Stein’s Law strikes
Just last week, Pakistani commentators Farrukh Saleem and Shafiq Khan warned that the Karachi Stock Exchange was sitting on dynamite. When, after a two year rally that shot the KSE-100 index from 2400 to over 10000, it finally began to tank, the effect — on small investors at least — was indeed explosive. Riot police and paramilitary personnel had to be called in to prevent irate investors from venting their anger on the exchange building.
But is the story of the Karachi bubble just a routine example of the wonders of capitalism or is it a microcosm of the still unresolved problems of Pakistan’s political economy?
Until the advent of Shaukat Aziz as Pakistan’s finance minister, the Karachi Stock Exchange was controlled by a handful of powerful stockbroking families with almost negligible regulatory oversight. The KSE-100 index comprises of 13% of the stocks listed on the exchange, but these account for over 85% of the stock market capitalisation. The top two counters — Pakistan’s state-owned energy and telecoms firms — together account for almost 40% of the market capitalisation. Their share prices have risen on the back of record high oil prices and impending privatisation. While Pakistan’s overall economic and industrial growth has improved over the last three years, it fundamentals by themselves cannot account for the spectacular bull run. Although reforms were introduced for the securities market, the Karachi stock exchange remains indirectly under the influence of the stockbroking families, and regulatory oversight is not quite as effective as it should be. With the field so overwhelmingly in favour of the big boys, small investors were left bearing an disproportional part of the losses when the bubble began to burst.
That is where the similarity with the rest of Pakistan’s political economy begins — wealth and influence is largely concentrated in the hands of the feudal, business and the political elite.
Is the Pakistani nation getting rich? When the prices of shares go up, only the owners of those shares get rich. When the price of land goes up only landowners become rich (no more than two percent of our population actually owns shares or land). A nation only becomes rich when the “price of labour” (salaries) goes up, and that unfortunately isn’t happening in Pakistan. [Farrukh Saleem/The News]
Focus on macroeconomics has helped improve in Pakistan’s growth indicators but this has not resulted in a better distribution of wealth across the economy. Very often, such imbalances in economic power (accompanied with a lack of political power) results in instability. The riot outside the stock exchange building is just one manifestation of this.
More than mere market correction, Karachi’s woes are inextricably linked to Pakistan’s overall lack of transparency, accountability, and reconciliation that come with Musharraf’s dispensation. Until that happens, Shaukat Aziz’s claims of Pakistan being an ‘investor’s paradise’ will remain tall.
The perils of trading in a phantom market:…Matters have reached the hazardous point that they have mainly because the government has tended to look the other way while irregularities were committed and massive amounts of tax evaded funds were employed in market manipulation through benami transactions. What was important from government perspective was to quote the rising stock exchange index to claim that its economic policies were working wonders and generating a lot of economic activity. [Business Recorder]