A Tribute to Agha Hasan Abedi : A banking legend Of Pakistan

By Muhammad Nasim Khan

Fore sight is a talent. Foresight with vision is leadership. Leaders fall short of prophecy yet exercise this exquisite art of observing, feeling, knowing and doing about the needs of the people surrounded them. It’s only when you add humility to this visionary leadership that you get Mr. Agha Hasan Abedi. Through the vision beyond boundaries one man single handily:
* Founded two banks of stature and global reach in one life span.
* Initiated the very concept of IT by founding FAST, over a quarter century ago when few in the country knew what it meant.
* Instituted four charitable Foundations in Pakistan, Bangladesh, Zimbabwe and United Kingdom which even today dish out over Rs 500M annually.
* Rubbed shoulders with the heads of states of many important countries including
* America, Russia and China and claimed their personal friendships even though coming from a middle class family of no professional or political origin.
* Patronized an institute of global excellence like GIK University, not to mention the Rs. 750M grant.
* Employed large number of Pakistanis globally. * Turned youthful graduates into bankers and power executives.
* Had the vision to focus the need of third world foundation and global 2000 in 1970’s and 1980’s. * Put Pakistan on the map of corporate excellence.
* Dreamt to transform Pakistan into a power of technology and advancement.

Remained solely responsible to feed around 100,000 families for over 3 decades. The continuum of knowledge remains incomplete without learning from the experience of great leaders who have embedded their names in golden words in the history. I am trying to touch upon a Pakistani legend in the banking sector. My humble effort can only be equivalent to awe for the legend: Agha Hasan Abedi for all the years that I have had the opportunity to work under his guidance.

Mr. Agha Hasan Abedi born in 1922 in a middle class family in Lucknow, did his masters from Lucknow University in English literature; joined Habib Bank Ltd. in Bombay as a selective service officer in 1946. He excelled in his assignments and attained senior positions very fast. His power of excellence remained thirsty, which led him to found a new Bank by the name United Bank Ltd in 1958. His charismatic personality obtained spontaneous acquiescence and obedience. Within five years of its inception, he brought United Bank in Pakistan up at par with the largest private sector bank claiming number two position in the Country.

I am positive that there is hardly any professional person who has not heard great epics of the late Mr. Abedi. Infact I can safely vouch that there must be quiet senior bankers here whose inspirations were propelled by the name itself. I don’t talk of mere inspiration Mr. Abedi was an institution in himself. Not only being the founder and the president of a global bank in just one feat but taking it to the height of excellence through his ideals and philosophy reflects the epitome of leadership. Bank of Credit and Commerce International (BCCI) had its presence spanned over the globe in 73 countries in less than three decades; and even begged the position of the 6th largest bank in Country network against the difficult competition of Citibank, Barclays Bank and other top Banks of the world. At the helm of all these achievements was the magnificent leader Mr Agha Hasan Abedi himself.

Mr. Abedi was a man who immensely impressed the throngs of people who surrounded him and it is not surprising to hear bankers still quoting him on various occasions. He brought a revolution in the banking sector not only in Pakistan but over the globe. His staff practiced management philosophy which provided opportunities for maximum initiatives, decision making and enterprise within the concept of “joint personality” and “real management” which, while creating built in controls, inspired dedication to result oriented performance in the management team. The mission statement always remained “Submission to God, Service to Humanity, Giving and Success”. Since I have had a chance to work in the institution created by Mr. Abedi, I can relate to his philosophy and how he developed the character of his institution. The philosophy defined all dimensions and domain of vision and quality of vision with clean instinct and clear perception. The joint personality concept was preached to learn to live in totality with acceptance and responsibility and make to feel the power of togetherness and how it energises each other. The spirit of mutual love and respect permeated by moral pledge was professed. The guardianship concept had won the hearts of the BCC family for internal flow of guidance and love. Moral and material are two sides of a coin thus are inseparable but learn to bring equilibrium between our moral and material balance. Mr. Abedi believed in developing the human resource full of human capabilities supported with the moral and professional values and competence of highest level. The state of art management development centers and the staff colleges of BCC in Bogotá, New York, London, Cairo, Harare, Abu Dhabi, Karachi, Bombay, Dhaka and Hong Kong was a proof of his belief and he was always heard saying:

“We do not want to make you machine like traditional banker; we want you to grow as man of knowledge while also having technical knowledge. Although technical ability or technical knowledge, what ever you may call it is essential, development ability is the core of ability in banking”.

It was the management philosophy and encouragement of Mr. Abedi that led every employee put in his best efforts to make the organization grow to its full potential having an in built feeling that each one of them is the stake holder of the Bank. Mr. Abedi always referred to his success as the success of the organization and considered himself as only a part of the big picture. The humble individual that he was had associated success to hard work. His advice to young professionals who joined his league was:

“The source of all factors that play a part in the success of any operation is the ability to discover realities. You have to break through the barters of traditions and environment, which are not in tune with the reality of your life, and make you ignorant of your own bio-reality. The less you mortgage yourself to ego, the more you are able to disentangle yourself from the web of inhibitions and complexes and the more you relate to your actions to realities, the nearer you are to success. Unless you tackle your greatest enemies: ego and time, squarely you will never succeed”

Management conferences of Geneva, Vienna, Luxemburg and London of 1980’s attended by almost 500 professionals at each occasion including top auditors like Price Waterhouse and Earnst Whinney, few American congressmen, visionary ex- Finance Ministers and ex-ambassadors, were the true learning of real management in two days session. The motivation of staff in those conferences was evolved through deliberations on the floor on “Vision, Quality of vision, and Quality of commitment, Desire, Love, Moral and material, Joint Personality, Power of togetherness in addition to core banking discussions. The discussion of these concepts in the large meeting of professional managers and top bankers was not understood at that point in time by the world bankers and critics of Mr. Abedi but discovered later through a deep American Management research in late 1990’s and declared that “Love” is the most important factor in the motivation of employees against all benefits, perks, positions, bonuses and gratuities including stock options. Abedi was a dynamic personality who on one hand took the reigns of the Bank and took it to the peek of brilliance and on the other hand he was a tycoon who contributed to the economy of Pakistan and the diplomat as the roaming ambassador who rubbed shoulders with the elite of the world. His close association with the world leaders like Jimmy Carter, Deng Xiao Ping, Michael Gorbachov, Indra Gandhi, Shaikh Zyaid and many others brought recognition to the financial vista of Pakistan and uplifted the Pakistani talent in the eyes of the global community. He was a living example of “People Management” and harbored on establishing relationships on this principal. Mr. Abedi use to say: “What is really difficult is dealing with man and that you can learn only dealing with them”. Unquote All the past Heads of States of Pakistan since the early 70’s could be counted as his close friends. The ruler of UAE particularly of Abu Dhabi and Dubai treated Mr. Abedi with utmost respect and sought his advice and assistance on personal and state finances. Opening up a BCCI branch in India and China was a high mark in public relation and a great tribute to his personal contribution. During 1987 BCCI organized Third World Advertising Congress in China and to the great astonishment and pride of all; The Great Hall of People of China was made available for the conference. I remember the days of my career when Mr. Abedi was the role model of every young banker entering into the financial arena. Those who didn’t know him were impressed by his professional achievements and those who had the opportunity to work under his leadership or to meet him were impressed not only by the thorough professional that he was but also by the fine aspect of his personality. He was one of the few bankers who had anticipated nationalization of banks by ZAB and started planning for an independent overseas bank with Arab capital. He witnessed nationalization as anticipated and faced undue criticism from the Government of Pakistan while he was founding president of United Bank Ltd., yet he was never wary of Pakistan. Infact, he proved to be a compassionate patriot who offered his services to the Country at times of dire need. There was more to his personality that what one can say. Where Mr. Abedi took the role of a great leader, He also played the part of a mentor for his staff, an inspiration to the entire financial sector, and envy to competitors, awe to the peers and addition to the list of great leaders. Mr. Abedi brought marketing revolution in banking and introduced new marketing culture. Opened the closed doors of western banking disciplines and brought the Bank to the doorsteps of the customers. New banking products which were not known to the financial markets of third world in 1970’s and 1980’s were introduced with exemplary service and lot of mileage was covered which created a threat to the western banking, finding it difficult to compete. The IMP (internal market place) & EMP (external market place) products generated volumes of business, internally and externally at each location in addition to the credit cards and traveler cheques sales which captured the market business to the extant of over 80% at few locations and generated large profit volumes and fund float. The best furnished premises of the banks at best locations, equipped with a state of art technology were introduced by Mr. Abedi in those days in the third world countries to provide best services for the customers no less than the first world environment and even better. In the changed unique management style, the cabinised senior executives and bankers including him were brought on open floors to sit and interact with their colleagues to lead them with the joint personality and participative management concept. Mr. Abedi’s credo of “giving and service to humanity” for business relationship and social interaction is little known – so is his very tangible contribution to charity: Mr. Abedi said. “The spirit of charity is tarnished and evaporates should any other, beside the resilient, get to know about it”. Some of his enthusiastic ventures in the realm of charity can now be mentioned: BCC staff was granted a specific gratuity every year meant for the colleague to specially seek the needy, give this amount and feel the joy of giving.

BCCI Fast foundation to promote technical education in computer sciences through injection of huge endowment funds produced degree colleges in Islamabad, Lahore and Karachi. BCCI foundation now known as Infaq is not only serving the poor and poverty stricken but also cash starved health and educational institutions. Thousand of individuals, ordinary people in adversity, writers, artists, sick and needy are provided succor. Sind Institute of Urology and Transplantation (SIUT), National Institute of Cardio Vascular diseases karachi, GIK Engineering University Topi N.W.F.P, Shaukat Khanum Cancer Hospital Lahore, Lady Duffirin Hospital and Sir Syed University Karachi are few known major beneficiary institutions. The foundation had all along been funded with the endowment from BCCI operating profits in Pakistan, which instead of being repatriated overseas were dedicated to charity by Mr. Abedi. The foundation never takes any donation from anybody even now. His vision beyond the boundaries extended beyond the grasp of foreseeable time, but it was the magnitude of his desire to transform that vision into pragmatic reality to be put to use for the betterment of the Country, the people, the purpose and the deprived that called for more than a lifetime. I cannot say that I have presented to you Mr. Abedi as the person, he was, because there are volumes to quote to his dynamic personality. You would all agree that any man who can achieve all that he did and was poised for more was surely not just another man. He was a man full of capabilities that knew his potentials and utilized the gifts of his abilities. I summaries it as : “His routine was to dream and his schedule to achieve them. His desire was to change the way we think. His passion was to have us standing with our heads high. His commitment was to give us excellence, competence, health, education, science and technology and self-reliance. His achievement was he did all the above”. I conclude my presentation with an official statement of Lord Justice Bingham of UK: released in 1992: “He aimed to create an international bank which would not simply be a national bank expanded overseas, but a worldwide \Organization at home everywhere and bring its services in particular to less developed Countries of the world where such facilities were least readily available. There was nobility in his ideal which, by his ambitions, energy and flare he did much to realize. The vices, which brought BCCI down, should not obscure the virtues it showed in some places and which inspired its creations”. Lord Bingham attributed the banks failure to the banks treasury losses claiming them on Quote “Incompetence and errors of unsophisticated immature venturing into highly technical and sophisticated markets”.

Robert Lee Pemberton – the erstwhile Governor of the Bank of England had also given a similar statement despite his negative role against BCCI as the then Governor in 1991. Mr. Abedi suffered a massive stroke early 1988, had a heart transplant, and was rendered incapable of any work. In this capacity he lived for almost six years and died on 04th August 1994 in Karachi leaving behind a widow and the only daughter in the family and million of admirers and followers and new generation of bankers over the globe called “BCCI Product” to carry the flag of burning desire with unmatched quality of commitment and professionalism to deliver the legacies of Mr. Abedi to the future generations.

Mujhe Ghuroob na Jano Jo main ufaq Pe Naheen
Bikhar gaya Hoon Undheron main Kehkeshan ki Tarah

It seems not all recessions are created equal

It seems not all recessions are created equal

By Samuel Brittan

Published: March 12 2009 14:46 | Last updated: March 12 2009 14:46

As can be imagined, international economic organisations, whatever else they do or do not do, spawn vast numbers of research papers. Most of them are worthy but of limited interest, a hypothetical example being "Forward Markets and Cash Crops in Ruritania". But occasionally something of real interest arrives. A recent example is an International Monetary Fund working paper entitled "What Happens During Recessions, Crunches and Busts?"* Although there is no such thing as "letting the figures speak for themselves", this paper is relatively theory-light.

Specifically it asks the question: "Are recessions associated with credit crunches and asset price busts different from other recessions?" The authors have examined 122 recessions in 21 Organisation for Economic Co-operation and Development countries over the period 1960-2007. This approach has the apparent defect of treating economies such as Portugal's as being as important as that of the US. But it has the advantage of providing more cases to examine. Moreover, international business cycles are sufficiently synchronised to prevent the study from being overwhelmed by the idiosyncrasies of a few countries.

The authors find that the typical recession in the period lasted four quarters and led to an output loss of 2 per cent of gross domestic product. One out of six recessions was associated with a credit crunch, one in four with a house price bust and one in three with an equity crash. Recessions associated with such financial stresses result in average output losses two or three times greater than other recessions.

Although financially generated recessions last only three months longer than other recessions, there is often a lag between the financial events themselves and the associated recessions. A typical credit crunch lasts 2½ years and is associated with a 20 per cent decline in credit. An equity price crash lasts for about the same time, but is associated with a drop of about half in the value of equities. Housing busts last even longer, namely 4½ years, and bring with them a 30 per cent fall in real house prices. The most robust of the relationships is between house price falls and the depth of recessions. Despite the volatility of equity prices their relation to the real economy is more uncertain. Paul Samuelson has quipped that the stock market has forecast eight of the past five recessions.

There is, however, worse to come. Recessions associated with oil price shocks bring with them a drop in output 0.8 percentage points greater than in other recessions. Although oil prices of about $45 a barrel are now regarded as very low, in the first half of 2008, when the recession was gathering force, they reached heights of about $135 compared with less than $20 at the end of the 1990s.

Taken by themselves the results of the IMF study are gloomy rather than catastrophic. Their results do not claim to represent more than average experience. In any case we are not doomed to repeat the past exactly. The 19th-century philosopher Hegel said that the only lesson of history is that "peoples and governments have never learnt anything from history, or acted on principles deduced from it." His disciple Karl Marx, who seems to be back in fashion, said that history does repeat itself - first as tragedy, then as farce. Nevertheless, history is all we have to go on.

This encourages me to ventilate the view that, "The recession will be over sooner than you think", to quote the title of an article in CentrePiece by two US academics, Nick Bloom and Max Floetotto. The bit of history they emphasise is that of uncertainty exhibited in the equity market, measured by the implied volatility of the S&P100, apparently known as the "financial fear factor". This reached an all-time peak at the time of Lehman Brothers' collapse last September but has since fallen back by 50 per cent, and "other measures of uncertainty have also fallen".

The authors predict that US GDP will start to rebound from the autumn of this year. The indicators used by these economists may seem a flimsy basis from which to base such forecasts. But no more so than the more heavyweight multi-equation models that have let us down so badly at crucial moments. My own intuition suggests that the US will start to recover before other big economies partly because of national "can do" attitudes, especially under the Obama administration.

In any case the US is admirably free of concerns about budget and balance of payments deficits and Federal Reserve "printing of money". Whether these attitudes are a matter of hard conviction or merely reflect a feeling that the US is better placed to flout orthodoxy than other countries is neither here nor there.

The most encouraging thing I have read was the interview in the Financial Times this week with Lawrence Summers, economic counsellor to Barack Obama, who called for a short-term demand stimulus by governments. He added that the old global imbalance agenda of "more demand in China, less demand in America" should be shelved. "There is no place that should be reducing its contribution to demand right now." Amen.

 

Regards,

 

Haider Hussain

Economist

Elixir Securities Pakistan

UAN: +9221 111-354-947 Ext. 3331

Fax: +9221 2420527

http://www.elixirsec.com

 

 

Everyone is an economist

One of the best Zaidi's articles I've ever read......

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Everyone is an economist
S. Akbar Zaidi
Dawn, Saturday, 25 Oct, 2008

 

Pakistan’s economic crisis and confusion, exacerbated primarily on account of unforgivable delayed responses by the incumbent government, has also revealed the rather sad state of Pakistan’s media and of its economists.

 

The huge media explosion, particularly in the electronic media but also the English newspapers, has revealed how bare Pakistan’s scholarly cupboard is, and how charlatans have been crowned kings. These days, given the deserved interest in both the global financial crisis and the domestic economic meltdown, all television channels have been giving extended time to information and views pertaining to such issues on their channels.

 

Today, the electronic media has made bankers, businessmen, stockbrokers and journalists experts on the intricacies of economic and financial issues of which most know very little. Personal anecdotes, and not even informed opinion, replace any sound academic or general discussion about Pakistan’s economy or about the international financial crisis.

 

Barring very few exceptions, most supposedly informed guests on these channels cannot distinguish between the capital market, capital investment or the capital account, yet speak with an authority which only reveals their complete ignorance. Stockbrokers hold forth on monetary policy, bankers and MBAs on fiscal policy, and journalists on an assortment of issues ranging from what they think the impact of raising (or lowering) the CRR and SLR would be to the impact of an IMF programme of which they know barely the basics and can claim no understanding.

 

In the 25 years in which I have taught and done research in economics in Pakistan, I have never seen so many people appearing in the public arena and being called ‘economists’. Most of these self-styled, or increasingly media-styled, economists have hardly written academic papers or books, yet speak with the authority of someone who understands how a complicated and complex social, political and economic system works. Many now call themselves ‘political economists’ which gives them license to talk about anything at all, without having understood what it is that makes up the discipline of political economy. High journalism — and usually not even that — substitutes for scholarly and academic discussion in the media. Moreover, access to the Internet has made a cut-and-paste job far easier, and for many newspaper readers who do not scan more than just a single column, material which has been developed and debated in very different contexts is recycled as original.

 

Editors often complain about the huge dearth of ‘good writers’ and this is particularly marked in the case of economic and financial issues. While many articles or reports in newspapers simply provide a great deal of information, the inability of many writers to make sense of the data is an obvious and chronic problem. Given the format of the electronic media, even data and information are not a requirement, and with generalist anchors not even trained in the very basics of economics and hence unable to ask the right questions, both anchors and their guests make do with a few popular sound bites, talking a lot but saying very little. It is very seldom that one hears an informed discussion on the economy.

 

Yet, it is important to state that it is not just the media that is responsible for the low level of discussion or debate, but economists too are to blame. While there are a few competent and trained economists in Pakistan, many of them having worked in educational institutions and with practical experience, most shy away from the media leaving the spaces to be filled in by the excess supply of mediocrity that this country has to offer. In the long list of highly accomplished eminent economists who constituted some of the many committees set up by this government, very few speak to the media or write in the press.

 

Some of course, for numerous often petty reasons, prefer not to be seen as critics of the government and stay away. Others consider themselves to be ‘above’ such populist or frivolous activity, feeling that their time is better spent teaching, writing papers or advising government. Then there are those who hardly have the time any longer, given the huge commitments their lucrative consulting involves. Moreover, speaking publicly may require them to articulate an opinion which may cause any one of their donors to take issue. As one prominent economist said once when asked why he didn’t write: discretion is the better part of valour.

 

Nobel prize winners like Joseph Stiglitz and Paul Krugman, to name perhaps the two most prolific, write regular columns in numerous newspapers in addition to teaching and their academic commitments which include writing articles and books. They write for a general audience and are immensely popular and critical of numerous issues. I believe, following the footsteps of such economists, there is a need for many of the best economists in Pakistan to intervene and shape public opinion and educate readers and viewers in the country.

 

There is a large audience out there, hungry for scholarly and academic discourse on issues which now affect everyone’s lives. More importantly, only those with understanding and scholarship can replace much of the nonsense that one reads or hears regarding the economy in Pakistan’s media. 

 

 

Regards,

 

Haider Hussain

Economist

Elixir Securities Pakistan

UAN: +9221 111-354-947 Ext. 3331

Fax: +9221 2420527

http://www.elixirsec.com

 

 

US $2 mn for Thatta Coastal Area Farmers

Islamabad, March 12, 2009- The Japan Social Development Fund (JSDF) will provide around US $2 million grant to improve the living conditions of approximately 6,500 small farmers’ and tenants’ households in coastal area of Thatta, Sindh by increasing household income and decreasing household expenditure and burdens. An agreement in this regard was signed between the Japanese Embassy and the World Bank on Thursday.

The Japan Social Development Fund (JSDF) provides grants in support of innovative social programs to help alleviate poverty in eligible client countries of the World Bank Group. The JSDF was established by the Government of Japan and the World Bank in June 2000. These grants target initiatives that foster direct participation of non-governmental organizations (NGOs), community groups and civil society at large.

This JSDF grant “Improving Living Conditions in a Changing Environment of the Thatta Coastal Farmers”, for US$1,977,650 will be implemented by Action Against Hunger (AAH) over a period of 3 years. High investments on inappropriate agricultural inputs, poor returns on agricultural activities and high health care costs due to the high incidence of waterborne diseases have created low standards of living for coastal farmers in district Thatta. As a result more small farmers and tenants are dependent on loans not only to procure agricultural inputs to sustain their livelihood activities but also for daily food items and health care.

Source: World Bank (South Asia) 12-03-2009

UK Economy

-- Khalid--
The weak lose themselves in God, the strong discover Him in themselves. (IQBAL)

An excellent resource for Economics books and articles

 

http://www.econlib.org/index.html

 

 

 

 ---------------------------------

Regards,

 

Haider Hussain

Economist

Elixir Securities Pakistan

UAN: +9221 111-354-947 Ext. 3331

Fax: +9221 2420527

http://www.elixirsec.com

 

 

Adam Smith's market never stood alone

Adam Smith’s market never stood alone

By Amartya Sen

Published: March 10 2009 20:15 | Last updated: March 10 2009 20:15

 

Exactly 90 years ago, in March 1919, faced with another economic crisis, Vladimir Lenin discussed the dire straits of contemporary capitalism. He was, however, unwilling to write an epitaph: “To believe that there is no way out of the present crisis for capitalism is an error.” That particular expectation of Lenin’s, unlike some he held, proved to be correct enough. Even though American and European markets got into further problems in the 1920s, followed by the Great Depression of the 1930s, in the long haul after the end of the second world war, the market economy has been exceptionally dynamic, generating unprecedented expansion of the global economy over the past 60 years. Not any more, at least not right now. The global economic crisis began suddenly in the American autumn and is gathering speed at a frightening rate, and government attempts to stop it have had very little success despite unprecedented commitments of public funds.

 

The question that arises most forcefully now is not so much about the end of capitalism as about the nature of capitalism and the need for change. The invoking of old and new capitalism played an energising part in the animated discussions that took place in the symposium on “New World, New Capitalism” led by Nicolas Sarkozy, the French president, Tony Blair, the former British prime minister, and Angela Merkel, the German chancellor, in January in Paris.

 

The crisis, no matter how unbeatable it looks today, will eventually pass, but questions about future economic systems will remain. Do we really need a “new capitalism”, carrying, in some significant way, the capitalist banner, rather than a non-monolithic economic system that draws on a variety of institutions chosen pragmatically and values that we can defend with reason? Should we search for a new capitalism or for a “new world” – to use the other term on offer at the Paris meeting – that need not take a specialised capitalist form? This is not only the question we face today, but I would argue it is also the question that the founder of modern economics, Adam Smith, in effect asked in the 18th century, even as he presented his pioneering analysis of the working of the market economy.

 

Smith never used the term capitalism (at least, so far as I have been able to trace), and it would also be hard to carve out from his works any theory of the sufficiency of the market economy, or of the need to accept the dominance of capital. He talked about the important role of broader values for the choice of behaviour, as well as the importance of institutions, in The Wealth of Nations ; but it was in his first book, The Theory of Moral Sentiments, published exactly 250 years ago, that he extensively investigated the powerful role of non-profit values. While stating that “prudence” was “of all virtues that which is most helpful to the individual”, Smith went on to argue that “humanity, justice, generosity, and public spirit, are the qualities most useful to others”.*

 

What exactly is capitalism? The standard definition seems to take reliance on markets for economic transactions as a necessary qualification for an economy to be seen as capitalist. In a similar way, dependence on the profit motive, and on individual entitlements based on private ownership, are seen as archetypal features of capitalism. However, if these are necessary requirements, are the economic systems we currently have, for example, in Europe and America, genuinely capitalist? All the affluent countries in the world – those in Europe, as well as the US, Canada, Japan, Singapore, South Korea, Taiwan, Australia and others – have depended for some time on transactions that occur largely outside the markets, such as unemployment benefits, public pensions and other features of social security, and the public provision of school education and healthcare. The creditable performance of the allegedly capitalist systems in the days when there were real achievements drew on a combination of institutions that went much beyond relying only on a profit-maximising market economy.

 

It is often overlooked that Smith did not take the pure market mechanism to be a free-standing performer of excellence, nor did he take the profit motive to be all that is needed. Perhaps the biggest mistake lies in interpreting Smith’s limited discussion of why people seek trade as an exhaustive analysis of all the behavioural norms and institutions that he thought necessary for a market economy to work well. People seek trade because of self-interest – nothing more is needed, as Smith discussed in a statement that has been quoted again and again explaining why bakers, brewers, butchers and consumers seek trade. However an economy needs other values and commitments such as mutual trust and confidence to work efficiently. For example, Smith argued: “When the people of any particular country has such confidence in the fortune, probity, and prudence of a particular banker, as to believe he is always ready to pay upon demand such of his promissory notes as are likely to be at any time presented to him; those notes come to have the same currency as gold and silver money, from the confidence that such money can at any time be had for them.”

 

Smith explained why this kind of trust does not always exist. Even though the champions of the baker-brewer-butcher reading of Smith enshrined in many economics books may be at a loss to understand the present crisis (people still have very good reason to seek more trade, only less opportunity), the far-reaching consequences of mistrust and lack of confidence in others, which have contributed to generating this crisis and are making a recovery so very difficult, would not have puzzled him.

 

There were, in fact, very good reasons for mistrust and the breakdown of assurance that contributed to the crisis today. The obligations and responsibilities associated with transactions have in recent years become much harder to trace thanks to the rapid development of secondary markets involving derivatives and other financial instruments. This occurred at a time when the plentiful availability of credit, partly driven by the huge trading surpluses of some economies, most prominently China, magnified the scale of brash operations. A subprime lender who misled a borrower into taking unwise risks could pass off the financial instruments to other parties remote from the original transaction. The need for supervision and regulation has become much stronger over recent years. And yet the supervisory role of the government in the US in particular has been, over the same period, sharply curtailed, fed by an increasing belief in the self-regulatory nature of the market economy. Precisely as the need for state surveillance has grown, the provision of the needed supervision has shrunk.

 

This institutional vulnerability has implications not only for sharp practices, but also for a tendency towards over-speculation that, as Smith argued, tends to grip many human beings in their breathless search for profits. Smith called these promoters of excessive risk in search of profits “prodigals and projectors” – which, by the way, is quite a good description of the entrepreneurs of subprime mortgages over the recent past. The implicit faith in the wisdom of the stand-alone market economy, which is largely responsible for the removal of the established regulations in the US, tended to assume away the activities of prodigals and projectors in a way that would have shocked the pioneering exponent of the rationale of the market economy.

 

Despite all Smith did to explain and defend the constructive role of the market, he was deeply concerned about the incidence of poverty, illiteracy and relative deprivation that might remain despite a well-functioning market economy. He wanted institutional diversity and motivational variety, not monolithic markets and singular dominance of the profit motive. Smith was not only a defender of the role of the state in doing things that the market might fail to do, such as universal education and poverty relief (he also wanted greater freedom for the state-supported indigent than the Poor Laws of his day provided); he argued, in general, for institutional choices to fit the problems that arise rather than anchoring institutions to some fixed formula, such as leaving things to the market.

 

The economic difficulties of today do not, I would argue, call for some “new capitalism”, but they do demand an open-minded understanding of older ideas about the reach and limits of the market economy. What is needed above all is a clear-headed appreciation of how different institutions work, along with an understanding of how a variety of organisations – from the market to the institutions of state – can together contribute to producing a more decent economic world.

 

*An anniversary edition of ‘The Theory of Moral Sentiments’ will be published by Penguin Books this year, with a new introduction in which I discuss the contemporary relevance of Smith’s ideas

 

The writer, who received the 1998 Nobel Prize in economics, teaches economics and philosophy at Harvard University. A longer essay by him on this topic appears in the current edition of The New York Review of Books

---------------------------------

Regards,

 

Haider Hussain

Economist

Elixir Securities Pakistan

UAN: +9221 111-354-947 Ext. 3331

Fax: +9221 2420527

http://www.elixirsec.com