India and China to build largest telescope

China and India are catapulting to the forefront of astronomy research with their decision to join as partners in a Hawaii telescope that will be the world's largest when it is built later this decade.

China and India will pay a share of the construction cost - expected to top one billion US dollars - for the Thirty Metre Telescope at the summit of Mauna Kea volcano. They will also have a share of the observation time.

It is the first advanced telescope in which either nation has been a partner.

"This will represent a quantum leap for the Chinese community," Shude Mao, professor of astrophysics at National Astronomical Observatories of China, said in a telephone interview from Waikoloa on the Big Island, where he was attending a meeting of the telescope's scientific advisory committee.

A report in Press Association. Here

BRICS and the China Trap

Earlier this month the BRICS countries (Brazil, Russia, India, China, South Africa) agreed at their summit meeting in Sanya, China, to establish mutual lines of credit in local currencies. On the face of it, this is an innocuous effort by the world's fastest growing countries to strengthen their mutual relationship. However, in the context of the emerging global power relations, this is yet another important step in the Chinese initiative to end the reign of the dollar as the world's single reserve currency.

Two years ago I wrote about the Chinese campaign to dethrone the dollar. Shortly before the G20 London summit, China's central bank governor announced that the dollar should be replaced by SDRs. This was a shrewd approach. About half of China's foreign exchange reserves of $2 trillion are reportedly held as dollar denominated assets, as indeed are large chunks of the reserves of many central banks. This large exposure implies that any major depreciation of the dollar would severely erode the value of these assets. At the same time, large diversification of these reserves away from the dollar is not an option. Such a move itself would trigger a sharp depreciation of the dollar. But the exchange rate of SDR is a weighted average of a basket of convertible currencies, and a swap of dollars for SDRs at a pre-determined exchange rate would allow China, and other countries, to significantly reduce their dollar exposure without any erosion of the value of their reserves. Of course, it would also end the reign of the dollar.

At the time, most analysts dismissed the Chinese initiative as impractical and unworkable. However, China has taken several strategic steps to carry forward its agenda through alternative routes. It has established currency swap arrangements with several developing countries, which protects their trade with China against the risk of their currencies depreciating. The initial value of these arrangements was quite modest, less than $100 billion. However, during the past two years, the volume of these arrangements would have grown significantly and could eventually cover the entire trade of these countries with China. 


How should India prepare for such an outcome? India should embed itself in the currency arrangement being forged for the BRICS countries, and strive to join the embryonic Asian Monetary Fund to take full advantage of opportunities arising from these initiatives. At the same time it must remain mindful that North America and the EU will remain important trading partners in the foreseeable future.


Sudipto Mundle in The Times of India. More Here.

"Why Libya?"

"Why Libya, why not Cote d'Ivoire or Somalia? It's a question posed in Africa - from Cape Town to Addis Ababa, from Nairobi to Abuja. Though reasonable, the question has not yet been highly valued or clearly responded... The U.N.-sanctioned military operation is based on an assumption: Libyan leader Muammar Gaddafi will massacre all the residents after storming the rebel's eastern stronghold of Benghazi. Thus, the crisis is latent and the operation is preventive. Also in Africa, on the western side, a humanitarian crisis looms in Cote d'Ivore. That's where hundreds of thousands of people have fled their homes and nearly 500 have been killed by forces loyal to President Laurent Gbagbo, who clings to power despite losing to Alassane Ouattara in the Nov. 28 presidential run-off election. Why Libya but not Cote d'Ivoire?"

Ugandan President Yoweri Museveni accused Western countries of using double standards by pushing for a no-fly zone and asked: "Why Libya, but not Bahrain or Somalia? While imposing a no-fly zone in a rival country like Libya, the West turns a blind eye to a similar case in Bahrain, one of the pro-West countries. We have been appealing to the U.N. to impose a no-fly zone over Somalia so as to impede the free movement of terrorists, without success. Why? Are there no human beings in Somalia similar to the ones in Benghazi? Or is it because Somalia does not have oil which is not fully controlled by the western oil companies?"

The commentary concludes by rallying African opinion against the West. "In the world arena, the Africa countries have often been regarded as a 'silent majority'. In fact, Africa may not be really silent. Instead, maybe its voice has not been valued or considered. As the war in Libya faces a deadlock and turbulence in the Middle East appears to be sprawling to Africa, questions concerning Africa's situation require rational settlement, rather than any unwise approach." 

The way things are developing, the longer the western military operations in Libya continue, the greater will be the opportunity for China to rally African opinion. The decision by the African Union not to participate in the London conference last Tuesday creates a highly favorable backdrop for China's diplomatic offensive in Africa. The West has no answer to China's campaign.

M K Bhadra Kumar in Diplomatic Perspective. More Here.

If Ibn Batuta could do it, why can't we?

When British journalist Robert Fisk said that in the face of disaster Arabs act like mice, he was being polite. He could have said that the Muslims act like mice. The question is why?

It is easy and customary to blame the current Muslim rulers for this sorry situation. No doubt the Iraq invasion would not have been possible without their acquiescence and support. If they refused to open their lands, waterways, and airspace to the invasion, it could not have taken place. Neither would the slaughters in Afghanistan, Bosnia, Kosova, Kashmir, Chechnya, and Palestine have been possible if the Muslim rulers had their act together. But was it only because the Muslim rulers happened to be immoral, coward, and unscrupulous characters? Is the 1.2 billion strong Ummah suffering only because there are fifty-four corrupt persons who are ruling it?

These rulers do not carry out all their plans personally. They have armies of compliant soldiers, bureaucrats, and other staffers at every level of government that do the dirty work. Further the societies at large produce, nurture, and sustain the corrupt machinery of the corrupt governments. As we continue our investigation, we find that our problem is corruption; not only of the rulers but also of the ruled. Today we have strayed from the Shariah in our personal lives; we lie, cheat, steal at a higher rate than ever before; we exploit and oppress in our small spheres. In short, our problems are caused by our moral corruption.

But there is something more. And it is getting scant attention in the Muslim discourse.

.... ..... ....

While we had more then one centers of political power for centuries, the Muslim world was much more integrated then than we realize. It was one social, cultural, religious and economic domain. Its language, system of education, currency, and laws were the same. There were no restrictions on travel, or movement of capital or goods. A Muslim could take up residence and start a business or get a job anywhere. Ibn Batuta traveled from Tunisia to Hijaz, East Africa, India, Malaya, and China, covering 75000 miles without traveling the same road twice. During the twenty-five year journey he took up residence where he wanted to; got even government assignments as Qadi and even as ambassador in China for the Sultan in India. If that was possible then, it should be easier now because of the huge advances in the communication and transportation technologies alone.

From Khalid Baig's thought provoking article on the status of Muslim Ummah.
To read the full article click here.

Is India a flailing state?

Lant Pritchett

Here is and interesting analysis on the state of our country. Lant Pritchett has this to say:

How does one reconcile the contradictions of a booming economy and democracy with world class elite institutions and yet chaotic conditions in service provision of the most rudimentary types?

I argue that for India we need a new category.  I argue that India is today a flailing state---a nation-state in which the head, that is the elite institutions at the national (and in some states) level remain sound and functional but that this head is no longer reliably connected via nerves and sinews to its own limbs.  

In many parts of India in many sectors, the everyday actions of the field level agents of the state—policemen, engineers, teachers, health workers—are increasingly beyond the control of the administration at the national or state level.  

The contrast with China could not be more striking.  In China one worries that, due to the lack of the processes of democratic representation the head of the state, while capable, is beyond the control of the citizens.  Yet, at the same time one reads of local government officials being executed for corruption.  Clearly the head has a strong interest in retaining control of the administrative apparatus of implementation. 

To read the full analysis click here

Here is an interesting article on Islamic Economics. It is written by Dr. Muhammad Najathullah Siddiqui. He is a member of Jamaat-e-Islami Hind and has written number of books on the subject. He has been awarded with Shah Waliullah Award. He could be said as the authority in the subject. His other articles could be read here.

CURRENT FINANCIAL CRISIS AND ISLAMIC ECONOMICS

mnsiddiqi@hotmail.com

[31 October 2008]

The current crisis emanating from US financial markets and spreading to other developed and fast developing countries like China, India and Brazil, is threatening a global meltdown leaving the entire world poorer and full of forebodings regarding future .It started as a credit crunch due to highly over-stretched leverage, was aggravated by the complexity of the products and reached its zenith due to moral failure generating conflicts of interest and mismatch between incentives of the various groups and individuals involved in the saga.

Islamic economics stands for abolition of riba and maysir in financial dealings as well as on a regard for the interest of others in one’s pursuit of material gains.

The purpose of this brief note is to examine the relevance of Islamic economics today. Does it have a message for humanity insofar as its current financial problems are concerned?

In what follows we first outline the broad features of the crisis under the four headings noted above, trying to establish the thesis that most of them are rooted in a moral failure that leads to exploitation and corruption. This would be followed up by an explanation of riba and mysir that equates them to bank interest and gambling-like speculation based on risk shifting as distinct from risk sharing.

It will be argued that debt-finance coupled with speculative products whose intricacies defy understanding provide ample opportunities to greedy profit-maximizing agents to exploit the aspirations of ordinary investors and for goading home owners and consumers into living beyond their means and chasing untenable dreams.

Even the calls for more and more deregulation, and the philosophy of non interference with financial markets have [im]moral dimensions. There is a hidden agenda behind this call [Joseph Stiglitz and Bruce Greenwald, Towards a New Paradigm in Monetary Economics (2003), p. 206].

Though they swear by the name of efficiency and innovation, the champions of deregulation and laissez faire have their self interest in view, not the social weal.

In conclusion a world of banking and finance without riba and maysir will be suggested as the best alternative to the current scenario. In this new environment risk sharing will replace risk shifting and morality, advising people to be moderate in their material pursuits and considerate about public good in their private decisions, coupled with realism, will serve as the corrective to self- destructive outgrowths of current financial capitalism.

It will be noted that for this alternative model to be robust and resilient, morality has to be rooted in spirituality. This will provide a basis for willing acceptance of social norms, state supervision, regulation and intervention in the market based on values rather than interests.

THE ECONOMICS OF CURRENT CRISIS

We begin with the fourth element of the crisis noted above, i.e. moral failure and a mismatch between the incentives of various players in the financial arena.

The reason: some of the other elements of the situation described above are partly a product of this factor.

Currently, financial institutions include banks, investment companies, insurance companies etc., managed by hired professionals. Those who govern financial conglomerates by virtue of owning enough shares have motives different from ordinary shareholders. Almost the entire population in developed countries is involved in supplying capital through purchase of stocks, bonds, insurance policies, pension funds, etc. While these ‘principals’ are interested in profits they care about many other things too, among them stability, jobs, social justice, and anxiety free communities. Not so the hired managers who consider profit maximization to be their mission as it earns them maximum bonus and continued employment.

There are those amongst middlemen who earn fees. They earn more when transactions multiply. In an environment where no one cares about others, focused as everyone is on his or her own interest, public interest is supposedly guarded by regulators. How can the same self-focused assembly of individuals throw up regulators who would work to protect and promote public good remains a moot question for neo-classical economics. An answer to this question is, however, provided by the public choice school: public servants too, elected as well as appointed, seek to maximize private gain!

Without committing myself to this rather bleak view of man in society, I suggest that we embark upon a discussion of the first three factors from the vantage point provided by this very view. It means I regard maysir- infested financial products[ like CDS, Credit Default Swaps], the inverted pyramid of debts[with a slender base of real assets] and the dearth of liquidity…,all the remaining three features of the current situation, to be rooted in the moral failure briefly described above. It could have been different. The reason it is what it is can be found in the denudation of economics from morality after the secularization of society in the wake of enlightenment. Islamic civilization has the instruments to pre-commit man in society to certain values leading to rules [abolition of interest and gambling, for example] that guard the society from falling prey to shortsighted predators. I proceed to elaborate taking the above-mentioned elements of the crisis one by one.

CASINO ECONOMICS AND HUMAN WELFARE

What is wrong with gambling? Firstly, gambling does not create additional wealth. Games of chance only transfer wealth from its (losing) owners to new (winning) ones. Considering the human resources consumed in the process, wealth transfers through games of chance cannot be considered to be efficient. They do not serve any social purpose. The satisfaction and thrill they provide to the players do not justify the opportunity cost involved. Other exonerating circumstances like the revenue to state in form of taxes or employment generated by casinos, lotteries, etc. cannot be considered as ‘advantages’ until the acceptability of gambling itself is established.

I argue that risk shifting is gambling. One who buys risk exchanges a definite amount of money (the price) for an uncertain amount of money, whose delivery itself is not certain. Credit Default Swaps are an appropriate example. The millions of loans made by a bank are each subject to the risk of default (credit risk) in various degrees. As Joseph Stiglitz and Bruce Greenwald have rightly pointed out credit is not homogenous like money [Towards a New Paradigm in Monetary Economics (2003), page 271]. The risks attached to each loan are unique. The institution undertaking to pay for all defaulters among, say a million borrowers has no scientific basis for measuring the risk it is taking. There is no long history to fall back on. The law of large numbers does not apply. It is just taking chances, gambling. The banks that so protect themselves against credit risks are emboldened to give more and more loans. That is how aggressive lending policy gained an impetus. The sub-prime mortgage crisis would not have occurred without the speculative deals like CDS. Aggressive lenders offered to refinance mortgages on the basis of rising home prices, virtually converting owned homes into ATM machines, sending people on a buying spree, some of it on installment purchase basis, encouraging an expansion that had little basis in the fundamentals: earning powers, disposable incomes and savings and investments.

The Islamic approach to risk is realistic but cautious. It does not allow deals involving excessive uncertainty (gharar kathir). It encourages sharing arrangements for facing risks. The additional wealth created with the use of existing wealth through risky ventures should be shared between fund users and fund owners while both bear the risks involved and the resulting losses. Differences in the participants’ perception of risks involved will be decisive in determining the terms of bargain between those sharing risk. Even though the motive of each party is making profits, it is very different from taking chances in gambling. There is real wealth to be created, real gain to be reaped. It is different in case of risk shifting [as in CDS]. Neither the buyer nor the seller of risk has any stakes in real wealth creation. As in gambling only one party actually gains, either the seller of risk or the buyer. It is different in risk sharing in which both parties gain (or lose). Like gambling, risk shifting is a zero sum game.

Risk sharing fits in with a system that integrates risk management with value creation. The Islamic institutions of musharakah, and mudarabah, for example target value creation and are good ways of managing risk. In a healthy venture fear of loss works to counter-balance hope for gain. When a system allows shifting the risk (at a cost) the fear factor becomes inoperative insofar as the seller of risk is concerned. It is worse when the government takes over the risk (as in case of Fannie Mae and Freddie Mac in USA). Such a system is heavily tilted towards the rich and leads to greater inequality as it protects the lenders but leaves the borrowers to fend for them selves. This is the feature of the current system that lead to an almost universal cry that it amounted to privatizing gain and socializing pain---profits go to the corporations, losses are borne by the taxpayers.

As an aside take a minute to ponder over the Islamic approach as encapsulated in verse 278-281 of the second chapter of Quran:

Believers! Have fear of Allah and give up all outstanding interest if you do truly believe. But if you fail to do so, then be warned of war from Allah and His Messenger. If you repent even now, you have the right of return of your capital; neither will you do wrong nor will you be wronged. But if the debtor is in straitened circumstances, let him have respite until the time of ease; and whatever you remit by way of charity is better for you, if only you know.[2:278-81]

In effect the above is advising how to handle a crisis caused by default. A crisis like the sub-prime crisis in US (if it ever occurred in an Islamic interest free system based on risk sharing) would be handled not by extending credit to lenders but by giving more time to borrowers and writing off some of the debts.

CREDIT WITHOUT CREDIBILITY

Over extended leverage, outstanding credits amounting to an ever-increasing multiple of existing capitals of the relevant institutions, is a direct result of financing through interest bearing debts. The business of lending to thrive requires continued expansion of credit. After all, the primary concern of the lending institutions is making money that comes in the form of interest on loans outstanding. Every loan recovery kills an existing income stream, every loan extension generates a new income stream. With credit defaults swaps available and insurance companies like AIG supposedly providing cover, sub-prime lending looked attractive. The rest of the story is well known.

Debt financing of productive enterprise amounts to preferring risk shifting to risk sharing. This is immoral as well as counterproductive. The environment in which productive enterprise takes place does not guarantee creation of additional wealth. It is only a probability. The lender’s demand for a guaranteed positive return to the sum lent is unfair. Actually it cannot be met at the macro [i.e., society’s] level in the long run. Some enterprises do fail. Some others end up without any positive return to capital invested. Repayment in these cases can come only from old wealth already existing when the debt financed new projects were launched. Repayment of the borrowed sum with interest added, by those whose ventures failed to create wealth, causes a transfer of wealth from the entrepreneurs to the owners of money capital who would not share risk yet want a return. Putting producers/innovators at a disadvantage as compared to those having money to spare does not bode well for society. Easy money for those who have contributes to a life style at the top of the wealth pyramid that creates problems at its bottom. Society can continue meeting its debt obligations as long as there is growth at an accelerated rate. But the planet earth, its ecology, environment and resources are not designed for limitless growth. Deterioration in environment, increase in inequality, and social tensions are direct results of heavy reliance on debt finance.

The problem is aggravated when monetary expansion too takes place in the form of interest bearing debts, as is the case with the current monetary system. In order for new money to come in circulation a loan must be given, a new debt must be created. For every loan to be paid back with interest, borrowers need more money than they have. This additional money leads to additional debts, and so on. As pointed out in the previous paragraph the debt imperative creates a growth imperative that contributes to the destruction of the ecosystem.

Selling Debts

Some debt financing has always been part of the financial markets. Even in hey day of Islamic civilization trade credit, a form of debt financing , thrived. Islam has no problem with that as it fits in with prohibition of exchanging money now with a larger amount of money after a period of time. The problem starts with sale of debt, whether created by a money loan or owed as a price of goods sold on credit. Sale of debt is allowed at par or face value. But there can hardly be a market for exchanging debts at par. You have a market for debt when bond [i.e., debt] prices are determined by supply and demand. Sale of debt implies selling risk [or shifting risk]. A thriving market for debts at prices determined by supply and demand [as in conventional bond markets] is vulnerable to gambling like speculation as there exists no objective basis for measuring risks of default. The changing prices reflect changing subjective perceptions of the risks involved. As is well known these perceptions can sometimes be manipulated through planting stories in the media.

Remarkably, a ban on selling debts would drastically reduce the outstanding volume of debt. In effect it would scale down the volume of outstanding debts to the level of existing real assets. The inverted pyramid of debts, standing on a slender base of real wealth, would be replaced by a rectangular column of debts, owed against an equal amount of real goods and services acquired. The volatility in the bond market is directly related to the total volume of bonds. The larger the volume of debts, the weaker its connection with real wealth, and the more the scope for gambling-like speculation.

Derivatives

Derivatives also involve excessive uncertainty. They facilitate managing certain market risks (related to prices, rates of exchange, etc.). Chance remains the basic element in the situation, however, expectations being based on pure speculation. Derivatives too are a zero sum game: you lose what I gain, unlike the win-win situations in trade or risk sharing. The claim that they increase liquidity and improve operational market efficiency in financial markets remains unsubstantiated. What can be empirically established is that, whatever the initial benefits for a certain class of investors, availability of derivatives invites speculative activity. This is evidenced by the fact that currently the volume of derivatives being traded stands at many times the world GDP. The market for derivatives literally becomes a casino.

THE NATURE AND ROLE OF LIQUIDITY

The demand for liquidity increases with expansion of credit. The current liquidity shortage is rooted in over extended leverage. Unbridled risk taking as in sub prime mortgage, results in lack of trust in the stability of the current prices as well as in defaults leading to strains on bank liquidity. The situation leads to a decrease in peoples’ confidence in the banks, resulting in widespread withdrawals. Pouring in more cash in the system could be more effective if it were to be given to the ultimate debtors---consumers, small businesses, poor home owners, etc.--- who would then use it to meet their financial obligations or engage in new purchases. As it works in the current system it is given to the banks and insurance companies. It enters the market as loans, creating another chain of debt obligations. This amounts to solving a crisis by methods that sow seeds for another crisis.

CONCLUSION

I wish I could go on. But there is already a wealth of material available on the subject. I seek the readers’ response to my central point: All the technical flaws and tactical mistakes leading us to the current crisis are rooted in a moral failure.

Given a society in which individuals care about public good and cooperate with one another to promote it, even though after securing their self-interest in order to ensure survival, we could escape much of the troubles currently facing us. Only such a society of individuals who care for public good can opt for the right mix of state intervention and private initiatives. Such a society is possible. Let us first shed the illusion that we have been living for decades now under the best of all arrangements, social, political, economic and financial. We have not. Let all join the search for an alternative.

Also read : This is not credit crisis! by Mansoor Durrani