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South Africa welcomes Pakistani investment with open arms Page 03

Monday, 16 April, 2012

The most prudent stepforward. Number oneproblem on the Pakistani side

taken up as soon as trade talks gathermomentum. This is just the kind ofnecessary linkage we mentioned –long term projects that force bothparties to play down politicaldifferences because of favourableeconomic and financial barter. Andelectricity will enable greater trade aswell, as soon as there’s enough formanufacturing and industry toperform at more productive levels.Subsequent value addition will meanmore exports, and a healthier fiscalposition in Islamabad. The trade drive is important alsobecause Asian exports are stillvulnerable to the sovereign debtnightmare in europe – near zerogrowth and diminished importexpenses – as well as weak growth asbest in the US. Perhaps increasedintra-regional trade and redrawing ofeconomic linkages is one of the betterthings to have come out of the ’08recession’s lingering hangover. As wesee regional trade blocs forming,there is a feeling that such movementshould have begun a long time ago.Still, better late than never. To give credit where it is due, noteven the most enduring of optimistswould’ve counted unprecedentedcommercial breakthroughs in their’12 outlook for Pak-India relations.And while prospects of an electricitydeal have done rounds in the press,surely there are avenues of potentialcooperation that will surprise manyon both sides. Let’s just hope riskmanagement has been given fairtime and attention. We have seenconfidence building measures of thepast derailed by elements out toharm both countries. They areperhaps the biggest threat to theprogress that has been made in thelast few months.

COmmEnTElectricity from India

ISLAMABADONLINE

ISLAMABAD Chamber of Com-merce and Industry (ICCI) haswelcomed resumption of Pak-India economic relations as In-

dian government has taken decisionin-principle to allow foreign direct in-vestment from Pakistan.

Yassar Sakhi Butt, President, ICCIchairing a meeting, welcomed the deci-sion of Indian counterparts to open for-eign direct investment gateway forPakistan and termed it a highly positivestep which could unleash many benefitsfor the people of both countries.

he was of theview that strongereconomic relationsbetween India andPakistan would notonly prove benefi-cial for both the coun-tries, it would also contributesignificantly in promoting regional inte-gration and stability in South Asia. TheICCI President said that huge potentialexists for increasing economic relationsfrom the current level of bilateral tradewhich stood around $2.7 billion to morethan $6 billion in coming years. he saidthat opening up of investment relationwould likely to cut down the illegal trade

between the twosides which was esti-mated to be worthbillions of dollars.Butt also appreciatedthe decision of grant-ing a year-long mul-

tiple-entry visas for business visitors toenter and exit through different cities andsaid that the decision would shut tradethrough third countries and provide ben-efit to both countries in long-term.

he said the people of both countriesshare a common border that gives bothcountries additional advantage to en-hance many times the current level ofbilateral trade.

The ICCI President said that it is theera of economic collaboration and compe-tition as many regions have already madebig strides to promote trade by establish-ing regional block. however, South Asiawas still considered a least integrated re-gion due to which it was way behind ineconomic progress, he opinioned.

he said that the two countriesshould now focus on resolving other eco-nomic issues before moving on to moresevere problems. ICCI Presidentstressed the need for bringing more tar-iff reforms and proactive steps for reduc-tion duty on exports items to India sothat bilateral trade relations could benormalized in real terms.

BEIJINGREUTERS

The People’s Bank of China saidit would allow the yuan to riseor fall 1 percent from a mid-point every day, effective

Monday, compared with its previous 0.5percent limit.The timing of the move underlinesBeijing’s belief that the yuan is near itsequilibrium level, and that China’seconomy, although cooling, is sturdyenough to handle important, long-promised, structural reforms, analystssaid. The move would help China deflectcriticism of its controversial currencypolicy ahead of the annual springmeeting of the International MonetaryFund in Washington next week.A slowing world economy that has paredinvestor expectations of a steadily risingyuan likely also gave Beijing theconfidence to proceed, knowing that alarger band would not necessarily lead toa stronger currency.“The central bank chose a good timewindow to enlarge the trading band.The market’s expectation for a strongeryuan is weakening,” said Dong Xian’an,chief economist at Peking FirstAdvisory in Beijing.

“The move partially clears away doubtson whether China can manage a softlanding in its economy, and makes clearChina’s reform road map.”Investors have widely expected China towiden the yuan’s trading band this year,thanks to repeated hints from Beijingthat the change would take China onestep closer to its financial goal: abasically convertible yuan by 2015.having a currency that trades with fewerrestrictions also enhances Shanghai’sstatus as a financial center. Chinaenvisions turning the city into a globalbanking hub by 2020.“From April 16, 2012, the trading bandfor the yuan against the dollar in thespot interbank currency market will bewidened from 0.5 percent to 1 percent, “the People’s Bank of China said in ashort statement on its website.“At present, the development of China’sforeign exchange market is maturing,the market’s ability to independentlyprice and manage risks is growing bythe day,” the bank said.Ultimately, the government wants theyuan to rival the dollar as a globalreserve currency, and to this end it hasgradually allowed the currency to trademore freely.After a pilot programe last year was

judged successful, in March this year itgave permission for firms across Chinato pay for imports and exports in yuan, away of helping to increase the use of theyuan in trade deals.NO SHARP GAINS: The yuan, alsoknown as the renminbi or “people’smoney”, hit a record high of 6.2884against the dollar on Feb 10, but islittle changed against the U.S.currency for the year, softening 0.14percent since January.Analysts say its listless showing islikely to persist through 2012, asexpectations of future gains are dulledby China’s easing economic growth,and speculation that the yuan is nearequilibrium.As China this year heads into its biggestleadership changeover in a decade, itwould be in Beijing’s interests to avoiddramatic fluctuations in the yuan thatcould hurt exporters, many of whomare battling rising costs and tepiddemand as it is.“The yuan is close to an equilibrium. Weexpect it could only gain 1.4 percentagainst the dollar this year, so the time isright to widen the band,” said Lan Shen,an economist at Standard CharteredBank in Shanghai.So muted is the yuan’s outlook that

investors in the offshore non-deliverableforwards (NDF) market believe there iseven room for the currency to fall. Thebenchmark one-year NDF is pricing for a0.4 percent depreciation.Any decline would be a stark contrast tothe yuan’s steadfast rise in recent years.It jumped about 5 percent in 2011 on topof nearly 4 percent in 2010, givinginvestors the impression that China wascomfortable with a rising currency.It has gained about 30 percent innominal terms against the dollar sincethe landmark move in the summer of2005 to de-peg the yuan from thegreenback.A WELCOME MOVE: The yuan’svalue has always been a point ofcontention between China and itstrading partners, notably the UnitedStates, which say China suppresses thecurrency to boost exports. Chinarepeatedly rejects the accusation.Instead, Chinese leaders say the yuan isnear its equilibrium level and thatauthorities aim to keep its value“basically stable”, more flexibilitynotwithstanding.Beijing’s desire to have the yuan trademore freely was stressed by bothPremier Wen Jiabao and Central BankGovernor Zhou Xiaochuan in March

when they said conditions were ripefor changes.Their calls came even as China is set toconfront its slowest economic growth ina decade this year, leading many tobelieve Beijing is ready to foresakeheady growth for a restructuredeconomy driven more by domestic thanexport demand.Although not a primary intention, amore flexible yuan also works in China’sfavor in turbulent times by giving itmore room to guide the currency lowerto aid exports.“The message of this move is that therenminbi appreciation story is over.Greater two way volatility will be thename of the game going forward,” saidQu hongbin, an economist at hSBC.Data on Friday showed China’s economysuffered its weakest growth since theglobal financial crisis in the first quarterby expanding just 8.1 percent, belowforecasts for 8.3 percent.The last time China changed its currencypolicy was in June 2010, after a two-yearperiod when it effectively re-pegged theyuan to the dollar to shield China fromthe 2008-09 global financial crisis.“I think the step should be welcomed byforeign countries, especially the UnitedStates, who has called for reforms,” saidDongming Xie, China economist atOCBC Bank in Singapore. “This is alsorelated to growing domestic calls foreconomic reforms.”

China gives currency more freedom with new reformChina took a milestone step in turning the yuan into a global currency on Saturday by doubling the size of its trading bandagainst the dollar, pushing through a crucial reform that further liberalises its nascent financial markets.

WHEn yOu’RE HAppy

AnD yOu KnOW IT,

ClAp yOuR HAnDS

TRICKS OF THE TRADE

ICCI applauds India’s decisionfor FDI from PakistanICCI president touts step asbeneficial for South AsiaBilateral trade could jumpfrom $2.7 billion to $6 billion

PRO 16-04-2012_Layout 1 4/16/2012 12:10 AM Page 1

IntervIew: Cape town Chamber of CommerCe and Industy presIdent, mIChael bagarIm

news02Monday, 16 April, 2012

LAHOREYASIR HABIB

PAKISTAN is welcome to ex-ploit trade and business op-portunities in South Africabrimming with enormous po-

tential as an investment destination,offering a unique combination ofhighly developed first world economicinfrastructure with a vibrant emergingmarket economy.

Cape Town Chamber of Com-merce and Industry presidentMichael Bagarim gave the positivegesture in an exclusive interview withPakistan Today.

he suggested Pakistan to gain a sta-tus of potentially sound economic coun-try rising above its fame as cricketingcountry if it wanted to emerged as de-veloped country. “Cape Town Chamberof Commerce and Industry, being estab-lished in 1804 as oldest member-basedbusiness organisation with mandated toserve, enable and lead business in theCape and having plethora of services,networking opportunities as well as ro-bust advocacy on behalf of business,aims to bring together business peoplewithin the South Africa and other partof the world to create business opportu-nities,” he said. “Pakistan has ocean oftrade opportunities here and it shouldgear up to seize all of them,” Mr.Michael added. he emphasized theneed for exchange of trade delegationsbetween Pakistan and South Africa, say-ing the exercise would be beneficial forboth the country.

Micheal informed that since the ad-vent of democracy in 1994, SouthAfrica’s economy had been undergoingstructural transformation, with the im-plementation of macro-economic poli-cies aimed at promoting domesticcompetitiveness, growth and employ-ment and increasing the economy’s out-ward orientation.

he made it clear that foreign invest-ment was welcome in South Africa, andinvestor-friendly policies supported thepublic pronouncements. “South Africa’sfinancial systems are sophisticated, ro-bust and well regulated. South Africanbanking regulations rank with the bestin the world, while the sector has longbeen rated among the top 10 globally.Foreign banks are well represented andelectronic banking facilities are exten-

sive, with internet banking a growthfeature of the sector, he revealed.

Located at the southernmost tip ofthe African continent, South Africa isideally positioned for access to the 14countries comprising the SouthernAfrican Development Community(SADC) – with a combined market ofover 250-million people – as well asthe islands off Africa’s east coast, andeven the Gulf States and India. SouthAfrica also serves as a trans-shipmentpoint between the emerging markets ofCentral and South America and thenewly industrialised nations of Southand Far east Asia.

Major shipping lanes pass along theSouth African coastline in the South At-lantic and Indian oceans, and its sevencommercial ports form by far thelargest, best equipped and most effi-cient network on the continent.

These ports are the conduits fortrade between South Africa and herpartners in the SADC and the SouthAfrican Customs Union, as well as hubsfor traffic to and from europe, Asia, theAmericas and the east and west coastsof Africa. Mr. Michael Bagarim said thatnot only was South Africa in itself animportant emerging market, it was alsoa minimum requirement for accessingother sub-Saharan markets. “The coun-try borders with Namibia, Botswana,

Zimbabwe, Mozambique, Swazilandand Lesotho, and its well-developedroad and rail links provide the platformand infrastructure for ground trans-portation deep into sub-SaharanAfrica,” he added.

“South Africa is also a dynamicforce within the 14-member SouthAfrican Development Community(SADC), and was a key player in the de-velopment of the New PartnershipforAfrica’s Development (Nepad), thesocio-economic renewal programme ofthe African Union.”

he said that market access has beenenhanced through free trade agree-ments with the european Union and theSouthern African Development Com-munity and the implementation of theAfrica Growth and Opportunity Act bythe United States.

The country’s manufacturing out-put, he said, was increasingly technol-ogy-intensive, with high-techmanufacturing sectors – such as ma-chinery, scientific equipment andmotor vehicles – enjoying a growingshare of total manufacturing produc-tion since 1994.

About South Africa’s technologicalresearch and quality standards, he saidthat they were world-renowned andadded that country had developed anumber of leading technologies, partic-

ularly in the fields of energy and fuels,steel production, deep-level mining,telecommunications and informationtechnology.

About Cape Town Chamber of Com-merce and Industry, he said CapeChamber of Commercehad alwaysplayed a significant part in keeping itsmembers informed of the latest issueswhich affected businesses both largeand small. Speed networking events, in-formation sessions, staff training andother events were well attended by bothmembers and non-members, he added.

“The tougher than normal economicclimate of the last few years has re-quired a much more pragmatic view andthe Chamber is finding new ways topractically reach out and help busi-nesses drive efficiencies. Our Interna-tional desk and business supportdepartment have been set up to drivenew business deals, assist companiesreach export potential and help mem-bers run their business more efficientlyand within the bounds of national com-pliance regulations. Access to arbitra-tion and mediation will also be madeavailable to ensure members avoidcostly litigation wherever possible,” headded. One of the key functions of theCape Chamber is advocacy. Lobbying onbehalf of its members is gaining tractionand the Chamber is now represented atthe highest national levels, taking partin bargaining and negotiations at theNational economic and Developmentand Labour Council (NeDLAC) andmany other local and provincial bodies.The Chamber is also working with itsactive membership to create leadershipbodies in various key sectors. TheChamber portfolio committees havebeen set up to reflect those at nationalParliament and through these, the com-mittee chairs comment on policy, legis-lation and regulatory issues which mayimpact businesses in various verticals.

The Cape Chamber of Commerce isever mindful of the fact that it while itis important to provide information andpractical measures to help its membersbetter run their businesses, creatingdeal flow is also critical. For this reason,the leadership has also developed an ag-gressive pan-African policy which willsee it connecting and collaborating withother African chambers, governmentsand agencies to facilitate expansion intothe continent for its members.

JEffREy fRANkEL

WhY do many countries findit hard to control theirbudgets? Concern aboutbudget deficits has become

a burning political issue in the UnitedStates; helped to persuade the UnitedKingdom to enact stringent cuts, despitea weak economy; and is the proximatecause of the Greek sovereign-debt crisis,which has grown to engulf the entireeurozone. Indeed, among industrializedcountries, hardly anyone is immunefrom fiscal woes.Clearly, part of the blame lies with voterswho don’t want to hear that budgetdiscipline means cutting programs thatmatter to them, and with politicians whotell voters only what they want to hear.But another factor has attracted littlenotice: systematically over-optimisticofficial forecasts.Such forecasts underlie governments’failure to take advantage of boomperiods to strengthen their finances,including running budget surpluses.During the expansion of 2001-2007, forexample, the US government projected

that budget surpluses would remainstrong. These forecasts supportedenactment of large long-term tax cutsand faster spending growth (bothmilitary and otherwise).european countries behaved similarly,running up ever-higher debts. Notsurprisingly, when global recession hit in2008, most countries had little or no“fiscal space” to implementcountercyclical policy.The US Office of Management andBudget (OMB) has perennially turnedout optimistic budget forecasts. Foreight years, it never stoppedforecasting that the budget wouldreturn to surplus by 2011, even thoughvirtually every independent forecastshowed that deficits would continueinto the new decade unabated. The USprojections were over-optimistic evenat short time horizons. From 1986 to2009, the bias averaged 0.4% of GDPat the one-year horizon, 1% at twoyears, and 3.1% at three years.Sanguine macroeconomic assumptionsand fanciful theories about the effects oftax cuts underpinned rosy scenarios. Forthe quarter-century until 2009, theOMB’s three-year forecasts of economic

growth were biased upward by awhopping 3.8%, on average.But, in order to get buoyant budgetforecasts out of the rival CongressionalBudget Office, which is moreindependent than the OMB, a moreextreme strategy was required. electedofficials hard-wired misleadingprojections by excising from current lawexpensive policies that they had everyintention of pursuing.For example, the wars in Afghanistanand Iraq were financed with“supplemental” budget requests eachyear, as if they were some unpredictablesurprise. Likewise, every year, Congresscanceled “planned” cuts in payments tophysicians that, if ever implemented,would drive doctors out of the Medicaresystem. And, on the revenue side, thetax cuts that were enacted in 2001 wereall extended into 2011-12, despite anexpiry date of 2010; those whoproposed the law never intended toallow it to expire.Unrealistic macroeconomicassumptions, farfetched theories abouttax cuts, and legislation thatdeliberately misrepresented policyplans all worked as intended, yielding

overly optimistic forecasts, which inturn help to explain excessive budgetdeficits. In particular, such forecastsexplain the failure to run surplusesduring the economic expansion from2002-2007: if growth is projected tolast indefinitely, retrenchment isdeemed unnecessary.Many have suggested that budget woescan best be held in check through fiscal-policy rules such as deficit or debt caps.Some countries have already enactedlaws along these lines.The most important and well-knownexample is the eurozone’s fiscal rules,which supposedly limit candidatecountries’ budget deficits to 3% of GDP,and their public debt to 60% of GDP.The european Union’s Stability andGrowth Pact (SGP) dictated thatmember countries must continue tomeet these criteria. We know now howwell that worked out.Other countries have also adoptedfiscal rules, most of which fail. Indeed,part of the problem is that governmentsthat are subject to budget rules likeeurope’s SGP put out official forecaststhat are even more biased than those ofthe US or other countries. The Greekgovernment, for example, projected in2000 that its fiscal deficit would shrinkbelow 2% of GDP one year in the futureand below 1% of GDP two years into thefuture, and that the fiscal balancewould swing to surplus three years into

the future. The actual balance was adeficit of 4-5% of GDP – well above theeU’s 3%-of-GDP ceiling.In almost all industrialized countries,official forecasts have an upward bias,which is stronger at longer timehorizons. On average, the gap betweenthe projected budget balance and therealized balance among a set of 33countries is 0.2% of GDP at the one-yearhorizon, 0.8 % at the two-year horizon,and 1.5 % at the three-year horizon.So, how can governments’ tendency tosatisfy fiscal targets by wishfulthinking be overcome? In 2000, Chilecreated structural budget institutionsthat may have solved the problem.Independent expert panels, insulatedfrom political pressures, areresponsible for estimating the long-runtrends that determine whether a givendeficit is deemed structural or cyclical.The result is that, unlike in mostindustrialized countries, Chile’s officialforecasts of growth and fiscalperformance have not been overlyoptimistic, even during economicbooms. Thus, unlike many countries inthe North, Chile took advantage of the2002-2007 expansion to runsubstantial budget surpluses, whichenabled it to loosen fiscal policy in the2008-2009 recession. Perhaps othercountries should follow its lead.

Courtesy: Project Syndicate

JETRO Tulln Japanese delegation visits PBIT,

interviews CEOn CEO does his best to talk up Punjab

as a potential investment hub LAHORE

STAFF REPORT

AN official delegation of Japanexternal Trade Organization(JeTRO), comprising Keiichi Kimura,

Director JeTRO, Japan and Kaoru Shiraishi,Country Manager JeTRO Pakistan, visitedPunjab Board of Investment & Trade (PBIT).JeTRO is official trade and investmentpromotion office of the Government of Japanworking under the Ministry of economy,Trade and Industry (MeTI). The JeTRO,team conducted electronic interview of DrSajid Yoosufani CeO, PBIT and his team onthe Retail Consumer Market in Punjab andthe upcoming popular business & investmenttrends. The documentary on retail sectoropportunities being filmed by JeTRO will alsoinclude similar insights of the sector inBangladesh and Sri-Lanka besides Pakistan.After finalization, the documentary will beprojected from the platform of JeTROamongst the prospecting investors in Japan.Dr Sajid Yoosufani, CeO PBIT made the caseof Punjab, very strongly and comprehensivelyand highlighted the lucrative and profitableopportunities for Japanese investors in theretail sector in Punjab. he said that with over93 million consumers, and over half of itunder 30 years of age, Punjab offerstremendous opportunities in retail sectorpresently. Pakistan’s Retail industry is worthUSD 42 Billion & with the 18 Million middleclass where, an average consumer spends 42%of his income on food and with a sectorgrowth rate of 7.3% per annum, retail sector isrising rapidly. The potential of varioussegments within the retail sector was amplydemonstrated to the JeTRO team, who wouldin turn convince the Japanese investors tochoose Pakistan as their next businessdestination. Dr Sajid further added that “Theprovincial government is highly committedto the Private Sector development in Punjaband is offering a very pro-businessenvironment accentuated with a positivepolicy framework to generate foreign anddomestic investment and employment. PBITis essentially present to promote the viableeconomic sectors in Punjab and is willing tooffer every support and facilitation to theJapanese Investors wanting to invest inPunjab”, he concluded. JeTRO in itsendeavors to provide latest information onthe current economic and business trends inPakistan to businessmen in Japan ispresently working on gathering informationpertaining to the developing consumertrends on the retail sectors in Pakistan.

Budgetary wishful thinking

South Africa welcomes Pakistaniinvestment with open arms

PRO 16-04-2012_Layout 1 4/16/2012 12:10 AM Page 2

news

Monday, 16 April, 2012

03

DOUGLAS J SkINNER

MUCh has been made ofApple Inc. (AAPL)’srecent decision tobegin paying regular

dividends, given the company’slarge free cash flow (about $1 billiona week) and cash balance (close to$100 billion).

Yet, according to finance theory,stock-market investors should be in-different to whether they receive theirreturns as cash dividends or capitalgains. In fact, when dividends are taxdisadvantaged, as was the case until2003 and may be so again soon, in-vestors should prefer retention andthe resulting capital gains. This ledeconomists -- notably Fischer Blackin 1976 -- to describe the payment ofdividends as a puzzle.

If dividends were puzzling in1976, they are even more so today be-cause companies can now return cashto stockholders using stock repur-chases, which have at least two ad-vantages over dividends.

First, stock repurchases don’tcommit companies to future distri-butions. By announcing a dividend,however, managers are essentiallycommitting their firms to paying aregular dividend for the foresee-able future.

Second, if President BarackObama has his way and dividendsare returned to their traditional tax-disadvantaged status, the case infavor of stock repurchases becomeseven stronger.STOCK REPURCHASES: For awhile, it did seem that dividendswere in retreat and that stock repur-chases would become the dominantform of payout. The use of stock re-purchases has grown tremendouslysince their emergence in the early1980s. It is no longer uncommon forthere to be years when the dollar

amount of repurchases exceeds thatof dividends, something that first oc-curred in the late 1990s.

Meanwhile, dividends seemedto be disappearing. In a paper pub-lished in 2001, the economistseu-gene Fama and Kenneth Frenchreported that just one-fifth of U.S.nonfinancial firms paid dividends in1999, compared with two-thirds inthe mid-1970s.

Further, survey evidence sug-gested that the only reason man-agers of the remaining dividendpayers continued that practice wasbecause their companies had doneso for many decades.Coca-Cola (KO)Co., for instance, has paid dividendseach year since 1920, making it a dif-ficult habit for its investors (andmanagers) to break.

In recent research, we used dataon companies’ payout policiesthrough the financial crisis to shednew light on the dividend puzzle.The idea was simple: If dividendsare an inferior payout vehicle, it wasreasonable to expect that managersof companies wishing to end themcould use the Great Recession as aconvenient excuse. Given the up-heaval in the financial markets in2008 and 2009, along with the re-lated economic downturn, investorswould surely understand the need todispense with dividends.

We found little evidence thatnonfinancial firms cut dividendsduring the crisis. While many banksand other financial firms cut backtheir payouts, many of them only didso when forced by regulators. Re-markably, even banks receiving tax-payer money from the TroubledAsset Relief Program continued topay dividends, though the govern-ment soon forced them to stop. Thisfact alone is testament to the stayingpower of dividends.

For many dividend payers it wasbusiness as usual during the crisis:

Blue-chip companies such as McDon-ald’s Corp. (MCD), Procter & GambleCo. (PG), Coca-Cola, PepsiCo Inc.(PeP) andexxon Mobil Corp. (XOM)continued to increase their payouts,as they had for many decades.CONCENTRATION OF COMPA-

NIES: We also found that the shareof dividend payers bottomed out at 15percent in 2002, and has increasedsince then. Further, as discussed in a2004 paper I wrote with harry andLinda DeAngelo, there has been astrong increase in the concentrationof dividend payments over the last 30years: While the number of firmspaying dividends has declinedsteadily, the total amount of divi-dends paid has risen (in real terms,adjusting for inflation). The paper re-ported that the top 25 dividend-pay-ers accounted for more than half ofall dividend payments by public non-financial firms in 2000.

Also inconsistent with the ideathat repurchases are a substitute fordividends is the fact firms that paythe largest dividends also tend to bethe largest repurchasers. Instead ofcutting dividends to make repur-chases, the small set of large blue-chip industrial firms that paydividends have augmented their pay-outs with repurchases. Because re-purchases are so flexible, thesecompanies can use them to pay outexcess earnings in unusually goodyears, so payout ratios for these firms(the ratio of payouts to earnings) areoften well above 50 percent.

In our recent paper, we find thatthe growth of total payouts -- divi-dends and repurchases -- has beenvery strong over the past decade.From 2001 through 2007, aggregatedividends paid by nonfinancial firmsalmost doubled while repurchases forthese firms increased by a factor offive. Strikingly, aggregate payout ra-tios increased to about 80 percent in2006 and 90 percent in 2007, before

the crisis caused companies to radi-cally reduce repurchases.

Is it good for the largest compa-nies, those that contribute the lion’sshare of earnings, to be distributingso much cash? If firms are distribut-ing the bulk of their earnings tostockholders, it means that theyaren’t investing in the equipment orundertaking the research that leadsto future improvements in productiv-ity, earnings and job creation.

But back to the original question.It seems clear from our recent workthat dividends are very resilient, andare unlikely to disappear. What ex-plains this staying power?

First, some argue that dividendsprovide important “signals” about thestrength or quality of the firm’s un-derlying earnings stream. (Becauseinvestors know that a significant div-idend is a very strong commitment topaying out at least the current divi-dend amount on a continuing basis.)

Second, dividends help disciplinemanagers’ tendency to squandertheir firms’ cash on wasteful or un-productive projects or acquisitions.This is particularly a problem inlarge, mature companies that gener-ate sizable free cash flow.

Third, it could be that companiesare catering to certain investors, whohave a strong preference for divi-dends over capital gains. This notonly applies to the traditional “wid-ows and orphans” who might disci-pline their spending by limitingconsumption to dividend income, butalso to large institutions such as pen-sion funds that often face institu-tional and regulatory restrictionsforcing them to invest only in divi-dend- paying stocks.

Although we haven’t yet estab-lished the reason, the data are veryclear: Dividends, even though theyremain a puzzle, are here to stay.

Courtesy: Bloomberg

AMAR BHIDé

SAvING the euro, say thesages of the globaleconomy, requires radicalsteps. The OeCD recently

called for a large european firewall– a mega-bailout fund for troubledgovernments and banks. Othersargue for integrating taxes andborrowing in the eurozone andshedding weak members, likeGreece, that struggle with astrong currency. But tall firewalls, fiscal union, orhomogeneity of membership areneither necessary nor desirable.What is needed are mechanismsthat recognize and accommodatedifferences, rather than new top-down efforts to impose uniformity.All governments, even Germany’s,tend to spend more than they tax,and to hide shortfalls usingaccounting sleight-of-hand.Treaties alone do not induce fiscalvirtue. The expectation that alleurozone countries would obeyrules aimed at capping their budgetdeficits was the common currency’sfoundational fantasy.Countries cannot get overlyindebted on their own: excessiveborrowing by europeangovernments required lenders whooverlooked the fact that sovereigndebt is in many ways similar to, andin some cases worse than,unsecured private debt or junkbonds. Governments provide no

collateral and offer no covenants torestrain profligacy. As the Greekdebacle has shown, governments donot pay penalties for fraudulentaccounting. There is neither a legalprocess for forcing a state to pay offcreditors, nor a legal venue for debtrenegotiation.Purchasers of sovereign debt,therefore, should be extremelycareful – either shunningspendthrifts or demanding higherinterest rates to offset greater risk.Making excessive borrowingexpensive or impossible would capdeficits, treaty or no treaty.Unfortunately, banks enabledexcessive borrowing by recklessgovernments by accepting interestrates that were only a bit higherthan the rates that more cautiousgovernments had to pay. The 2008debacle should have served as asharp reminder of credit risk.Instead, banks increasedindiscriminate purchases ofgovernment debt, and regulatorsunwittingly encouraged it bypermitting banks to hold sovereigndebt without capital reserves thatproperly reflected the risk. In fact,holding government debt helpedbanks to meet their liquidityrequirements. Not surprisingly, theyloaded up on the highest-yieldingbonds, ignoring whether the extrainterest justified the risks.This indiscriminate lending nowjeopardizes the solvency of banksworldwide. Yet the official responsehas been more willful blindness to

differences between dodgy andsound debt. The european CentralBank has been lending to bankswithout regard to thecreditworthiness of theirgovernment-bond holdings, therebyaccumulating debt that threatens itsown solvency.Bailout funds have been created tobuy troubled debt. But, while theirpurchases have temporarily boostedasset prices, they won’t change thereality of over-indebtedness.The “more integration” camp wantseuropean governments toguarantee each other’s debtsexplicitly. Such schemes couldeliminate risk and interest-ratedifferentials; however, while somegovernments, like Germany, are inrelatively good shape, theirresources are not infinite.Straining these governments’finances in the hope of restoringmarket confidence is a bad bet.Moreover, any meaningful fiscalunion is a non-starter. handingrevenues over to a single fiscalauthority is unappealing to manyeuropeans. Indeed, regional partiesin Spain, Italy, and Belgium arealready pushing for greaterdevolution. And, even if fiscalintegration were feasible, theexamples of the United States andJapan do not inspire confidence thatintegrated european finances wouldexhibit German thrift rather thanGreek profligacy.According to French PresidentNikolas Sarkozy, “There cannot be a

single currency without economicconvergence.” Yet the dollar hasserved the US as a medium ofexchange for nearly 150 years,despite huge regional differencesbetween, say, Silicon valley, theRust Belt, and the Oil Patch. Anddollars are widely used in domestictransactions in places far outside theUS, such as Russia and Israel.Differences in the circumstances ofindividuals and businesses withinand across countries areunavoidable. It behooves all,whether they are struggling orsoaring, and whether they are nearor far, to use a common medium ofexchange to trade with each other.Like standardized weights,currencies are supposed to calibrateand bridge, not eliminate,differences. The Greek economy wasnot “unfit” to join the euro in 1999,just as no one is too heavy to beweighed in kilograms.That is why shrinking the eurozoneto exclude weak members reflectsanother unwarranted predilectionfor uniformity. Governments, afterall, can rarely overborrow withoutaccess to international credit.Indiscriminate lending – not theend of the drachma – saddledGreeks with unbearable debt. Andexiting the euro will neither reducethe burden nor erase German andFrench bank losses.The least awful solution requires anhonest reckoning: writing downdebts that cannot be repaid andrecapitalizing insolvent banks.Country-by-country and bank-by-bank, the good must bedisentangled from the bad.

Courtesy: Project Syndicate

Why US companies continue to pay dividends

Honda inaugurates state-of-the-art 3S authorised dealership

LAHORE: honda Atlas Cars (Pakistan) Limitedrecently inaugurated its new state-of-the-art 3Sauthorized Dealership, honda Gateway, on Multan Roadnear Thokar Niaz Beg, Lahore. The objective of this newfacility is to ensure the provision of the best services tohonda customers. honda Atlas Cars (Pakistan) Limitedhas always tried its best to provide the maximumconvenience to its customers so that they can fully enjoythe pleasure of driving a honda, the world’s topautomobile brand. honda Gateway will not only providethe customers with brand new cars, but will also providethem with honda genuine parts, professional expertiseand high levels of service quality. honda’s 3SDealerships network in Pakistan, set up on the samepattern as that of honda Global guidelines, provides allhonda customers with a one-stop solution with the bestproducts and technical services. PRESS RELEASE

pak- China Business Forum and Industrial ExhibitionLAHORE: COMSATS Institute of InformationTechnology is organizing Pak-China Business Forum &Industrial exhibition from April 15-18 at Pak-ChinaFriendship Center. COMSATS-IIT introduces anacademia driven model of Business Cooperation byconducting Pak-China Business Forum to promoteacademia-industry collaboration in business andeconomic sector for mutual benefit of both thecountries. Major Chinese and Pakistani companies,small and medium enterprises, entrepreneurs,universities, and research & developmentorganizations will be attending the forum activities. Itis envisaged that the forum would provide anopportunity for commercialization of products andprocesses of the participating organizations. The mainthemes of the forum are Renewable energyTechnologies, New energy Technologies, Information& Communication Technologies, Water Conservation,Purification & Sanitation, Biomedical Materials andGeneral category. The main features of the eventinclude an exhibition of products by local and Chinesecompanies and Chinese companies and firms active inPakistan, workshops and side meetings withindustrialists, academicians and Pakistani Businesscommunity has been planned for the promotion ofbusiness activity among the two countries. ManyChinese companies are expected to participate. Astrong driver behind the South-South cooperation isthe increasing importance of middle-income countries.These developments, coupled with the growingnumber of organizations are dedicated to researchbased learning. The event partners are PakistanScience Foundation, National Testing Service, highereducation Commission, Xuzhou Normal University,Capital Development Authority, Islamabad Chamberof Commerce & Industry,Rawalpindi Chamber ofCommerce & Industry and NADRA Pakistan.It is important to promote university-industrycollaboration to strengthen the economy of thedeveloping countries to improve the living standardsof the people. PRESS RELEASE

CORPORATE CORNER

RAWALPINDI: Kafeel Burney, Head of Public Affairs MCB Bankltd hosted a dinner in honour of newly elected office bearersof APNS and senior editors at a local hotel. seen in thepicture are, Mr. Sarmad Ali, President APNS, Mr. MasoodHamid, GS APNS, Kafeel Burney, Kazi Asad Abid, Asif Zuberi,Dr. Jabbar Khattak, Ilyas Shakir, Mukhtar Aqil Adnan Malik,Shamsi Osman Satthi and others. PRESS RELEASE

Debt reckoning for Europe

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