector. Sustainability and integrated reporting also continue to be important strategic issues. Our work with the International Integrated Reporting Committee (IIRC) is progressing, and we have made strides in raising awareness. We expect the IIRC to produce a discussion paper in the third quarter; the paper is intended to demonstrate the links between environmental, social, governance, and financial factors, and lay the foundation for a framework for these factors to be systematically taken into account in reporting and decision making. From stronger alliances with regions of the world, different industries, and other organizations, to the rapidly evolving sovereign debt crisis and the push to sustainabilitythe world, the economy, and our profession will change dramatically in the coming months and years. We must keep pace with this changeindeed, we must lead it. I am confident in IFACs and the professions ability to do son
About the Author: Gran Tidstrm is president of the International Federation of
Accountants (IFAC). Prior to this role, he served as IFAC deputy president (2008-2010). A European representative to IFAC since 2000, he became a member of the IFAC Board in 2003. A highly regarded expert on international and European audit and accounting issues and a frequently requested speaker, Mr. Tidstrm has more than 30 years of experience as a public accountant with PricewaterhouseCoopers in Stockholm, Sweden, where he is a past partner and former chair. Mr. Tidstrm's clients have included many of the largest international companies in Sweden; he has been engaged as an arbitrator and investigator, and has helped restructure major companies. Currently, he is responsible for the audit of Sweden's second largest global company. He was a founder of the European Financial Reporting Advisory Group (EFRAG), the European private sector body that gives European input to the International Accounting Standards Board, evaluates new International Financial Reporting Standards for use in Europe, and recommends endorsement to the European Commission. Mr. Tidstrm served as chair of the EFRAG Supervisory Board (2002-2009). Mr. Tidstrm was also a member and president (2000-2002) of the Council of the Fdration des Experts Comptables Europens, the European accountancy organization. He has been a chair and a member of numerous standard-setting and policy-making bodies for financial reporting, tax, corporate governance, and capital market regulation practices.

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Article

Exploring Acquisitions Through Financial Ratios

By Qaisar Mufti, FCMA

erchant Banks functioning is multi-dimensional. They cater un-bridged gap between supply and demand of investible funds. The banks help enterprises in raising funds and investors to invest their money. In new securities offerings and managing funds, merchant banks play an important role. These are also referred as investments banks. Role of a merchant banker is dynamic in the wake of diverse nature of services offerings. A merchant banker has to devise instruments of financing for commercial propositions in accordance with requirements of his customers. Merchant banks do not accept deposits from public like ordinary commercial banks. Role of merchant banks in equities and debt instruments private placements, market making, mergers, acquisitions and corporate structuring is pervasive. Also acting as underwriters of both listed and non-listed securities, the banks assist individuals, companies, institutions and governments in raising funds. Sales force of the banks call on high-net-worth investors to suggest trading ideas. To fit specific requirements, trading desks in merchant banks price and execute trade, structure new products. Merchant banks operations extend beyond issue management to project and corporate counseling, portfolio management, consultancy on sick units, providing and procuring venture capital, leasing financing, trusteeship for instruments of redeemable capital, arranging international finances etc. At times, as divisions of commercial banks, non-banking financial institutions, financial and corporate consultants, merchant banking activities thrive. A Merchant Bank in USA is subject to Securities & Exchange Commission (SEC) and Financial Industry Regulatory Authority (FINRA) regulations. In Pakistan they are under the discipline of Securities & Exchange Commission of Pakistan (SECP) in terms of Non-Banking Financial Companies Rules and Regulations (NBFIs Rules). In India, Securities & Exchange Board of India (SEBI) regulates these banks. UK has the Securities & Investment Board (SIB), under Financial Services Act, 1986, with wide powers to put in place fair practices on the part of all those engaged in investment or merchant banking business like stock brokers, jobbers, unit trust managers, life insurance agents, pension funds managers and financial consultancy.

In common day to day reference, terms like takeovers, mergers, amalgamations, acquisitions etc. are considered synonyms exchange. Acquisitions and Mergers (AM) involve transfer of an entire undertaking for shares of the transferee company-given in exchange to subsisting shareholders in the ratio of their holding. AM are strategic decisions that can introduce a paradigm shift of business. On rejuvenations of enterprises AM have volumes to tell. They help usher rejuvenation at a pace and volume internal developments would normally not. Of the activities merchant banks get into AM is a core activity. In the melee, as a mater of course, AM appear great on paper. However, real test is after these are put in place, when people from different organizations collaborate to turn the plans into action and finally into results. Value is not created until after the combinations. Due to this, despite pressure for a quick secretive go that surrounds almost all AM decisions, managers of the game, which include consultants and advisers of the exercise, do not make their decisions lightly.

Financial Statements Provide Kick Start

Financial statements present condensed position of a date and summarized operating results for a period. Personal judgment is enshrined in financial statements with conventions in deciding:
l

a particular method or combination of methods to estimate depreciation, depletion, amortization or provision for receivables no longer collectible. compile merchandise inventory figures. choose the method of inventory valuation for purposes of charge to cost. record certain expenditure as capital instead of revenue and vice versa.

l l

Operations presented by financial statements are historical in nature which can hardly be used for analysis of segments and phases of business during the operating period. For an AM exercise relatively deeper information and segmental data, both 31 Management Accountant, July-Aug, 2011

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with regard to financial position and operations would be called for. Financial Ratios are used to compare return relationships. Through these, risk and returns of different entities can be compared by investors and creditors. A merchant bank needs these to make intelligent investment and credit decisions. To gauge feasibility or efficacy of a proposition, merchant banks engrossed in AM exercises apply many tests, based on techniques drawn from different disciplines.

centage through pegging-up percentage allocations for marketing overheads by pushing-up incentives for the marketing force. This process may be to target increase in volume of operating profit. An expert assisting an AM exercise can not afford to ignore state of: production and marketing strategies, changing price levels and fixed and variable costs complexions On profitability and financial health of the enterprise. He can not be oblivious of similar ratios obtaining in other (competitive) business concerns. It is study on this pattern which decides whether sales should be augmented, production pattern reshuffled and capacity should be increased to bring down cost, particularly fixed component of cost, and whether outside financing would be required to push-up level of operations.

Role Financial Ratios Play

Analysis of financial ratios would always be there. The ratios categorized from different angles provide profile of a companys economic properties, its strength and its operating, financial and investment characteristics. These normally are: 1. 2. 3. 4. Activity analysis. Liquidity analysis. Term-debt and solvency analysis. Profitability analysis.

Knowledge gained through accounting ratios is used to the end of: testing efficiency of operations, determining investment value of the enterprise concerned, and deciding whether financial and operating policies, methods or practices should be continued or altered.

The process of evaluation can not possibly be reduced to inflexible arithmetical exercises. Too much reliance on mechanical means may not be good. All ratios or indicators have their limitations. Ratios do not always have something definite to say. Technical analysis may not be effective where capital is small.
In the planning process prices and / or sorts of costs are projected at the desired points with a view to put in place machinery to achieve the targets. Hereinafter are cited some ratios, projection of change in which may be in pursuance with an AM plan. What follows is neither a scientific outline for ratios modification nor enumerated are all the steps under each head. Engaging attention of the AM team, this is listing of ideas for probe under each heading. This scribe is aware that information on a number of points herein below, the AM team may not eventually be able to have.

Inflexible Arithmetical Exercises

The process of evaluation can not possibly be reduced to inflexible arithmetical exercises. Too much reliance on mechanical means may not be good. All ratios or indicators have their limitations. Ratios do not always have something definite to say. Technical analysis may not be effective where capital is small. Accounting ratios and equations do not have to be used in isolation. Judgment will have to be based on judicious discretion taking into account all the relevant factors. Such factors would include quality and integrity of the management, present and prospective competition and yield on a scrip comparable with share of the company being analyzed. Not to be overlooked will be the possibilities of window dressing of accounts being examined.

Gross Profit to Sales

whether service industry, industrial or commercial activity. graph of market share enjoyed by the entity. effect of changes in duties and taxes on gross profit margin. competitive strength of the company and obsolescence. stability of the company - % decline in sales to erode gross profit.

Dose for Change

Going into financial ratios by merchant banks would also be with the view point of exploring their alteration given the identified dose of change after AM. For example, the doers of an AM exercise would consider steps which go to alter the gross profit margin. They could look into reducing the operating profit perArticle 32

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reliance on associated / group companies for business. prospects of increase in gross profit margin. depreciation, depletion and amortization methodology. weightage and segment to sales and gross profit. sensitivity associated with governmental policies. strategic depth of sales revenue. cyclical trends associated with business of the entity.

evaluating impact of: o o decrease in credit sales. increase in credit sales

on financial overheads, cash flows and profit. Profit After Tax Profit to Equity characteristics of shares and instruments of redeemable capital issued: (a). for consideration other than cash, wholly or partly. (b). traded at a premium or discount. (c). option for conversion or otherwise. tax concessions available or existing and time frame for such availability. post re-organizations, reconstructions, amalgamations or changes otherwise in capital structure. current and previous liabilities included in tax computations and tax related contingences. impact of tax in relation to segment-wise profit. profit arising from normal operations and tax shields associated with different income categories. possible changes in accounting policies and their effect on profitability. tax holidays existing or possible and other tax incentives. deferred tax / tax rebates available and availed. claims on equity e.g. conversion of redeemable or preferred capital into ordinary shares, stock options to employees and right options released or to be released to shareholders. prospects for reduction in tax with change in corporate structure or presentation of tax information.

Operating Profit to Sales

sensitivity of marketing overheads in relation to sales. efficacy of subsisting marketing related incentives. trends of administration & marketing overheads ratio to sales. factors leading to variation in marketing expenses, fixed & variable components of marketing expenses.

Net Profit to Sales

spread between operating and net profit margins. percentages of cash and credit sales in total sales and terms for credit sales. impact of increase or decrease of days allowed to pay for sale on credit. amount of interest against short term borrowing charged to operations. net profit if there were no financial overheads.

Financial Overheads as % Sales and Capitalization

purposes for which term loans utilized and such loans in the pipeline. term loans as percentage of fixed assets, cushion existing for further borrowing and impact of such borrowing on profitability. possibilities of utilization of short-term loans as term loans and vice versa. impact of cash dividend in view of the related tax shield missing, particularly when the funds are borrowed for such payment chances of swapping between types / forms of financing. implications of further issue of instruments of redeemable capital / debentures.

Earning Per Share

past years trend. past years trend of other companies in the same business. EPS of companies in general. EPS with all financial overheads written back. EPS with cost of long term borrowings written back. major shareholders of the company, nature of their business and support flowing from them to the company.

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sensitivities associated with earnings comparison with industry averages and impediment with removal of which earning could improve. effective rate of the companys EPS in view of right issues made and stock dividends declared. high & low stock market quotations for shares & debentures of the company and their average prices during last six months. managements perception of risk factors. material contracts in force and in offing. review of capital available additions or surplusage.

characteristics associated with inventories forming current assets of the business: o o o o o o o seasonal availability. perishability. obsolescence. price variation associated with purchase timings. storage cost and delicacies associated with storage. stocks consumption as % of cost & cost as % of sales. do the stocks consist of items of daily use? Whether the stocks are commonly traded and used.

Debt Equity Ratio

industry relevance: o o conventional or non-conventional industry. consumption goods or capital goods relevance. o o o o o

peculiarities with accounts receivables: uncollectibles as % of all receivables booked, position obtaining and trend in the past. cost of receivables collection as % of receivables booked. receivables likely quantum when incentives are associated with sale against cash. availability of finance against receivables from commercial banks and otherwise. possibilities of securitization of receivables.

o production or service industry, fragility associated with production and delivery. o whether licence required for setting-up a project likewise and effective cost of licence. total loans in relation with total assets and assets under lenders lien. sale prospects of assets and their estimated (sale) value in relation with the investment proposed. soundness of lenders, prospects of postponement / rescheduling / restructuring of debts. status of debt servicing. debt service coverage computation and determining debt servicing capacity.

Short-term Investments
possibilities of conversion into spot cash, effectiveness of discount offer for early cash realization and availability of credit against pledge of instruments of investment.

Current Liabilities
forms of availability of short term credit and terms thereof. terms associated with accounts payable, implications of extension in the credit period and availability of credit for payables settlement. installments of term loans and interest forming part of current liabilities: o o debt servicing obligations as % of current liabilities and as % of resources generation. possibilities of down shift in impact of debt servicing

Break Even
break even point in units and value AM. break even point as % of enterprises capacity subsisting and capacity utilized. investment required to lower the fixed cost per unit by: o o increasing capacity operations. up-gradation etc. of production process.

Current Assets complexion of current assets.

About the Author: A former Chairman of ICAP and ICMAP Joint Committee & Development Banker, the author is a corporate & sales tax counsel.

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Article

Economic Crisis:
Causes, Remedial Measures
By Dr. Muhammad Yaqub,
Former Governor of the State Bank of Pakistan

casual review of the speeches and statements of successive government representatives in Pakistan during the last two decades will lead an objective observer to conclude that there has been a consistent pattern of each government criticising the economic management of preceding governments, praising their own policies and programs and complimenting themselves for doing a better job, but in reality adhering to similar short term, and short sighted, approach to economic management with similar results. In the nineties of the last century, several governments changed hand and each criticised economic policies of the previous government but continued similar policies during their own period. Early In the current decade, economic managers of the then government declared the nineties as a lost decade from the point of view of economic management but did not do anything different, or any better, during their time and left the country in a deeper economic crisis. In fact, they could not even understand that Pakistan was still in the Ricardian era of saving/investment deficiency rather than in the Keynesian period of idle capacity and lack of effective demand, and they tried to promote economic growth through consumption liberalisation and cheap money policy, and landed the country in double digit inflation, deeper internal and external debt and ultimate slowdown in economic growth. In the recent period of democratic rule also there has been a widespread criticism of economic management of the previous government but no positive change has been seen in economic policies in this period either. In fact, economic decision-making divorced from considerations of merit has increased recently and the government, instead of launching a long term strategy for acceleration in economic growth with relative price stability, remained trapped in the day to day problems and difficulties, and all the indicators point to a further deterioration in the underlying economic situation of the country.

funds collected to help rehabilitate the disaster affected people and infrastructure, not only eroded further the credibility of the government but also provided an additional proof that bad governance was indeed the main cause of poor economic management of the country.

IMF and World Bank

It is worthwhile to note that IMF and World Bank, which have been involved with the economy more often than not during this entire period, have also exhibited no better pattern in their performance in Pakistan. While diagnosing economic problems in a professional manner, and producing some good analysis of several aspects of the economy of Pakistan, they went along with short term economic policy patchwork undertaken by successive governments, without a long term strategy for economic and social development. In particular, they easily accommodated lapses in policy promises and commitments, particularly in the budgetary and governance areas, mainly with a view to supporting and sustaining even inadequate and collapsing programs to avert a foreign debt default by Pakistan that could engulf them also in a crisis. Endorsement by international financial institutions of inadequate short term policies, and their willingness to assist the authorities in obtaining additional foreign loans based on such policies, provided life support to various governments, and enabled them to remain current in repayment of foreign debt, but landed the country in deeper long term debt difficulties. Moreover, attitude, and nature and severity of conditionality of international financial institutions fluctuated from time to time depending on the attitude and influence of their largest shareholders, who, in turn, were driven by their own changing security and strategic national considerations. Most of the bilateral and multilateral loan inflows arranged under programs with IMF and World Bank dissipated in foreign debt repayments, technical assistance for various purposes, training programs for manpower abroad, consultancy fees, hiring of national and international experts at expensive rates and leakages through pilferage and corruption. There is no evidence on the ground to show that the large amount of accumulated foreign debt of the country was used productively in building up of the base for export sector, agricultural and industrial development or viable infrastructure projects that could help generate foreign exchange for future repayment of foreign debt. As a result, increasing foreign debt servicing liability, without a corresponding expansion in foreign exchange earning capacity, has en-

Natural Calamities
Superimposed on man-made impediments to full exploitation of the economic potential of the country have been natural disasters, like earthquake and flood, which added to the economic misery of the ordinary people of Pakistan, damaged infrastructure, contributed to budgetary weaknesses, pushed up prices and further jolted the already fragile economy. However, natural disasters are only a small part of the story. In fact, it can be argued that flooding was directly linked with lack of long term economic planning and inability of the top leadership of the country to develop a consensus for water resource management, in particular building of dams. In the case of earthquake, if large foreign aid flows were utilised effectively and honestly, the natural destruction could be turned into an opportunity for economic betterment of the affected region. Instead, mishandling of natural disasters, and reported misuse of

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trapped the country in a vicious circle of more external borrowing and more foreign debt servicing. These multilateral institutions, if they are serious about economic welfare of Pakistan, should change their approach and make a genuine and bold effort to reduce foreign debt burden of the country through concessional rescheduling, and restructuring and write offs, rather than keeping governments afloat through additional lending that enables foreign creditors to continue to get paid on time. For this change to take place in IFIs, the government and people of Pakistan need to first decide and demonstrate determination to move on a self sustaining, and self respecting, path of economic and social development. Simultaneously, and in the context of a comprehensive strategy to reduce foreign debt burden, these institutions should help the Government to implement long term structural reforms in several areas to increase domestic saving rate to a level that can finance a large component of domestic investment requirements. A continuation of the past approach of indiscriminate bilateral and multilateral borrowing, and its ineffective use by Pakistan government, is bound to land the country in a much more serious balance of payment and economic crisis, from which it will find increasingly more difficult to recover.

slow and erratic economic growth, persistently high inflation, extreme poverty of the bulk of the population coexisting with prosperity of a few, deep and rising debt burden, and huge budget deficit. On the face of it, these seem to be problems emanating from diverse sources but in reality these are mainly the product of one factor, and that is poor governance giving birth to mismanagement of public finances which, in turn, has become the mother of all economic ills. It should be clear by now that Pakistan cannot dig itself out of its deep-rooted budgetary problems by continuous reliance on printing of notes by SBP in excess of country's capacity for their noninflationary absorption and/or by continuous accumulation of expensive and ineffectively used external debt by the government. Continuation of such a course will intensify inflationary pressures, plunge the country in a steeper hole of debt trap, accentuate structural problems, impede long-term economic development and socially and politically destabilise the country in a big way. Pakistan desperately needs a clean break from this failed approach, and implementation of policies to place the budget on sound footing is the first order of business for Pakistan. Budgetary measures should include mobilisation of additional revenue resources, severe curtailment of inessential and unproductive government expenditure, and honest and efficient use of development expenditure to facilitate economic development and improve economic wellbeing of the majority of the population. In addition, SBP should implement a prudent monetary policy that is not hostage to the financing needs of the government. The subsequent section of this paper is devoted to an outline of the direction in which fiscal policy, and its twin, monetary policy, must move in actual practice, with only a passing reference to some of the other pressing policy issues.

Good Governance Requirements

Viewed in the historical perspective of Pakistan, or cross section data of developing countries, it appears that an effective economic policy framework cannot be evolved and implemented in the absence of good governance. The first essential requirement for launching a program of sound long term economic management in Pakistan is the emergence and continuation of good governance, and of a competent, stable and sincere government that adheres to the rule of law, promotes social and economic justice, ensures peace and security, adopts austerity measures, strengthens institutional framework, does not raise false hopes and expectations, makes no false promises, tells people the truth about the state of the economy and of the budget to take them into confidence for tough economic policy choices. Narrowing down of the existing trust deficit of the leadership, building up of political consensus on national economic development strategy to be adhered to by every government, strengthening of decaying state institutions and good governance in all its other dimensions can lay the foundations on which the edifice of sound economic management can be built. Whether, and when, foundations of good governance can be created for better economic management is any body's guess. In the last 63 years, the country has seen regression, and not progression, in this area, and no hopeful signs are seen on the horizon. But let there be no doubt that there can be no real breakthrough in economic management of the country without the emergence and solidification of good governance and stable institutional foundation.

Mobilization of Domestic Savings

To have a visible impact on the living standards of the majority of the population within a generation or so, the country needs to have a policy framework to sustain annual rate of growth of 6-8 percent with growth impulses emanating from all the productive sectors of the economy, and fruits of growth being shared by all segments of the society. Economic prerequisite for the achievement of such a high rate of economic growth on a sustained basis is, inter alia, a national investment level of 20-25 percent of GDP. This level of investment must be financed by a gradual increase in real domestic savings complemented by foreign non-debt creating inflows like grants and foreign direct investment. It is the mobilisation of real domestic savings for economic development that can ensure an environment of relative price stability, soundness of the financial and fiscal systems, balance of payment viability, and efficient resource utilisation that increases agricultural yield and improves industrial efficiency. The real long run policy issue, therefore, is as to what can be done to raise the domestic low rate of saving, which in combination with external non-debt creating inflows, can match up with the required rate of investment. Domestic rate of saving in Pakistan is low compared with other developing countries and in relation to investment requirements of the country. In spite of a critical need to raise domestic rate of saving, there has not been enough focus on reviewing the factors for its low and declining rate and developing a long term strategy for

Macroeconomic Problems of Pakistan

Implementation of difficult policy choices, and not their diagnosis, is the real problem of economic management in Pakistan. The main macroeconomic problems of Pakistan are well known to even ordinary citizens and well articulated by professionals. These are:

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raising the rate of national saving. Without a concerted effort to mobilise real domestic savings, the country will not be able to get out of its debt trap, moderate inflationary pressures and achieve the stage of self sustaining growth.

Public Finances and Public Sector Saving

In Pakistan, government has impeded more than facilitated the process of saving, capital formation and economic growth. The consumption expenditures of the federal and provincial governments and public sector enterprises have in the last several years exceeded their revenue with the result that they had to rely on printing of currency notes and foreign borrowings to meet the deficit in the current operations of the government. In addition, the government has relied on borrowing to finance its development expenditure. The consequent fast accumulation of internal and external debt necessitated setting aside an increasing amount of tax revenue for debt servicing, thereby further lowering the prospects of public sector saving. This has entrapped the government, and indeed the country, in a vicious circle of rising debt burden, higher debt service obligations, and widening deficit in current operations of the public sector necessitating more borrowing. True cost of government operations: Instead of facing the budgetary problem squarely, bureaucrats of the Ministry of Finance have been engaged for a long time in statistical manipulations to conceal the true cost of public sector operations and hide the real level of budget deficit and budgetary difficulties from the public and even the top political leadership. Separation of the loss making public sector entities from the federal budget was one such step so that a lower budget deficit could be shown. As a result, perpetual losses and wide deficit in the current operations of public enterprises, separated from the budget, lead to recurrent interagency debt, which, for all practical purposes, should be treated as a part of the budget deficit. Inefficiency, waste, corruption, high administrative cost and price distortion in public sector enterprises have created recurring losses and interagency debt that is repeatedly covered by government-dictated financing by commercial banks at below market rates, with its adverse implications for monetary policy and for the banking system. Such government directed credit subsidizes inefficient public sector enterprises, crowds out the efficient private sector from access to bank credit at reasonable rates, distorts asset side of the balance sheets of commercial banks, and promotes excessive monetary expansion. It is worthwhile to mention that such instructions and coercion of commercial banks by the Federal Ministry of Finance for provision of credit to public sector enterprises violate section 46(B) of SBP Act that specifically states that no government or quasi government body or agency shall issue any directive, directly or indirectly, to any banking company or any other financial institution regulated by the Bank which is inconsistent with the policies, regulations and directives issued by the Bank pursuant to this Act, the Banking Companies Ordinance or any other law in force Similarly, for some time the true cost of government debt servicing was concealed by budget makers by paying, and recording in the budget documents, below market rate of interest on treasury bills held by SBP, and by artificially maintaining a fixed official exchange rate. For example, up to 1991 Ad hoc Treasury bills were forcibly sold to SBP at the annual rate of interest of 0.5 per cent and

to commercial banks at the rate of 6.0 percent. The official exchange rate was kept at an overvalued level for a long time through various devices like the Export Bonus Scheme and quantitative import controls and exchange restrictions, understating the real rupee cost of foreign debt servicing. The true debt servicing burden came to the surface when financial sector reforms were introduced in the nineties, and Treasury bill rates were priced at the market rate, showing in budgetary accounts a higher domestic debt servicing liability at the same level of internal debt. Similarly, exchange rate depreciation, reflecting mainly a sharp rise in inflation in Pakistan relative to its competitor countries, increased burden of rupee cost of external debt servicing at a given level of liabilities in foreign exchange. For some time, the fiscal authorities created confusion by blaming financial sector reforms and devaluation for rising debt servicing. The real situation was that successive governments resorted to reckless external borrowing and their wasteful use and concealed the true cost through interest rate and exchange rate manipulations. Interest rate reforms brought on the books the true cost of domestic borrowing that was kept hidden in the fiscal accounts of the government for a long time. Similarly, the exchange rate depreciation was the consequence, and not the cause, of rising debt servicing liabilities; in other words, exchange rate depreciation reflected the cumulative impact of excessive domestic and foreign borrowing by the government for a long time that fuelled inflationary pressures, eroded the external value of rupee and necessitated devaluation. What financial sector and exchange rate reforms did was to bring out in the open the true cost of government debt that was kept hidden in budget documents through interest rate and exchange rate distortions. It may also be pointed out that higher interest payment to SBP due to financial sector reforms was only a book keeping entry because the consequent higher SBP profits accruing from higher interest payments got transferred back to the Budget or were diverted by the government to other uses. Similarly, a more depreciated exchange rate did increase the rupee cost of debt servicing but at the same time it also generated a larger amount of rupee counterpart of a given amount of new external debt in foreign exchange. To the extent that inflow of new foreign loans exceeded the repayment of external debt the budget was a net beneficiary from the exchange rate depreciation in rupee terms. Nevertheless, it remains true that the rising cost of internal and external debt servicing, as recorded in government budget divorced from inflow in rupee terms of new foreign loans, and transfer of SBP profits to government, combined with high burden of defence expenditure, began to exceed total tax revenue (that failed to keep pace even with nominal GDP) leading to negative saving in the public sector.

Improper use of Privatisation Proceeds

Another budgetary practice that has been used to postpone the inevitable need of mobilising additional revenue resources and controlling wasteful government expenditure is use of privatisation proceeds to finance government expenditure. Even for a household, use of sale proceeds of its silver to meet a high level of recurring expenditure is neither advisable nor sustainable. It is more so in the case of a government or a nation.

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Way back in 1994, SBP had advised the Government that the best use of these proceeds would be to retire debt; it will create more fiscal space for future, divert resources available on a continuous basis from debt servicing to development expenditure, and improve the budgetary and monetary situation and credit rating of the country. SBP had further warned through analysis that the use of rupee counterparts of sale proceeds of assets to finance additional current expenditure or to cover budgeted revenue gaps is similar to that of printing of money to finance excessive government expenditure. The policy of using privatisation proceeds for retirement of most expensive debt was at least partially followed by the governments in the nineties but has been abandoned since then, and these proceeds have been used to meet budget gap, thereby concealing the real Budgetary situation, delaying action to address the underlying budgetary problems, and adding to inflationary pressures.

Fourth, a long term program of a complete overhaul of the revenue and expenditure structure at all levels of government and public corporations would have to be carefully and transparently developed with a consensus by all political parties and stack holders and commitment to undertake reforms regardless which party is in power. A time bound phasing in of structural reforms would be necessary requiring surgical operation in all fiscal areas to generate savings in the public sector at some point in time. Fifth, it is important for the government to overcome the constitutional and other hurdles in the way of introduction of a universal system of income tax that covers all incomes at relatively lower tax rates and that ensures progressivity in effect. Income taxation must be based on universal principle of equal taxation of all at the same income level (horizontal equity) and higher tax payment as a percentage of income at higher income levels (vertical equity). The agriculture and service sectors have so far escaped income tax payments and thus the bulk of the economy is not even covered by income taxation. If federal income tax cannot be extended to agriculture due to constitutional constraints then provincial governments should be made to impose a corresponding agricultural income tax. Sixth, indirect taxes should focus on taxing consumption and promoting savings. The best way to do that would be to introduce a broad based value added tax mainly on consumption items that could gradually become a mass consumption tax covering all consumer goods and all sectors and provinces. This should eliminate the need for several indirect taxes that are selective and discriminatory and distort the price structure and lead to misclassification of transactions. Seventh, tax laws must be simplified; tax administration improved and tax leakages and corruption controlled. Several studies indicate a substantial revenue generation potential of measures to plug the tax loopholes, improve tax administration and reduce the collusion between tax payers and tax collectors that costs heavy revenue loss to the government. An expansion of the tax base and lowering of tax rates and plugging of tax loopholes will go a long way to improve tax collection and also increasing effective tax rates at all levels. Eighth, on the expenditure side, conspicuous consumption of the government and of the upper echelons of the society coexisting with large scale poverty is not only morally offensive, it has its adverse implications for the rate of saving and the rate and quality of economic growth. Austerity must start at the government level not only to reduce inessential government expenditure but also to inculcate saving habits among the people in general. There should be full accountability and transparency in all government expenditures, current expenditures should be severely curtailed and development expenditures properly prioritised and effectively utilised and wasteful use of expensive foreign loans should be stopped. Ninth, the current trend of unlimited appetite to spend of the provinces with no effort at all to mobilise resources needs to be reversed. Provincial revenue base should be expanded and higher expenditure on health, education, provision of basic services and poverty alleviation should be directly linked with mobilisation of resources at the local and provincial levels.

Agenda for Budgetary Reform

It is quite clear that the current state of public finances is very serious and unsustainable, and budgetary problems of the country are deep rooted. Major structural reforms are warranted in accounting and budget- making practices and on both the revenue and expenditure side of the fiscal policy to reduce the burden of the government on national resources and to generate public sector savings. First, restoration of integrity of fiscal statistics and proper consolidation of total budget deficit is of paramount importance for the formulation and implementation of a sound fiscal policy. The first requirement for genuine budgetary reforms is cleaning up of public finance statistics to reflect the true budgetary position by removing window dressing, consolidating accounts at their correct cost, separating transitory revenue from the underlying picture, factoring in the deficit in the operations of public enterprises, and figuring out the true picture of the revenue deficit and of the overall budget deficit inclusive of provincial governments and public enterprises. The true budgetary picture would demonstrate the enormity of the task and the urgency to move on several fronts, and would make it clear that temporary patch work would neither increase public savings nor sustain economic development on a durable basis. Second, there has been a general resistance from powerful lobbying groups to the documentation of the economy as well as lack of serious effort to develop a program for documentation on the part of the tax authorities, and both the tax payers and tax collectors have taken undue advantage from this vacuum. A genuine effort would need to be made for documentation of the economy and improve reporting system to the tax authorities for self-policing and for introduction of checks and balances. Documentation would expand the tax base, reduce tax evasion and improve tax collection. Third, the large underground economy must be dismantled and gradually brought in the tax net. The underground economy has been estimated in the range of 30- 50 percent of the recorded GDP in Pakistan and there are studies that show that it is expanding. Smuggling, black-marketing and tax loopholes need to be effectively dealt with and policies reformed to make the underground activities less attractive.

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Tenth, public sector development program itself should shift its focus from prestige projects to essential infrastructure, better education and skill creation, energy and water resource development and provision of social services that help promote social harmony and economic stability. Eleventh, the deficit implications of the implementation of the latest National Finance Commission Award need to be fully grasped and addressed. While it is a step in the right direction for the strengthening of the Federation, larger resource transfer to provinces must be accompanied by one of the following actions or a combination thereof to limit its impact on the consolidated budget deficit. Either the Federal Government should reduce a corresponding amount of its current expenditure or raise additional resources to compensate this revenue loss at the level of the Federal Government or provinces should generate a surplus in their budgets equivalent to the increase in the deficit of the Federal Government. If neither of these steps is taken, the consolidated budget deficit will go up requiring more internal and external borrowing and printing of notes. Fiscal reforms on the above lines should lead to a gradual emergence and increase in public sector savings, which, supplemented by external grants and selective concessional loans, should gradually reach the level of public sector development program. This is the only way for the public sector to avoid siphoning off private savings and implicit taxation of people through inflation fuelled by printing of excessive notes.

as to have an effective control on the level of reserve money in the hands of the banking sector. If government influences balance sheet of SBP through forced borrowing from it on budgetary considerations, it would tantamount to subordination of reserve money creation and monetary policy to haphazard budgetary requirements. Similarly, it was important to recognise that interest rate was an instrument of monetary policy to be used effectively by SBP for the regulation of private liquidity in the system. Unfortunately, up to early 1990s, by law, and in practice, SBP was administratively and functionally subordinated to the Ministry of Finance, nationalised commercial banks and development finance institutions were being controlled by Pakistan Banking Council, which was an arm of the Ministry, and SBP was not allowed to use instruments of credit control for the private sector without government approval. Excessive public sector borrowing from the banking system remained a major contributory factor in reserve money creation and monetary expansion. Equally importantly, interest rates were not treated as an instrument of monetary policy by fiscal authorities in Pakistan and the government regulated and kept them low in real terms to provide subsidy to its own borrowings at the cost of savers and private sector investors.

Monetary Policy after SBP Autonomy

The negative implications for savings, investment and growth of a monetary policy that was subservient to the financing requirements of the government, and was unable to use interest rates as a major instrument, were recognised in the nineties by the policy circles in Pakistan. Accordingly, SBP was given administrative and functional autonomy, with guarantee of tenure to the Governor and SBP Board of Directors and some influence on the determination of government borrowing from the banking system through legislative reforms in 1994. As these legislative reforms were not adequate to control Federal government borrowing from SBP, SBP Act was amended again by the Parliament in May, 1997. This time the revision was done much more carefully and professionally to ensure that excessive government borrowing from SBP and interest rate suppression on fiscal considerations was stopped completely, and SBP was given explicit authority to have complete control on its own balance sheet and on interest rate policy. Specifically, it was stipulated in section 9A of SBP Act that the Central Board {of SBP} shall, in order to secure monetary stability and soundness of the financial system, formulate monetary and credit policy - and determine, and enforce, in addition to the overall expansion of liquidity, the limit of credit to be extended by the Bank to the Federal Government, Provincial Governments and other agencies of the federal and provincial governments for all purposes. In addition, the scope of Monetary and Fiscal Policies Coordination Board, set up under Section 9 B of SBP Act in 1994, was restricted mainly to reach an agreement on macroeconomic targets of growth, inflation and balance of payment and to co-ordinate fiscal, monetary and exchange rate polices. It was made clear at the end of the same section that the Co-ordination Board shall not take any measure that would adversely affect the autonomy of the State Bank of Pakistan as provided in this Act. Thus, all ambiguities were removed from the SBP Act by 1997 and SBP was given exclusive authority and responsibility for formulation and implementation of a proactive monetary policy with explicit power to determine and enforce government borrowing from

Government, Monetary Expansion And Inflation

It is recognised by all quarters that Pakistan is suffering from a high rate of inflation, and actual inflation is in fact much higher than the officially recorded inflation due to inadequate and outdated method of construction of price indices and their coverage. It is also generally accepted that a high rate of inflation is very harmful for economic and social stability and hurts the process of economic development. It is a regressive form of taxation and worst enemy of financial savings and long term economic growth. It taxes the poor and penalises savers and subsidizes the rich and rewards borrowers, and in the process transfers resources from the poor to the rich and from saving to consumption. As regards the causes of inflation, there may be some difference of opinion on the initiating factors but ultimately inflation is a monetary phenomenon whereby too much money chases too few goods and services. Gottfried Haberler, one of the most renowned economists, had put it more clearly that there is no record in the economic history of the whole world, anywhere or at any time, of a serious and prolonged inflation which has not been accompanied and made possible, if not caused, by a large increase in the quantity of money. Proper regulation of money supply for the containment of inflation is therefore of critical importance. For the convenience of presentation, the causative factors for monetary expansion are usually classified into those emanating from foreign sector, public sector and private sector; in other words, money supply may expand from accumulation of foreign exchange reserves, public sector borrowing of various types from the banking system and extension of credit to the private sector. For regulation of money supply and inflation, it was important that SBP had autonomy to professionally manage its balance sheet so

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SBP by all layers of government and public sector entities. This was a major step forward to enable SBP to control the growth of reserve money and of money supply.

Track Record of Monetary Policy after Autonomy

Immediately following the banking sector reforms of 1994 and 1997, SBP began to formulate and implement an independent monetary policy with a view to containing monetary expansion within limits that would facilitate the achievement of inflation target agreed with the Government. That was achievable only if Federal and provincial governments were to contain government borrowing from SBP within safe limits prescribed by SBP on monetary policy considerations. When governments failed to voluntarily contain their borrowing from SBP, SBP did indeed begin to use the legal authority to limit it. Initially, SBP started restricting borrowing by provincial governments from SBP within the approved limits. When some provinces did not take SBP warnings seriously, the then Prime Minister Benazir Bhutto was informed and Prime Minister extended full support to SBP and, in response to its submission, wrote a letter to the provincial Chief Ministers in 1996 reminding them of SBP's legal powers to dishonour cheques issued by provinces in excess of their SBP approved borrowing limits. When some provinces failed to pay attention to the advice and the warning, SBP did stop payments of defaulting provinces on six different occasions. A beginning was also made by SBP to indicate to the Federal government the amount of borrowing that it could resort to from SBP in the fiscal year 1997-98 based on monetary policy considerations, and the Federal government did begin to adhere to the limit prescribed by SBP. The Monetary and Fiscal Policies Co-ordination Board also began to meet regularly to agree on targets of growth, inflation and external accounts that were used to determine safe limits of monetary expansion by SBP on the basis of a reserve management framework. Similarly, the sale of Government securities to commercial banks began to be based on auctioning conducted by SBP, and cut off rates began to be determined by SBP. SBP also put in place a comprehensive framework of analysis to determine credit requirements of the private sector for the attainment of growth target and to ensure smooth flow of credit to the private sector. The safe limit of government borrowing was residually determined by SBP and communicated to the Government as an input to the scheme of budget financing. Accordingly, by FY199798 all legal, professional and procedural steps were put in place for the conduct of an independent monetary policy. It was a promising beginning and continuation and further refinement of this framework would have changed the direction of budget financing in general and ensured containment of monetary expansion and inflation in particular. However, this promising beginning proved short lived and autonomy in the conduct of monetary policy was in practice abdicated by SBP early in Musharraf era with the result that printing of notes on the instructions of the government was resumed, and has since been continued, and resistance to government interference in monetary and banking affairs was abandoned by SBP in the name of team work.

A casual reading of recent monetary policy statements makes it clear that SBP has by now no control on government borrowing from it and public sector has once again become the main engine of reserve money creation and monetary expansion. Similarly, the government, that had earlier begun to indicate only the volume of periodic borrowing from commercial banks and accept SBP decided cut off rates, seems to have reversed the practice, and the Federal Ministry of Finance has again begun to decide the cut off rates. There is also no evidence of regular quarterly meetings of the Monetary and fiscal Policies Co-ordination Board, for reaching an agreement on inflation, growth and balance of payments targets and for co-ordination of monetary and fiscal policies, which is a legal requirement. Without a limitation on government borrowing from SBP, and consequent loss of control on its balance sheet by SBP, and with no authority to determine cut-off rates for government borrowing from commercial banks, SBP has in practice lost control over interest rate policy, over reserve money and over monetary policy. SBP has gone a step further and delegated its responsibility for the formulation and implementation of credit policy to a Committee, which includes outsiders. By failing to discharge its statutory responsibility and by abdicating its central role to determine and enforce government borrowing from SBP, SBP has become a party to fuelling of high inflation that is being experienced in the country. There have been lame excuses given by some senior SBP officials for this state of affairs, and they have publicly stated that SBP did not have the power to stop the government from borrowing from SBP or from determining its cut off rate, and that a new law was required if it was to be done. Those SBP officials must not have read/understood the revised SBP Act because the fact is that the law was carefully revised on monetary policy considerations in 1997 and it is unambiguous and it is there giving authority to the Central Board of Directors to determine and enforce the limit on borrowing by government from SBP. The law cannot implement itself and, for that matter, any new law will also meet the same fate, if kept merely lined up in the shelves in SBP offices or in its library. In the context of the unwillingness or inability of SBP to enforce the law, let us learn from the experience of other institutions having constitutional or statutory autonomy. Pakistan had long periods of unconstitutional governments not because the Constitution was not there or it was ambiguous but rather because it was not respected and followed in practice, and similarly the superior courts of Pakistan did not exhibit independence till very recently not because their independence was not guaranteed by the Constitution but because there was no will to exercise that independence in practice. In the same way, monetary policy of SBP has been practically subordinated to the fiscal requirements not because there was no law but because there was no respect for the law and/or not enough courage to enforce the law. It may also be kept in view that if the existing provisions of Section 9A and 9B of SBP Act are removed/modified using one pretext or the other, SBP would never be able to get back the statutory authority that it has on books now in the matter of government borrowing from the banking system. Most governments would find it convenient to indirectly and indiscriminately continue to rob people through money creation and inflation rather than to directly tax them through a transparent and fair tax system. It is reported that SBP Act is being amended again to make two changes. First, approval of credit policy will be handed over to a Committee, including outside experts.

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Second, government borrowing from SBP will be linked with tax revenue or some other variable of the budget in a mechanical manner. This is being done in the name of enhancing autonomy of SBP and on the recommendations of some exert or experts from IMF. SBP has enough de jure autonomy and what is needed is de facto autonomy which depends on the personality and professional competence of the governor and the Board and not on further legal changes. These so-called IMF experts, having no experience or knowledge of the socio economic conditions in Pakistan can go off the mark if proper guidance is not available to them from within the country. Linking government borrowing to a fiscal variable and not to the safe limit of monetary expansion derived from monetary policy considerations will make SBP again de jure subservient to the budget. Handing over the core central banking function of formulation of monetary policy to an outside Committee will make SBP Board redundant. Many in SBP may not be aware that the same IMF had fully endorsed the indigenously produced reforms of 1994 and 1997, and in fact made them a prior condition of their standby program. If at all further reforms are to be made, those should relate to the reformation of the composition and qualifications of the Board, and the way it is appointed, and further clarification of the functions of Monetary and Fiscal Co-ordination Board rather than its abolition. Making the SBP Board redundant by renting out its functions to an outside group or enabling the government to automatically borrow from SBP a certain percentage of their revenue receipts or making Prime Minister Chairman of MFPCB will diminish and not enhance SBP autonomy. The fact that such recommendations are made by a so-called legal expert of IMF taken from a developed country does not make them right for Pakistan. What is required is courage to enforce SBP autonomy and not to continue to flirt with the law. Laws are as good as their implementation.

of the saving rate in the country. Added to that is the demonstration effects of conspicuous consumption of the rich and powerful, consumption liberalisation through cheap money policy in this decade, and discouragement of savings by the high rate of inflation and negative real rates of return on most financial savings. If the rate of inflation can be brought down to a moderate level of 4-6 percent a year through appropriate demand management policies, SBP can also use tools at its disposal to gradually improve nominal rates of return on financial savings so as to ensure a positive real rate of return to savers. Some quarters doubt elasticity of savings in relation to the rate of return but it may be noted that the same argument was used for quite some time in the case of agricultural products, and control on agricultural product prices became a vehicle for providing agricultural products at relatively cheap prices to the more vocal urban sector and thereby transfer resources from rural areas to the urban areas through unfavourable terms of trade for the agricultural sector. Similarly, the banking system of Pakistan is currently discouraging financial savings by offering a negative rate of return in real terms and is also instrumental in transfer of income from the poor to the rich. The bulk of banking sector deposits are owned by small savers and a large proportion of loans are taken by the relatively rich people. Negative real rates of return on savings combined with low/negative real rate of interest on borrowings, and a large amount of wilful loan defaults, amount to implicit taxation of the poor and subsidisation of the rich through the banking system. It is important that SBP adopts policy measures to ensure that the banking system gives positive rate of return on savings held in the form of deposits, and thereby rewards rather than retards financial savings.

Interest Spread and Private Sector Saving

Negative real rate of return on financial savings has been accentuated by the recent abnormally high spread between the average deposit rate and the average lending rate of banks, which has inflated the profitability of banks. A large interest spread has been allowed to exist not only at the cost of financial savers but also at the cost of private sector borrowers, who are the main engine of economic growth in the country. SBP has the institutional responsibility and legal authority to bring down this spread within the normal limits obtaining in other countries and on that basis to ensure a higher nominal rate of return on deposits and lower cost of borrowing of the private sector. In the absence of a concerted effort on the part of SBP to ensure positive real rate of return on financial savings, the rate of saving through financial instruments will remain depressed, and whatever savings take place will find their way in real estate, commodities and speculative activities. Moreover, such an interest rate policy would continue to promote inefficiency in resource allocation and hampers long run economic growth.

Private Sector Saving

Simultaneously with generation and expansion of public sector savings, and containment of inflation through a proactive and independent monetary policy, a strategy needs to be adopted to promote private savings that are usually divided between corporate savings and household savings. Corporate savings depend on the efficiency and profitability of the corporations and policy incentives to encourage them to plough back in further investments or keep as retained earnings an increasing share of their profits. A sound investment policy and supportive fiscal, exchange rate and monetary policies, and a promising environment for new investments, are the main instruments that can be used for the promotion of corporate saving and investment. A stable political environment, reasonable law and order situation, strong anti-monopoly framework and an effective and transparent legal system for the corporate sector will go a long way in promoting corporate saving. Household savings depend on many complex factors, the most important being income levels, relative price stability and positive real rates of return on savings. Slow growths in real per capita income and increasing disparity in incomes have in the past promoted consumption rather than savings. Lavish life style of the rich and subsistence living of a large segment of the society has led to lowering

Other Measures to Promote Private Sector Saving

The government can also take institutional and other measures to encourage household savings. It can introduce contributory retirement schemes gradually replacing the traditional pensions that would become increasingly more costly with increase in life expectancy, and further strain the budgets of the government and public sector entities. Tax incentives to promote savings can be carefully planned so that those do not become avenue of tax evasion and in

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fact promote household savings, and new instruments of financial savings could be encouraged. Austerity in government expenditures and simplicity in the life style of the so-called elite of the country, based on the age old principle of simple living and high thinking, can set the stage for promotion of saving habits in the masses. Development of capital markets and discouragement of conspicuous consumption can all play their part. But for simple living to take hold in the society, leadership needs to set the trend.

Concluding Remarks
Pakistan is rich in human and material resources but poor governance of the country has impeded the process of exploitation of these resources. Some of the essential ingredients of good governance that are lacking in Pakistan are rule of law, effective institutional checks and balances, transparency and accountability, safety and security, well defined and well functioning federation, strong state institutions, and a coherent long term national economic agenda that, along with foreign policy, is jointly approved by the major political parties, and implemented by all governments through a transparent institutional framework, and not on the basis of ad hoc decisions or individual whims. Good governance in all these dimensions is a prerequisite to get out of the present economic crisis. Among macroeconomic problems faced by the country, budget mismanagement is the mother of most economic ills in Pakistan. Fiscal policy has been directly responsible for low domestic saving rate, high rate of inflation, steep rise in external debt and balance of payment difficulties. The recent high rate of inflation also reflects failure of SBP to discharge its statutory responsibility given to it in 1997 to determine and enforce government borrowing from it and to follow a monetary policy that ensures relative price stability and facilitates steady economic growth. The most fundamental change in economic policies that is required to address economic crisis is that the past practice of large scale financing of government operations through external borrowings and internal money creation should be abandoned. This would be possible if the government makes a concerted effort to increase domestic revenue, to control inessential current public sector expenditure and to create policy framework favourable for private saving and investment. Tax revenue needs to be mobilised on war footing at all levels of the government and from all sectors of the economy, a severe cut in current expenditure should be attempted through effective austerity measures, and development expenditure has to be diverted towards energy and water resource management, creation of infrastructure for agriculture and industry and skill development of the younger population. An autonomous monetary policy will have to play an active role in moving the country towards better economic management and macroeconomic stability. SBP has to have effective control on all sources of reserve money creation, including the government, and should be able to effectively use the rate of return as an instrument of monetary policy. SBP cannot control money supply only by regulating credit to the private sector while allowing the government to borrow at will from it. There is thus a heavy responsibly that rests on the shoulders of those who are privileged to occupy leadership positions in SBP, which has been given responsibility and statutory autonomy to determine and enforce limit on government borrowing from it and to formulate and implement a prudent monetary policy. Any further delay in taking measures to promote economic self reliance, increase domestic savings, both in the public and private sector, and to launch a long term economic development strategy, while ensuring relative price stability, will prove very costly for the country in the long run. Weakening of SBP autonomy pretending that it is being strengthened is also no service to SBP or the country
Courtesy: Daily Business Recorder

Resource Allocation
Resource allocation is as important as resource mobilisation for economic growth but, it being a vast subject in itself, cannot be covered in this paper in any details. A rise in domestic saving rate is a necessary but not sufficient condition to accelerate economic growth. Higher national saving must be efficiently used for capital formation and economic growth. It is important that reform in this area also starts from government development expenditure. First of all, development expenditure needs to be properly defined and unproductive activities undertaken in the name of development expenditure should be weeded out. A close scrutiny of the components of development expenditure would show that several expenditures included in the development program have no direct relevance to economic development of the country. It is for this reason that correlation between so-called public sector development expenditure and the rate of economic growth is very weak. Second, development expenditures should be reprioritised to direct them to projects that help create an enabling environment for private sector investment activity. In particular, there should be concentration on development of water and energy resources, promotion of professional education that leads to production of skills rather than educated unemployment and creation of rural road network and other infrastructure aiding private sector development activity rather than building of prestige projects like highways and airports. Third, the past neglect of the social sectors in allocating development expenditure has proven very costly, and allocations for these sectors need to be expanded. Pakistan's allocation of resources to education and health is one of the lowest in the world and there is no evidence in world history of a country making steady progress in economic development without an improvement in the quality and quantity of education and of health services. Fourth, a proper policy framework for improving agricultural yields and industrial efficiency and promoting private sector investment activity and export led growth is of paramount importance. A flexible exchange rate policy that promotes exports, a trade policy that discourages non-essential imports and a regulatory framework that is less bureaucratic and more efficient should constitute essential ingredients of such an investment and development strategy. Fifth, it is important that less developed areas are developed faster to bring them at par with relatively more developed areas of the country. With lopsided development, the less developed areas and people would begin to hold back development in the entire country. Sixth, any incentive given to agriculture, industry, region or group of people should be direct and transparent, and price distortions to promote their development need to be avoided. Price subsidies by distorting price signals will lead to permanent misallocation of resources.

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Article

Public Interest, Ethics, and the Balanced Scorecard: Implications for the Accounting Profession
The accounting profession has been grappling with the issue of public interest responsibility for a number of years. The aim of this paper is to examine how a balanced scorecard (BSC) model can be used by the accounting profession to more effectively incorporate a public interest responsibility in its strategic framework. By using a BSC model, the paper provides an integrated framework for translating strategic values into a comprehensive set of objectives, Marc Olynyk performance measures and improvement actions.
This papers BSC model, adapted from Rampersad (2003), takes into account the ethical behaviour and needs of the professional accounting bodies and their members. The concept is exploratory in nature and is designed to facilitate and encourage further research into improving public interest accountability and responsibility in the accounting profession. The BSC has been extensively discussed in the academic literature. However, much of the limited re-search conducted in Australia has focused on the BSC as a performance measurement tool in the private sector. The public sector has considered the usefulness of the BSC in measuring performance, as a strategic management tool and to discharge external accountability requirements. This article fills a gap in the literature by examining how the BSC can be used in a not-for-profit professional association as a strategic management tool to improve public interest responsibility.

Saeed Askary

he widely discussed corporate collapses and scandals of the past few years have undoubtedly increased the public perception that the professional accounting bodies are incapable of regulating the ethical behaviour of their members or of effectively monitoring and disciplining member transgressions (see Cullinan 2004, Leung and Cooper 2003). Largely in response to public pressure, the Sarbanes- Oxley Act of 2002 in the US and Corporate Law Economic Reform Program 9 (CLERP 9) in Australia were introduced to reform accounting regulations and reporting practices and to enhance the protection afforded to the investment community and other stakeholders (Jones et al 2004, Brown and Tarca 2000). As a further response to the corporate failures, considerable effort has been put into improving corporate governance in Australia. Examples include the Corporate Governance Councils Principles of Good Corporate Governance, released in 2003 by the Australian Stock Exchange, and the Australian National Audit Offices Best Practice Guide on public-sector governance, also issued in 2003. One of the key attributes of a professional organisation is the ability to self-regulate its members. From a macro level, the accounting associations have a vested interest in protecting the public interest if they are to retain their credibility and public confidence. On a micro level, however, members of a profession may be motivated by economic gain to further their own interests at the expense of the public interest. The increasing legislative regulation of the activities of the accounting profession has arisen largely because of the professions inability to regulate its members. As a consequence, the accounting bodies have made public-interest responsibility one of their key strategic issues and have established several mechanisms to improve the actual and perceived ethical behaviour of members (Schiro 2000). This paper considers the development of an appropriate framework to assist the professional accounting bodies adopt a publicinterest responsibility to underpin their activities, operations and resource allocation. The framework is based on the balanced scorecard (BSC) concept and a key feature is the need to align the interests of the accountancy bodies with the aspirations and needs of a diverse group of individual members. Since Kaplan and Norton (1992) introduced the BSC as part of a performance management system, the model has become widely used by business and public-sector management (see Johnsen 2001). All organisations, whatever their focus, are concerned with balancing their strategic directions against operational requirements. The BSC provides for the development of a conceptual framework model that aligns the strategic mission of an organization with achievable goals and actions, measured against predetermined metrics (McJorrow and Cook 2000).

Promoting the Public Interest

One of the key missions of professional accounting associations worldwide is establishing a robust ethical environment (see Farrell and Cobbin 2000). Society will judge the credibility and maturity of a professional association against the extent to which ethical values and a responsibility to act in the interests of the public are accepted as critical success factors by both the association and its members. Given that a professional association is made up of a diverse group of members sharing different needs, ambitions, objectives, principles, standards and values, how does any association establish a standard for ethical behaviour and professionalism? The ability of a professional association to protect and serve the public interest has been questioned by many groups within society (Carmichael 2004, Canning and ODwyer 2001, Sikka et al 1989, Willmott 1990, Henderson and Henderson 2001). What is the most effective way for a professional association to establish an ethical framework and culture? Can any association serve the demands of all its stakeholders? Is a code of conduct or ethics sufficient on its own to protect society? Can an association adequately selfregulate? And, probably most importantly, what is meant by public interest responsibility? Responding to public scrutiny, the accounting profession has undertaken a number of initiatives to promote, regulate and discipline members in terms of their professional responsibilities (see Chandler 1999, Lee 1995). Members of a profession have a powerful long-term self-interest to maintain their reputation and credibility in order to restrict unnecessary government intervention and litigation. Self-regulation is a privilege granted to a professional association for only as long as society has confidence in the associations regulatory processes. Continuing accounting scandals have cast doubt on the ability of the accounting profession to effectively self-regulate. Canning and ODwyer (2001, p. 743) argue that the

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accounting professions widely declared concerns for the public interest, often conceptualised as encompassing a commitment to public accountability and transparency, are frequently used as a convenient mechanism for avoiding criticism and maintaining the power and privilege of delegated self-regulation. Effectively balancing and satisfying the diverse and often competing range of interests, goals and values of the accounting profession is becoming a more difficult task. The strategic plans of any professional association are likely to include such objectives as attracting new members, offering value to existing members, building the reputation and quality of the association, effectively using existing resources and promoting and preserving a high standard of professional conduct among the members. The question of the extent to which any professional association can focus on serving the interests of members as well as those of the public is an important one. Canning and ODwyer (2001, p. 727) conclude that the protection of public interest is deemed a secondary function of professions deriving directly from the fulfilment of the primary function. The accounting profession needs to have a clear view of how a public-interest responsibility can be incorporated in their strategic objectives in a manner compatible with their other responsibilities. The cornerstone of an associations ability to establish a culture of professionalism and trust has traditionally lain in the formation of a code of professional conduct or ethics. A code of conduct enables an association to establish and guide the professional standards and core values of its members, to signal to society the competence and integrity of its members and to discipline unacceptable behaviour (Preston et al 1995, Henderson and Peirson 2002). The two main Australian professional accounting associations, the Institute of Chartered Accountants in Australia (ICAA) and CPA Australia, are responsible for developing a Joint Code of Professional Conduct for their members. The code comprises six sections, with compliance being mandatory for all members of the profession. Rule A.2 provides for disciplinary proceedings against members for noncompliance. Section A sets out the overall objective of the ac-counting profession and the basic needs to be met before the objective can be satisfied. The objective of the profession is described in the Auditing and Assurance Handbook (AAH 2005) as: The Code recognizes that the objectives of the accountancy profession are to work to the highest standards of professionalism, to attain the highest levels of performance and generally to meet the public interest requirement (p. 103). The code sets out the responsibility of members to the public interest: Members must at all times safe-guard the interest of their clients and employers provided that they do not conflict with the duties and loyalties to the community and its laws. The public interest is defined as the collective well-being of the

community of people and institutions that the members serve (p. 1035). CPA Australia and the ICAA are members of the International Federation of Accountants (IFAC) and accordingly members of the two Australian associations have an obligation to support the codes of ethics prescribed by IFAC. Section 100.1 of the Proposed Revised Code of Ethics for Professional Accountants (IFAC 2004) refers to the fundamental responsibility of accountants: Therefore, a professional accountants responsibility is not exclusively to satisfy the needs of an individual client or employer. It is evident that the fundamental duty of account-ants is to their clients and employees as long as this does not conflict with the public interest. Although the notion of a public-interest responsibility is clearly enshrined in the code, what remains unclear is what this responsibility entails. The academic literature suggests that the public interest concept in the codes of conduct is not clearly understood and defined (Willmott 1990, Henderson and Henderson 2001). Questions arise about what is the collective wellbeing of the community and how it is measured, what behaviour is expected by society and to whom in society does the public interest extend. Henderson and Henderson (2001, p. 69) believe that the phrase duties and loyalties to the community is not explained and have concerns over whether the phrase public interest is sufficiently explained to enable it to be accepted and acted upon by the accounting profession. The authors argue that the traditional accounting practices to safeguard the interest of clients and employers are likely to be contrary to the public interest and represent unethical behaviour in terms of the code (Henderson and Henderson 2001, p. 68). How accountants should balance their private and public responsibilities is a difficult issue for the profession and is yet to be resolved. The demise of the accounting firm Arthur Ander-

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sen in the US illustrates the difficulty. Baker (2004, p. 7) comments on the uncertainty surrounding the meaning of the phrase wellbeing of the community: What also remains unspecified is whether the collective well-being is confined to the community of people and institutions the profession serves, or does the public interest extend to those who are not members of the community of people and institutions the profession serves. Henderson and Peirson (2002) raise concerns regarding the ability of the codes of conduct to regulate and discipline unethical behaviour, as transgressions are likely to be known only by the accountant, employees and client who have a vested interest not to report. While the code of conduct has traditionally been used by the accounting profession to promote ethics and public-interest responsibility, there is recognition that this alone will not fix the problem. Despite public-interest responsibility being a focus of the professions training and education courses, subject to a consider-able monitoring and disciplinary structure, accounting scandals continue to occur.

personal ambitions and principles of members aligned with those of the professional accounting bodies? Do members of the profession understand and accept the responsibility to act in the interests of the public? Do the members feel personally involved in the strategy-setting process of the professional accounting bodies? While the balanced scorecard concept could undoubtedly be used to manage and execute the business strategy of a professional association, it can be argued that this is unlikely to succeed unless the personal balanced scorecards of its members are aligned with those of the association. This is critical if change is to be successfully implemented in the accounting profession.

Adapting A BSC Model to the Accounting Profession

The main justification for adopting a BSC model is that it will assist the accounting profession to translate a public-interest strategy into a set of objectives, performance measures and improvement actions. This will be important in facilitating organizational change and improving the credibility and integrity of the profession. Devising a BSC model that incorporates both the professional association and its members would seem to be essential for a sustainable, permanent improvement and transformation in the profession. Figure 1 shows a strategic management model that can be used as the basis for incorporating public-interest responsibility in the accounting profession. The model, based on the BSC concept and adapted from Rampersad (2003), represents a process whereby the alignment of organizational and personal interests can take place within a comprehensive and structured framework. This figure has three interrelated sections: four key perspectives, professional association BSC, and personal member BSC. Kaplan and Norton (1992) originally divided the BSC into four measurable perspectives: financial, customer, business procedures, and learning and growth. However, the model may need modification to reflect the particular needs of the organisation concerned (Chesley and Wenger 1999). In this paper, the BSC model has been modified to take account of the specific environment within which the accountancy profession operates in order to effectively address public interest responsibility. The BSC model depicted in the figure is constructed around four key views or perspectives: professional members, external stakeholders, the professional association and the government. Professional members concerned with the needs and behaviour of a diverse group of individuals who are remunerated by and accountable to the clients they serve, rather than to society. Members have different aspirations, ambitions, cultural backgrounds and ethical standards. External stakeholders there is an increasing expectation by society that the accounting profession not only has the competence and expertise required to perform reporting duties effectively, but also is capable of sound, responsible and accountable decision-making. Given that the profession is granted certain privileges in society, the general public expects more than just compliance with rules and procedures; it demands better corporate governance. Professional association concerned with the ability and responsibility of the accounting associations to perform strongly against their specified objectives and satisfy the requirements of their members. However, to maintain their status in society, the associations also need to be recognised as having effective leadership, integrity and ethical standards.

The Balanced Scorecard Model

The balanced scorecard model was initially introduced as part of a management system using non-financial as well as financial measures in managing an organisation and aligning these measures with the organisations strategic objectives. The BSC model has since been modified to become a performance management system designed to manage and execute business planning strategy (see Otley 1999, Norreklit 2000). The benefit of the model lies in establishing a frame-work in which the culture and direction of an organisation can be translated into strategies that are actionable, specific and measurable (Rohm 2004). A BSC model can be used to drive the way the organisation responds to issues, help shape its culture, and to map and measure the organisations performance targets. In the BSC model, objectives and measures are broken up into a range of perspectives based on the nature of the organisation. For example, private business is profit-driven with an emphasis on effectively identifying, targeting and satisfying the needs of consumers. A not-for-profit organisation, however, may be focused much more on delivering cost-effective services to members and satisfying the needs of a diverse group of stakeholders. Many accounting associations have incorporated ethics and public-interest responsibility in their strategic planning and a number have adopted a BSC model for implementing their key objectives. In Australia, accounting for the public interest is included in the strategic plans of the ICAA and CPA Australia. The notion of a public-interest responsibility has moved to the forefront of the strategic agenda of many professional accounting associations worldwide (Johnsen 2001). However, is the adoption by an association of a public-interest perspective enough to bring about a change in the ethical behaviour of its members? Rampersad (2003) argues that the mutual alignment of the personal ambitions of members and the shared ambition of an organisation is central to a change in ethical behaviour and personal credibility. While an organisation may stipulate its strategic goals, objectives, standards or codes, individuals may be unable to identify with the declared standards of professionalism. Rampersad (2003, p. 252) comments: Clarity and accordance of the personal values and principles and those of the organisation are basically essential for the active participation of the people within the organisation. Key questions include: Do ethical values developed by the professional accounting bodies match those required by society? Are the

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Government the public requires government to establish frameworks and checks to ensure a fair and equitable financial market. The government seeks in turn to make the accounting profession more accountable by imposing more rules and regulations and in-creasing transparency. The strategic management model provides a five-step framework for enhancing the professions public responsibility role and aligning the views and behaviour of the accounting associations and their members. Step one is to determine the strategic mission, vision and long-term directions of the associations and members. The mission and values shape the culture of the parties and help them to define who they are, what they stand for and to whom they are accountable. Step two provides for the identification of critical success factors necessary for achieving the core values and vision. Step three uses objectives to determine the measurable short-term results that are required. In step four, performance measures and targets are established to ensure that there is a direct link between the objectives and improved performance. Whereas a measure is a way of gauging success in accomplishing the objectives, a target defines the expected levels of performance. In step five, improvement actions are developed to enable the entity to achieve its objectives and mission. Issues to be considered include what new initiatives are required, what challenges will be faced in adopting the required actions, how the initiatives are to be communicated to the appropriate people and what changes will be required to implement the improvement actions. Figure 2 demonstrates the use of the BSC concept to align organizational and personal issues for the enhancement of publicinterest responsibility in the ac-counting profession. It requires the parties to consider their key values and critical success factors, to prioritise their objectives, to monitor performance in achieving their strategic mission and to determine what improvement actions are required and how these are best implemented. One of the key issues is the conflict between the professional interests of the accounting bodies and the self-interest of the individual members (see Quick 2003). While a framework based on a BSC model can be established at both organisational and personal levels to promote public interest responsibility, effective and long-lasting change is unlikely to be successful unless both parties accept and work towards a common set of goals and values. The model established in this paper highlights the importance of aligning the vision and mission of the accounting bodies with those of the individual members through all facets of the strategic and operational planning process (Talbot- Allan 1996). The question of how the accountancy bodies align and integrate the interests of members within their own values and culture is a challenging one. The Accountancy Foundation Review Board (2002) refers to the various regulatory mechanisms adopted by the accountancy profession to develop and maintain professional characteristics. These mechanisms are summarised under the headings of knowledge and skills, ethical values, and competence and conduct. The area of knowledge and skills is concerned with ensuring that accountants possess a level of skill commensurate with the provision of specialised services. The accounting bodies develop the competence of mem-

bers through regulating the qualifications and admission of members. Encouraging and requiring members to undertake continuing professional development (CPD) is part of the process of ensuring that members retain their skill base and keep abreast of current developments in the industry. Over the past two to three decades, the accountancy bodies have devoted considerable resources to developing the quality and competence of their members. Ethical training is now common in preparatory courses for membership, university degrees and CPD activities. However, education and training courses on their own are unlikely to result in the acceptance by members of the notion of public-interest responsibility. The benefits of ethical education and training need to be fully explained to, and appreciated by, members before there is mutual alignment of interests. One of the primary means used by the accountancy bodies to regulate and control professional values has been their codes of ethics and conduct. It is important for the credibility of the profession that members not only observe these principles; they must also be seen to do so. Transparency and accountability are important if the public is to have confidence in the regulatory processes of the profession. Many accounting bodies have adopted a principle based system to regulate ethical behaviour, rather than an approach that is rule-based. Participation by members in the formulation of codes is likely to encourage compliance and acceptance. Farrell and Cobbin (2000, p. 23) suggest: Where addressees (or to a lesser extent their representatives) are authors of codes they are more likely to perceive themselves as having a proprietary interest in the code and thereby more likely to conform to its behavioural directives. What is also important is a continuing emphasis on the code throughout the accounting profession. The ongoing use of effective communication channels to promote a publicinterest responsibility will enhance the alignment of values.

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Systems to regulate and monitor the competence and conduct of members is seen as a key ingredient of effective self-regulation. The complaints and disciplinary processes adopted by the accountancy bodies act as a deterrent against future transgressions. Members of the accountancy profession are less likely to behave unethically and promote their self interest at the expense of the public when they know they could be reprimanded, fined or excluded from membership. Again, for members to accept the monitoring mechanisms that have been established, it is important that they consider the processes fair and reasonable, and that their interests are being adequately protected and represented by the association.

Conclusion
This study examines how a BSC system could be developed and used in the accounting profession to pro-mote acceptance of a public-interest responsibility. The accounting profession has been battling with the issue of ethical and public-interest responsibility for a number of years. Continuing revelations about corporate collapses and scandals increase the perception that the accounting profession is only paying lip service to the notion of public-interest responsibility. Will the adoption of the BSC system result in the accounting profession fully embracing a responsibility to act in the public interest? Previous experience suggests that unless members can identify with the process and unless the interests and core values of members are aligned with those of the organisation, there is little likelihood of success. The strategic professional framework shown in Figure 2 illustrates of how the interests, needs and success factors of individual members can be aligned with those of the accounting association to achieve certain ideals and values. While many of the objectives, critical success factors and improvement actions will differ between the parties, the model shows how these factors can be translated into a framework for achieving a united strategic direction. The BSC system does not purport to be a total solution to the challenge of improving the actual and perceived ethics of the accounting profession. It does, however, provide a useful framework for promoting and managing cultural change. Many professional accounting associations have made the protection of the public a key component of their corporate plans and strategic directions. This, together with the promotion of codes of conduct and ethics, illustrates the strong public-interest focus and commitment of the accounting profession. However, the credibility of the accounting profession continues to be scrutinised and there is a need to look towards new and innovative approaches. The challenge is to ensure that all members of the accounting profession accept their responsibility to act in the public interest. The BSC model adopted in this paper provides a structure and framework to facilitate acceptance of a public interest responsibility throughout the profession. This study was not intended to provide a ready-made framework for incorporating public-interest responsibility into all facets of the accounting profession; rather, it was designed as an exploratory study to raise questions and issues, and to encourage further research into one of the most critical issues affecting the accounting profession. References
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Pakistan's Economic Horizons

Foreign Exchange Reserves Rise to $18.04bn

he foreign exchange reserves of the country have surged to dollars 18.0423 billion, the State Bank of Pakistan (SBP) announced. It said that the compared to the previous week when forex reserves were 17.978 billion dollars, the reserves again rose by a little 0.072 million dollar to 18.0423 billion dollar. The rise in reserves is likely

due to remittances following the Eidul-Fitr season, however, the fluctuations in reserves will continue, said a senior banker from a private bank. SBP also gave a break-up of the statistics of latest reserve position and added that the reserves held by SBP were dollars 14.55 billion and held by others banks stood at around 3.48 billion dollar.

Inflow of Foreign Investment Dips 60.8 Percent in July

he net inflow of foreign investment has shown a decline of 60.8 percent to $61.9 million in fiscal year July 2011-12 as against $157.8 million in the same period last fiscal. The net inflow of foreign investment is broken into two parts foreign direct investment (FDI) and foreign portfolio investment (FPI). The FDI slipped 17.2 percent to $90.9 million as against $109.8 million, while FPI fell 160.4 percent to $29 million as compared with $48 million. The FDI from developed states also witnessed a negative growth of 28 percent with $34.8 million investment made in the private and public sector whereas developing countries contributed $40.4 million to the FDI, which also posted 32 percent decrease as compared with the same month of the previous fiscal year. The major FDI landed from countries including UAE, USA, UK, China, and Caribbean Island. The potential sectors that attracted foreign exchange were textile, communications and household consumers. The sharp decline in FPI caused a break in inflow of capital at shares and bond markets, which seems to continue in the

current month after panic selling was observed at equity markets following high volatility in global stocks and commodity markets. The overall FPI in 2010-11 rose to $344.4 million with staggering growth of 634 percent as compared with an outflow of $64.5 million the previous year. The FPI outflow saw contraction from developed countries by $36.2 million in July as compared with developing countries, which invested $7.8 million FPI in local shares and bond markets. The investors opted for profit-taking in short-term investments in local capital markets in order to compensate their regional and overseas operations in big capital markets, analysts said. Analysts said that foreign investors are highly cautious to invest their capital in Pakistan owing to weakening of confidence on business environment and the government policy. They are reluctant to invest money on long-term basis in the country which is why they are avoiding spending capital expenditures in different potential sectors.

$2.5bn Rice Export Target Set for FY 2011-12

ice export target has been set at $2.5 billion in fiscal year 2011-12 as compared to $1.8 billion for last year.

Expected rice exports for the current fiscal year would be around 4.6 million metric tonnes with a turnover of $2.5 billion as compared to 3.7 million metric tonnes with a turnover of $2.02 billion in last fiscal year, Irfan Ahmed Shaikh, Chairman Rice Exporters Association of Pakistan said. The decision came in a meeting of a delegation of rice exporters with Zafar Mahmood, Federal Secretary Commerce at Trade Development Authority of Pakistan office. Tariq Iqbal Puri, Chief Executive, TDAP along with Senior Officials of Ministry of Commerce and TDAP were also present in the said meeting. Despite devastating floods last year we were able to export a quantity of 3.7 million metric tonnes of rice worth $2.02 billion, but this year we are hoping for better crop and getting better export result, Irfan said. The target is achievable if any natural disaster happens to our crops and mainly if the government does not intervene in exports, he claimed. Chairman REAP said that a major chunk of basmati rice was exported to Middle East and Iran, however non-basmati

rice was exported to Africa and Bangladesh. During last year rice exporters tried hard to explore new markets and we are hopeful that South Africa, Indonesia and Bangladesh will be our good markets in current year, he said. To a query, he said that India has started rice export recently and is a good competitor but we will not be affected, as our quality is much better, adding that Thailand and Vietnam are major competitor of Pakistan in commodity export. Although 1.5 million metric tonnes of rice crop was ruined during last year floods, but we are expecting a bumper crop of 7 million metric tonnes by the end of September 2011 due to last year floods, he claimed. He said that the performance of rice export during the last 3 year has got better despite hard challenges and tough climate conditions. There are a lot of issues and problems which are being faced by rice exporters, he said, adding that the government should resolve the same on a priority basis especially law and order situation in Karachi, as this will not only help maintain the targets but will also likely go beyond the set targetsn

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Global Economic Briefs

Moody's Cuts Japan Debt Rating

atings agency Moody's downgraded Japan's sovereign rating by one notch, heaping more pressure on the country's political leaders to address the industrialised world's largest debt. Moody's cut Japan's government bond rating to Aa3 from Aa2, citing large budget deficits and the build-up in Japanese government debt since the 2009 global recession compounded by weak postquake growth prospects. The new rating puts Japan on a par with China. Moody's said the outlook was stable, after warning in May that it might downgrade Japan over concerns over policy responses to the massive debt. It said frequent leadership changes prevented Japan from setting long-term debt reduction strategies, days before the nation was due to see its sixth new leader in five years with Prime Minister Naoto Kan set to resign amid discontent over his handling of the March 11 disasters. Over the past five years, frequent changes in administrations have prevented the government from implementing long-term economic and fiscal strategies into effective and durable policies, said Moody's. The March 11 earthquake and tsunami, and the subsequent disaster at the Fukushima Daiichi nuclear power station, have delayed recovery from the 2009 global recession and aggravated deflationary conditions. It was the first downgrade by Moody's of Japan's sovereign debt for nine years, and followed a similar move by Standard & Poor's in January, which accused the government of lacking a coherent strategy to ease its mountainous debts. Kan described the downgrading as regrettable, according to Jiji Press news agency, while Finance Minister Yoshihiko Noda defended the creditworthiness of Japan's bonds. I will not comment on the actions of a private rating agency. The smooth sales of Japanese government bonds at recent auctions show that confidence remains unshaken, Noda told reporters. The yen, which hit its post-war high of 75.95 to the dollar last week, barely moved from earlier levels around 76.70 yen to the greenback after the announcement and bond yields were steady. The market's reaction to Moody's downgrading is limited as the move was not a big surprise, said Sumino Kamei, senior analyst at the Bank of Tokyo-Mitsubishi UFJ.

Japan's debt stands at around 200 percent of its GDP, after years of pump-priming measures by governments trying in vain to arrest the economy's long decline. Much of government spending is swallowed up by a social security system catering to a rapidly ageing population, while entrenched deflation and a feeble economy have made it hard for lawmakers to curb borrowing. The March disasters and a nuclear crisis that led to power shortages undermined Japan's recovery from the global financial crisis, with massive industrial disruption helping plunge the economy back into recession and likely increasing the debt burden. The March earthquake and nuclear disaster may make it difficult for the government to stay under its 44 trillion yen annual budget borrowing ceiling, said Moody's. Tokyo has been able to fund its growing fiscal gap by raising money in the domestic market, with around 95 percent of the country's huge debt held domestically via banks and pension schemes, helping keep yields low. Japan's ability to finance its debt is therefore seen as sustainable for now, but analysts warn pressures will increase as the population ages and dips into savings to spend in retirement. While Moody's suggested that crisis is still a way off, Japan faces increasing international scrutiny over its finances in the wake of the European debt crisis and Standard & Poor's recent unprecedented downgrade of the United States, where debt is around 100 percent of GDP. In a plan that awaits final approval, the government aims to double sales tax by the middle of the decade to help tackle rising social welfare costs and ballooning debt a move Moody's said would help maintain confidence. Japan's very large economy and very deep financial markets provide the wherewithal to absorb economic shocks, it said. The downgrade puts Moody's on a par with other major ratings companies Standard & Poor's and Fitch Ratings, both of which rate Japan's sovereign debt at AA- with a negative outlook.

Argentina July trade Surplus Shrinks 22pc

rgentina's trade surplus shrank 22 percent in July from a year earlier to $672 million as import growth continued to outpace that of exports, the government said. The country's July primary budget surplus was 388 million pesos ($88.8 million), down sharply from a surplus of 3.91 billion pesos a year earlier, the economy ministry also said. July's trade surplus came in below the $760 million median forecast in a Reuters poll, which would have represented a 12 percent contraction. Argentina's economy is growing at an annual rate of nearly 9 percent, stoking demand for imported goods. Inflation is eroding the local currency's competitive edge, making imports relatively less expensive. In July, imports surged 30 percent to $6.65 billion on the back of higher prices and greater volumes, the INDEC national statistics

agency reported. Fuel and lubricant imports jumped 102 percent in July from a year earlier, responding to heightened energy demand during the southern hemisphere's winter. These purchases included diesel, liquefied natural gas (LNG), fuel oil and electricity. Meanwhile, exports rose 22 percent year-on-year to $7.32 billion, explained almost entirely by higher prices for the goods Argentina sells abroad. Car sales to Brazil and grains and oilseed products were among the country's most dynamic exports last month, the government said. Argentina's trade surplus from January through July totaled $6.46 billion, which is 21 percent smaller than during the same period of 2010. The trade surplus totaled $861 million in July 2010.

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tandard & Poor's president Deven Sharma is stepping down, its parent company announced, just weeks after the credit rating agency cut the US sterling AAA rating and sent global markets into turmoil. Sharma, who will take another role in the company before leaving altogether at the end of the year, will be replaced by Citibank's current chief operating officer Douglas Peterson. The US Justice Department is currently investigating the company for its practices regarding mortgage securities. Peterson, 53, will become the S&P president starting September 12, corporate parent McGraw-Hill said in a statement. Sharma, 55, will take on a special assignment working on the company's strategic portfolio review until the end of the year when he will leave the company to pursue other opportunities, the statement read. Harold McGraw III, chairman, president and CEO of The McGrawHill Companies, described Peterson as a seasoned executive with more than 25 years of global experience in financial services, risk management and capital markets. Peterson's resume in-

S&P President Steps Down after US Ratings Downgrade

cludes his role as the CEO of Citigroup Japan from 2004 to 2010, the statement read. McGraw also thanked Sharma for his dedicated leadership of S&P. US officials lashed out at S&P after it docked the country's credit rating from AAA to AA+, accusing the agency of committing a $2 trillion math error and of using a faulty baseline. S&P has stood by its analysis. S&P said the August 5 decision to downgrade the US long-term credit rating came as a result of divided US lawmakers failing to agree on a deal to reduce the ballooning US debt by some $4 trillion over 10 years. The decision followed a bruising fight on Capitol Hill over raising the country's congressionally-set debt ceiling, which resulted in a limited agreement to cut some $2 trillion over that period. The Justice Department probe, launched before the credit downgrade, is looking at whether S&P analysts wanted to lower the ratings of certain bonds backed by mortgage debt, but were prevented from doing so by superiors due to business concerns.

zbekistan and South Korea signed a $2.6 billion deal to build a gas-chemical plant in the Central Asian state which their leaders said was unprecedented in Uzbek-Korean relations. Starting the construction of Ustyrt gas-chemical plant on the basis of the Surgil gas field will be an unprecedented project in the Uzbek-Korean partnership, President Islam Karimov told reporters in Tashkent after talks with his counterpart Lee Myung-Bak. Uzbekistan was opening up its vast mineral resources, oil and gas, uranium, precious metals, as well as car building, textile industry and communications sectors for Korean business, Karimov added. South Korean President Lee Myung-Bak noted that more than 180,000 ethnic Koreans live in Uzbekistan and that this presence was stimulating trade and cooperation. Successful completion of

Uzbekistan and South Korea Ink $2.6 billion gas Plant deal
Ustyrt gas-chemical plant, which is the largest project in history of our relations, will be the best example of our cooperation, the Korean president said. Uzbek state oil and gas company Uzbekneftegas signed contracts with South Korean GS Engineering and Construction, Samsung Engineering, Hyundai Engineering and Korean Gas Corporation to build the Ustyrt gas-chemical plant, which is in the far west of the country. A total of 23 documents aimed to develop cooperation in different sectors, from hydrocarbons to sports and tourism, will be signed during president Lee's two-day visit to Uzbekistan, Uzbek officials said. Uzbekistan and South Korea enjoy warm relations and trade turnover between the two countries increased to 31 percent reaching $1.6 billion last year.

amsung Electronics unveiled four new smartphone models under its flagship Galaxy line to expand it to the mid to lowend segment and grow in emerging markets, as bigger rival Apple prepares a cheaper version of the iPhone 4. The move signals intensifying competition with AppleSamsung's biggest competitor and customer, as the US firm is set to launch a lower-cost version of the iPhone 4 and its much-anticipated iPhone 5 soon. Apple and Samsung emerged as the world's No.1 and No.2 smartphone makers respectively in the second quarter, ending the 10year regin of Nokia . Apple has long stuck to the higher end of a booming mobile device arena, but is now seeking out new markets to sustain the riproaring pace of growth that has enthralled Wall Street. Samsung seeks to expand market share in the emerging market with models costing around $200, as those markets have lower smartphone penetration rates compared with advanced markets, a Samsung

Samsung Targets Emerging Smartphone Markets

group spokeswoman quoted an executive from Samsung Electronics' mobile division as telling a meeting of the group's executives. Samsung sees cheap models costing below $200 accounting for more than half the overall smartphone market by 2015 in volume terms, up sharply from last year's 16 percent. Its new mid-to-high end Galaxy W will have a 3.7-inch screen, while the mid-tier Galaxy M Pro and lower-end Galaxy Y Pro will be Samsung's first Galaxy models with qwerty keyboards. The fourth Galaxy Y model is an entry-level product aimed at emerging market consumers. Samsung launched its top-end Galaxy S smartphone in June 2010 and its followup Galaxy S II, launched in April this year, has sold more than 5 million units. The new Galaxy lineup will be unveiled to the public at an annual electronics fair in Germany in early September. The global smartphone market is expected to account for around 64 percent of the total handset market this year in dollar terms, up from 54 percent a year ago, according to industry data.

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