01 BUSINESS B Monday, 1 April, 2013 Business, more than any other occupation, is a continual dealing with the future; it is a continual calculation, an instinctive exercise in foresight. — Henry R Luce via BloomBerg Sometimes you can learn the lessons of history too well. Today’s top central bankers formed their ideas about monetary policy from the inflation of the 1970s and the recessions that followed. The slump that began in 2008 is different, and calls those ideas into doubt. As a result, a consensus that was al- most unquestioned five years ago — that central banks should be shielded from pol- itics and given a simple mandate to keep inflation low — may be breaking down. What might replace it isn’t clear. The upheaval caused by the recent re- cession challenged monetary orthodoxies in at least one very specific way. In ordi- nary circumstances, central banks control demand through short-term interest rates. What happens when they lower interest rates and demand is still anemic? Once rates are close to zero, monetary policy has to look for other ways to stimu- late demand. That’s where quantitative eas- ing comes in. As the recession dragged on, central banks bought long-dated govern- ment bonds and other securities to press down on longer-term interest rates directly. The “zero lower bound” unsettles the old thinking partly because it demands untested innovations such as QE, but also because it attacks the earlier consensus head on. The logic of monetary policy under current conditions may call for a spell of deliberately higher inflation — higher, that is, than the inflation target the central bank has previously committed it- self to. DreaDeD InflatIon: The details get complicated, but the basic reasoning is straightforward. Although nominal interest rates can’t fall to less than nothing, real (in- flation-adjusted) interest rates can. To push real short-term interest rates as low as it deems necessary, a central bank merely has to achieve a sufficiently high rate of infla- tion. (A nominal interest rate of 3 percent is a real rate of 3 percent if prices are expected to be stable, but a real rate of only 1 percent if inflation is ex- pected to be 2 percent.) In fact, the central bank only has to prom- ise to raise inflation and be believed — that’s enough to change real rates. This is a promise a cen- tral bank, and only a central bank, is in a position to make. Could it therefore make sense for the federal Reserve to promise, say, three years of 4 percent infla- tion as a way to drive real short-term in- terest rates lower? Theoretically, it turns out, the answer is yes. Yet the idea fills most central bankers, raised on the consensus forged in the 1980s, with dread. The dread is understandable. If higher inflation becomes entrenched, bringing it down again may require a policy-induced recession. Any central banker will tell you that anchoring inflation expectations is vital for economic stability. few want to be suspected of even consid- ering a controlled dose of higher inflation — in fact many would say there is no such thing. This thinking is counterproductive. Modern central banks pay lip service to the idea of transparency and insist they want their actions to be better understood. When it comes to discussing the trade-off be- tween inflation and a more rapid recovery, they prefer to look away. Lately, however, this reluctance has collided with the inescapable reality that, with all the advanced economies growing so slowly, maintaining or increasing mon- etary stimulus through QE is necessary. At the same time, central banks know that doing QE while promising to keep infla- tion very low is partly self-defeating. new framework: Which brings us to the important question: As part of a new monetary-policy framework, can central banks openly aim for a therapeutic spell of higher-than-target inflation while contain- ing the danger that the treatment would go too far? The answer’s unclear, and the central banks’ unwillingness to confront the issue squarely isn’t helping the discussion. Our view is that a new target, tied to nominal incomes or to the level of future prices rather than the rate of inflation, could serve this purpose. There are good reasons to fear inflation. But no one should be so afraid that the subject can’t even be discussed. via BloomBerg I f this week’s BRICS summit in Durban, South Africa, passed you by, we don’t blame you. The leaders of Brazil, Russia, India, China and South Africa met, as they do once a year, to advance their common interests. They found, as they do once a year, that they don’t have many, so not much happened. What’s worse, one common interest they do have is ill- served by the BRICS grouping and by their lead- ers’ desire to develop formal institutions around it. That valid interest is to give big fast-growing nations — a group that extends far beyond the arbitrarily selected club of BRICS — the voice they should have at the World Bank, International Monetary fund and other global economic bodies. In pursuing this goal, the BRICS leaders would be wise to be less ambitious for their ill-sorted alliance and more ambitious for the de- veloping world as a whole. Summits must have something to discuss and this week’s gathering focused on plans to create a new devel- opment bank, supposedly to rival the World Bank. One wonders how seriously even the BRICS’ leaders are tak- ing this idea. It was considered at the previous summit, and after a year of study and consultation, it is barely inch- ing forward. Basic issues such as the apportioning of cap- ital contributions, the eventual location of the bank (an especially sensitive topic) and even what exactly it would do remain unresolved. The lack of progress amounts to tacit agreement that nothing is ever going to happen. So much the better. The BRICS don’t need their own development bank. What they need is to pool their influence with that of other big and fast-growing na- tions so that existing development institutions aren’t run for the sole convenience of the U.S. and Europe. This is a legitimate grievance. It’s scandalous that an arrangement formed decades ago in a different geopolitical era still controls representation and ap- pointments to the top jobs. Under this deal, an Ameri- can always leads the World Bank and a European always leads the IMf. That’s indefensible — yet the BRICS couldn’t line up behind an alternative candidate for the World Bank job last year (it went to Jim Yong Kim, an American) or for the IMf in 2011 (Christine Lagarde of france got the nod). On the issue where their alliance makes best sense, they failed to unite, let alone lead the emerging economies as a whole. An investment analyst at Goldman Sachs Group Inc. famously came up with the BRIC designation (South Africa was an afterthought) in 2001, and it was of doubtful utility even in that line of work. These countries’ export markets, import requirements, indus- trial structures, sources of finance, problems, prospects and levels of development are all quite different. In geopolitical terms, the alliance is even more pointless. It’s usually good to meet and talk, but institu- tion- building — such as the plan to create a new bank — involves an outlay of money and effort that would be better spent on repairing the institutions we already have. Break Up the BRICS Central banks must master their fear of infation 16-17 Business Pages (01-04-2013)_Layout 1 4/1/2013 9:42 AM Page 1
Transcript
01
BUSINESS
BMonday, 1 April, 2013
Business, more than any other occupation, is a continual
dealing with the future; it is a continual calculation, an
instinctive exercise in foresight. — Henry R Luce
via BloomBerg
Sometimes you can learn the lessons ofhistory too well. Today’s top centralbankers formed their ideas about monetarypolicy from the inflation of the 1970s andthe recessions that followed. The slumpthat began in 2008 is different, and callsthose ideas into doubt.
As a result, a consensus that was al-most unquestioned five years ago — thatcentral banks should be shielded from pol-itics and given a simple mandate to keepinflation low — may be breaking down.What might replace it isn’t clear.
The upheaval caused by the recent re-cession challenged monetary orthodoxiesin at least one very specific way. In ordi-nary circumstances, central banks controldemand through short-term interest rates.What happens when they lower interestrates and demand is still anemic?
Once rates are close to zero, monetarypolicy has to look for other ways to stimu-late demand. That’s where quantitative eas-ing comes in. As the recession dragged on,central banks bought long-dated govern-ment bonds and other securities to pressdown on longer-term interest rates directly.
The “zero lower bound” unsettles theold thinking partly because it demandsuntested innovations such as QE, but alsobecause it attacks the earlier consensushead on. The logic of monetary policyunder current conditions may call for aspell of deliberately higher inflation —higher, that is, than the inflation target the
central bank has previously committed it-self to.DreaDeD InflatIon: The details getcomplicated, but the basic reasoning isstraightforward. Although nominal interestrates can’t fall to less than nothing, real (in-flation-adjusted) interest rates can. To pushreal short-term interest rates as low as itdeems necessary, a central bank merely hasto achieve a sufficiently high rate of infla-tion. (A nominal interest rate of 3 percentis a real rate of 3 percent if prices areexpected to be stable, but a real rateof only 1 percent if inflation is ex-pected to be 2 percent.)
In fact, the central bank only has to prom-ise to raise inflationand be believed —that’s enough tochange realrates. This isa promise acen-tral
bank, and only a centralbank, is in a position to make.
Could it therefore makesense for the federal Reserve to
promise, say, three years of 4 percent infla-tion as a way to drive real short-term in-
terest rates lower? Theoretically, itturns out, the answer is yes. Yet theidea fills most central bankers, raisedon the consensus forged in the 1980s,with dread.
The dread is understandable. Ifhigher inflation becomes entrenched,bringing it down again may require apolicy-induced recession. Any central
banker will tell you that anchoring inflationexpectations is vital for economic stability.few want to be suspected of even consid-ering a controlled dose of higher inflation— in fact many would say there is no suchthing. This thinking is counterproductive.Modern central banks pay lip service to theidea of transparency and insist they wanttheir actions to be better understood. Whenit comes to discussing the trade-off be-tween inflation and a more rapid recovery,they prefer to look away.
Lately, however, this reluctance hascollided with the inescapable reality that,with all the advanced economies growingso slowly, maintaining or increasing mon-etary stimulus through QE is necessary. Atthe same time, central banks know thatdoing QE while promising to keep infla-tion very low is partly self-defeating.new framework: Which brings usto the important question: As part of a newmonetary-policy framework, can centralbanks openly aim for a therapeutic spell ofhigher-than-target inflation while contain-ing the danger that the treatment would gotoo far?
The answer’s unclear, and the centralbanks’ unwillingness to confront the issuesquarely isn’t helping the discussion. Ourview is that a new target, tied to nominalincomes or to the level of futureprices rather than the rate of inflation,could serve this purpose. There are goodreasons to fear inflation. But no one shouldbe so afraid that the subject can’t even bediscussed.
via BloomBerg
If this week’s BRICS summit in Durban, SouthAfrica, passed you by, we don’t blame you. Theleaders of Brazil, Russia, India, China and SouthAfrica met, as they do once a year, to advance theircommon interests. They found, as they do once a
year, that they don’t have many, so not much happened.What’s worse, one common interest they do have
is ill- served by the BRICS grouping and by their lead-ers’ desire to develop formal institutions around it. Thatvalid interest is to give big fast-growing nations — agroup that extends far beyond the arbitrarily selectedclub of BRICS — the voice they should have at theWorld Bank, International Monetary fund and other
global economic bodies. In pursuing this goal, theBRICS leaders would be wise to be less ambitious fortheir ill-sorted alliance and more ambitious for the de-veloping world as a whole.
Summits must have something to discuss and thisweek’s gathering focused on plans to create a new devel-opment bank, supposedly to rival the World Bank. Onewonders how seriously even the BRICS’ leaders are tak-ing this idea. It was considered at the previous summit,and after a year of study and consultation, it is barely inch-ing forward. Basic issues such as the apportioning of cap-ital contributions, the eventual location of the bank (anespecially sensitive topic) and even what exactly it woulddo remain unresolved. The lack of progress amounts totacit agreement that nothing is ever going to happen.
So much the better. The BRICS don’t need theirown development bank. What they need is to pool theirinfluence with that of other big and fast-growing na-tions so that existing development institutions aren’trun for the sole convenience of the U.S. and Europe.
This is a legitimate grievance. It’s scandalous thatan arrangement formed decades ago in a differentgeopolitical era still controls representation and ap-pointments to the top jobs. Under this deal, an Ameri-can always leads the World Bank and a Europeanalways leads the IMf. That’s indefensible — yet theBRICS couldn’t line up behind an alternative candidatefor the World Bank job last year (it went to Jim YongKim, an American) or for the IMf in 2011 (ChristineLagarde of france got the nod). On the issue where
their alliance makes best sense, they failed to unite, letalone lead the emerging economies as a whole.
An investment analyst at Goldman Sachs GroupInc. famously came up with the BRIC designation(South Africa was an afterthought) in 2001, and it wasof doubtful utility even in that line of work. Thesecountries’ export markets, import requirements, indus-trial structures, sources of finance, problems, prospectsand levels of development are all quite different. Ingeopolitical terms, the alliance is even more pointless.
It’s usually good to meet and talk, but institu-tion- building — such as the plan to create a newbank — involves an outlay of money and effort thatwould be better spent on repairing the institutionswe already have.
Break Up the BRICS
Central banks must master their fear of inflation
16-17 Business Pages (01-04-2013)_Layout 1 4/1/2013 9:42 AM Page 1
BUSINESSMonday, 1 April, 2013
02
B
Business is never so healthy as when, like a
chicken, it must do a certain amount of scratching
around for what it gets. — Henry Ford
CaraCaS
APP
AVenezuelan government foreign currencyauction for local importers has triggered ade-facto currency devaluation, the secondin less than 50 days, analysts said.Venezuela has had strict currency ex-
change controls since 2003 in an attempt to halt cap-ital flight. Individuals and businesses could obtainedlimited amounts of foreign currency through thegovernment at an official rate.
But the hunger for dollars and euros persisted, fu-eling a black market with a much higher exchange ratethat by law cannot be published.
The government scrapped a program that ex-changed currency at a rate of 5.3 bolivars per dollarsbecause officials said it allowed for “speculation,” anddollars wound up on the black market.
Instead, it launched a new plan known as SICADthrough which it auctioned $200 million on Wednesdayto a group of chosen companies. The government saidthat 383 companies participated, but did not name them.Neither did they reveal the sale price of the dollar.
Critics say the auction was a veiled devaluation,and an attempt by the government of acting PresidentNicolas Maduro to ease a demand for basic goods —everything from food to office and hospital supplies —
in this import-dependent country ahead of the April 14presidential election.
“The government did not announce the results ofthe foreign currency auction because clearly we arefacing a new currency devaluation,” claimed economistJose Guerra. He estimated that the dollars went foraround 12 bolivars per dollar, much higher than officialrate of 6.3 bolivars.
“This is another devaluation,” Caracas Chamber ofCommerce chief Victor Maldonado said.
“This also will mean that the costs and prices ofthe companies will have to be adjusted.” That wouldlead to higher prices, fueling inflation, he added.
finance Minister Jorge Giordani promised to find away for individuals to also obtain foreign currencythrough the SICAD program, which he said offers“transparency” in the exchange rate system. In february,Venezuela devalued the Bolivar by 32 percent againstthe US dollar, its fifth currency devaluation in a decade.
Investment bank Barclays Capital said in a notethat by not announcing the rate the dollars sold at auc-tion, the government was “avoiding the political costof the announcement of a second devaluation” in lessthan two months, and with a presidential election loom-ing. Econometrica head Angel Garcia Banchs said theSICAD program will be used “to carry out more deval-uations throughout the course of the year,” which willto finance government expenses and help with US dol-
lar debts run up by the state-run oil giant Petroleos deVenezuela. But Guerra, a former top official at the Cen-tral Bank, said SICAD will be insufficient to satisfy thedemand of foreign currency in Venezuela.
One effect of a devaluation is to make a country’sexports cheaper and thus more enticing to buyers,while another is to cut the deficit, which in Venezuelalast year was estimated to be nearly 10 percent of GDP.
The economy grew 5.5 percent in 2012 and infla-tion was 20 percent, down seven points from 2011 but
still the highest official inflation rate in Latin America.Venezuela is South America’s largest oil exporter
and has the world’s largest proven reserves. Its oiltransactions are dollar-denominated, so with any for-mal or de facto devaluation the bolivar-value of thosesales rise, boosting state revenues on paper.
The government says Venezuela produces threemillion barrels of oil per day, although OPEC says thefigure is 2.3 million. Oil production accounts for 90percent of the country’s hard-currency revenue.
Venezuela moveseen as currencydevaluation
LWMC
delegation
off to India LAHORE: A three-member delegation
of Lahore Waste Management Company
(LWMC) has left for Indian Punjab on
an invitation from Indian Punjab’s
deputy CM Prakash Singh Badal for
seeing the feasibility of replicating
LWMC model in Indian Punjab cities.
The delegation comprising LWMC MD
Waseem Ajmal Chaudhry, GM
Operations Khalid Majeed and Manager
Operations Asif Iqbal have left through
Wahga Border on a three-day visit to
Amritsar, Ludhiana, Ferozepur and
other cities. In November last year,
Badal visited Lahore and expressed
great appreciation for the LWMC model
while stressing on the need to replicate
such a modern SWM system in Indian
Punjab also. After his approval, a four-
member team comprising Indian
Punjab’s municipal secretaries and
experts studied the LWMC model in
Lahore in the first week of March. The
delegation will be meeting the Amritsar
mayor and commissioners of
corporation besides seeing SWM
systems and landfills in proposed cities.
Badal has specially invited the
delegation to his ancestral village in
Jalalabad, district Ferozepur. The LWMC
representatives will see SWM offices in
these cities and field operations of
general cleanliness will also be
observed. “Solid Waste is likely
to bring closer the two neighbors. We
are expecting major breakthrough in
the end of this visit in form of
consultancy services and replication
approval of LWMC model in Indian
Punjab cities. It is heartening to see
that solid waste management and
environment are becoming a concern in
third world countries and they are
eager to lend a helping hand to each
other to improve the situation in urban
areas,” said the LWMC MD while talking
to journalists at Wahga before his
departure. Press releAse
CORPORATE CORNER
SYDNeY
APP
Two Airbus A380s made a dramatic tandem flight over theSydney Harbour Bridge Sunday to launch the new Qantas-Emirates partnership, hailed by the Australian carrier as a“seismic shift” in aviation.
The tie-up, approved last week by Australia’s competitionwatchdog, allows the two airlines to combine operations foran initial period of five years, including coordinating ticket
prices and schedules.It will also see Qantas switch its hub for European flights
from Singapore to Emirates’ Dubai base as it attempts to turnaround its struggling international business.
“Dubai is the best hub for Qantas in the 21st century,” thecompany’s chief executive Alan Joyce said after watching theflyover by superjumbos from both airlines at 1,500 feet (450metres) over Sydney’s famous landmark.
“It is eight hours’ flying time from 75 percent of theworld’s population.”
All eyes on ECB to
calm markets after
Cyprus bailout
FraNKFUrT
APP
The European Central Bank will hold offfrom cutting rates or announcing any otherpolicy moves at its meeting next week so asto keep up pressure on governments to solvethe eurozone’s crisis, analysts said. The ECBhas never hesitated to act as firefighter in thelong-running crisis, which seemed to haveabated until political gridlock in Italy and thecrisis in Cyprus sent shockwaves throughfinancial markets once again. Throughout thecrisis, the central bank has slashed its keyinterest rates, pumped more than 1.0 trillioneuros ($1.3 trillion) into the banking systemto avert a credit crunch and sought to tameborrowing costs in worst-hit countries bybuying up their sovereign bonds.
Sydney flyover launches Qantas,Emirates tie-up
laHore
APP
The entire newly elected body of the fed-eration of Pakistan Chamber of Com-merce and Industry (fPCCI) Sundaystrongly demanded total exemption of in-dustrial sector from power and gas loadshedding to help strengthen national econ-omy besides saving the industrial andagricultural sectors from irreparable loss.
fPCCI President Zubair AhmadMalik, VP SAARC CCI Iftikhar AliMalik and all VPs Azhar Saeed Butt,
Shaikh Muhammad Ali,Khawaja MuhammadIqbal, Zafar KhalilKhan, Gulzar feroz,Abdul Khaliq andShaheen Ilyaswhile talking tomedia demandedthat government,in the larger na-tional interest,should accord toppriority to industrialand agricultural sectors.
They demanded uninter-rupted gas supply
throughout the year toboost the economicgrowth and meetexport targets be-sides ensuringbumper crops.
They said thatsurvival of all
countries rely onsound economy,
hence in the greater na-tional interest the govern-
ment should reshape its policy of loadshedding to provide a chance to industryto flourish.
Iftikhar Ali Malik said that keepingin view global business scenario, highmark-up rate by banks should also be re-duced to single digit for providing solaceto the industry.
He said that absence of gas andpower and increased fuel prices wouldburden the industrial sector which wasalready facing high mark up rate. “Allthese factors are increasing the cost ofdoing business”, he added.
FPCCI new body demands exemption from gas, power load shedding
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