111000 Complete

Volume 13 Number 3 October 2011

INSTITUTE OF BUSINESS MANAGEMENTMANAGEMENT EXCELLENCE CENTRE

KORANGI CREEK, KARACHI-75190, PAKISTANUAN (9221) 111-002-004, FAX: (9221) 509-0968, 509-2658

E-mail: [email protected], [email protected]://www.iobm.edu.pk

PBRISSN 1561-8706

PAKISTAN BUSINESS REVIEWIndexed and Abstracted by ECONLIT, Journal of Economic Literature

Inedexed by EBSCO, USAHEC Approved Journal

MotifPrivate Sector Responses to The Global Crisis: The Case of PakistanSultan Ahmed ChawlaResearchGermany’s South Asia Strategy: Implications for PakistanBetina RobotkaTesting the Validity of CAPM and APT in the Oil, Gas andFertilizer Companies listed on the Karachi Stock ExchangeH. Jamal Zubairi, Shazia FarooqStudents’ Prior Degree Performance as Predictor of their Performanceat MBA LevelAli Asghar MalikAggregate Imports and Expenditure Components in Pakistan:An Empirical AnalysisCh. Sohail AhmedSchizophrenia: The Exterminating Angel: A Deleuzoguttarrian CritiqueS.M. Mahboob-ul-Hassan BukhariIdentifying Active Factors to Address the Excess Flash Problemin Plastic Injection Molding ProcessEjaz Ahmed, Muhammad Wajahat AliThe Islamic Calendar Effect in Karachi Stock MarketKhalid MustafaCase StudyStock Valuation: Hub Power CompanyShazia Farooq, Dileep Kumar Maheshwari, Rabbiya Ghulam Mohammad,Rafia Abdul Sattar, Sateesh BalaniBook ReviewTaha Turabi (Ed. 2009) Turabiyat Allama Rasheed Turabi Memorial Trust KarachiJaved A. AnsariConference ReportStrong Leadership Strong Institutions: It’s a Matter of ChangeReport on Seminar held on February 26, 2011Nasreen HusainOverseas Chambers of Commerce and Industry Seminar on Pakistan:Challenges and AspirationsSyed Maqbool-ur-Rahman


PAKISTAN BUSINESS REVIEW OCTOBER 2011

Contents

MotifPrivate Sector Responses to The Global Crisis: The Case of PakistanSultan Ahmed Chawla 415ResearchGermany’s South Asia Strategy: Implications for PakistanBettina Robotka 424Testing the Validity of CAPM and APT in the Oil, Gas andFertilizer Companies listed on the Karachi Stock ExchangeH. Jamal Zubairi, Shazia Farooq 439Students’ Prior Degree Performance as Predictor of their Performanceat MBA LevelAli Asghar Malik 459Aggregate Imports and Expenditure Components in Pakistan:An Empirical AnalysisCh. Sohail Ahmed 488Schizophrenia: The Exterminating Angel: A Deleuzoguttarrian CritiqueS.M. Mahboob-ul-Hassan Bukhari 513Identifying Active Factors to Address the Excess Flash Problemin Plastic Injection Molding ProcessEjaz Ahmed, Muhammad Wajahat Ali 547The Islamic Calendar Effect in Karachi Stock MarketKhalid Mustafa 562Case StudyStock Valuation: Hub Power CompanyShazia Farooq, Dileep Kumar Maheshwari,Rabbiya Ghulam Mohammad, Rafia Abdul Sattar, Sateesh Balani 575Book ReviewTaha Turabi (Ed. 2009) Turabiyat Allama Rasheed Turabi Memorial Trust KarachiJaved A. Ansari 601Conference ReportStrong Leadership Strong Institutions: It’s a Matter of ChangeReport on Seminar held on February 26, 2011Nasreen Husain 606Overseas Chambers of Commerce and Industry Seminar on Pakistan:Challenges and AspirationsSyed Maqbool-ur-Rahman 610Instructions to Authors



Editorial CommitteeAmna Abbas, Humeira Jawed Abidi, Syed Aijaz Ahmed, Ejaz Ahmed, Javaid Ahmed, MaqsoodAhmed, Samin Ahmed, Ch. Sohail Ahmed, Naseem Akhtar, Ghayyur Alam, Khalid Amin, JavedA. Ansari, Sadia Aziz Ansari, Linah Askari, Nadia Ayub, Sharique Ayubi, Mirza Aqeel Baig, SahibKhan Channa, Aslam Dossa, Shazia Farooq, Syeda Mahtab Fatima, Sameena Hasan, NasreenHussain, Fareeda Ibad, Sheikh Muhammad Irfan, Samra Javed, Fauzia Kanwar, Talib S. Karim,Faisal Kazi, Shahida Kazi, Urfi Khalid, Fazal Anwar Khalidi, Muhammad Asif Khan, MuhammadMassarrat Ali Khan, Laiq Muhammad Khan, Krishan Lal Khatri, Deep Kiran, Ali AshgharMalik, Bismah Malik, Shahnaz Meghani, Mujtaba S. Memon, Abdul Qadir Molvi, MehboobMoosa, Fakhir Musharraf, Sarwat Nauman, Munazza Owais, Abdullah Patoli, Tauseef AhmedQureshi, Kamran A. Rabbani, Ajaz Rasheed, Wajdan Raza, Farheen Razzak, Syed MaqboolurRehman, Samina Riaz, Owais Riaz, Bettina Robotka, Sadiyah Saeed, Kausar Saeed, Syed ImdadShah, Asad Shahzad, Nida Shaukat, Asiya Shirazi, Lubna Siddiqi, Shama Siddiqi, Ejaz Wasay,Shahida Wizarat, Sobia Younus, Humayun Zafar, H.Jamal Zubairi.

Muhammad Ashraf Janjua: Chief EditorSabina Mohsin: Managing EditorFareeda Ibad: Literary EditorsMuhammad Asif KhanSheikh Muhammad IrfanGhulam Dastagir: Production AssociateShahzad Ali: Editorial Co-ordinator

International Advisors (Referees)Prof. Izlin Ismail, Faculty of Business and Accountancy, University of Malaya, Kuala LumpurProf. David L. Jones, Indiana University Center on Southeast Asia, USAProf. Dennis R. Briscoe, University of San Diego, USAProf. James M. Burns, University of San Diego, USAProf. Angelo Santagostino, University of Brescia, ItalyMr. Thomsas Winter, University of Rostock, Rostock, GermanyDr. Ishrat Husain, Institute of Business Administration, KarachiProf. Gerald D. Huston, Arizona State University, USAMr. Darshan Johal, UNCHS (Habitat)Prof. Mehtab Karim, John Hopkins University, USADr. Geoff Kay, City University, LondonDr. Khalid Nadvi, IDS, University of SussexDr. Peter O’ Brien, SADCC, South AfricaProf. Sarfaraz Qureshi, IslamabadDr. T.M. Roepstorff, UNIDO, ViennaDr. Shahid Hasan Siddiqui, Research Institute for Islamic Banking and FinanceProf. Charles J. Teplitz, University of San Diego, USAProf. Munir Wasti, University of Karachi, KarachiDr. K.M. Larik, Iqra University, KarachiDr. Javed Iqbal, University of Karachi, KarachiDr. Rashid A. Naeem, Allama Iqbal Open University, IslamabadProf. Dr. Shafiq ur Rahman, University of Karachi, KarachiDr. Rizwana Zahid, Government APWA College for Women, KarachiDr. Arshi Ali, Federal Urdu University, KarachiProf. Dr. Rafique Ahmed Khan, PAF-Kiet, KarachiDr. Ayub Ali Meher, KarachiMr. Amir Hussain Siddiqui, Trade Development Authority, KarachiSyed Zeeshan Arshad SZABIST, KarachiDr. Abdul Wahab Suri, University of Karachi, KarachiProf. Dr. Abdul Waheed, University of Karachi, Karachi (Cont’d)

Volume 13 Number 3October 2011


RefereesDr. Naveed, Institute of Business Administration (IBA), KarachiDr. Moazzam Khan Sherwani, Institute of Environment Studies, University of KarachiDr. Samiuzzaman, Global Environmental Lab (Pvt) Ltd. Korangi, KarachiDr. Anila Ambar Malik, University of Karachi, KarachiDr. Seema Munaf, University of Karachi, KarachiDr. Nabeel A. Zubairi, University of Karachi, KarachiDr. Sabira Sultana, Foundation for Advancement of Science and Technology (FAST), KarachiDr. Zainab F. Zadeh, Bahria University, KarachiDr. Ziasma, University of Karachi, KarachiProf. Asim Jamal Siddiqui, University of Karachi, KarachiProf. Dr. Mudassir-ud-din, University of Karachi, KarachiMs. Yasmin Zafar, Institute of Business Administration (IBA), KarachiDr. Muhammad Zubair, University of Karachi, KarachiDr. Uzma Parveen, University of Karachi, KarachiMs. Nighat Bilgrami Jaffery, Applied Economics Research Centre, University of Karachi, KarachiMr. Mohsin H. Ahmed, Applied Economics Research Centre, University of Karachi, KarachiProf. Syed Afrozuddin Ahmed, University of Karachi, KarachiProf. Ghulam Hussain, University of Karachi, KarachiMr. Mahboob-ul-Hassan, University of Karachi, KarachiDr. Muhammad Mahmood, Khadim Ali Shah Bukhari Institute of Technology, KarachiDr. Nargis Asad, Aga Khan University Hospital, KarachiDr. Abuzar Wajidi, University of Karachi, KarachiMr. Mohammad Umar, Takaful Pakistan Limited, KarachiMs. Rubina Feroz, University of Karachi, KarachiProf. Dr. Talat Wizarat, Institute of Business Administration (IBA), KarachiDr. Muhammad Zaki, University of Karachi, KarachiMr. H. Jaleel Zubairi, Allied Bank Ltd. , KarachiDr. Zaira Wahab, Iqra University, KarachiDr. Ismail Saad, Iqra University, KarachiMr. Naim Farooqui, Pak-Kuwait Investment Company Ltd. KarachiDr. Sara Azhar, University of Karachi, KarachiProf. Ahmad Farooq Shah, Bahauddin Zakarya University, MultanMr. M. Mazhar Khan, State Bank of Pakistan, KarachiDr. Tariq Yousuf Khan, KarachiDr. Fauzia Shamim, University of Karachi, KarachiMr. Mohammad Soliman, University of Sciences and Technology Chittagong, BangladeshProf. Abdul Mannan, School of Business, University of Liberal Arts BangladeshDr. Fatima Imam, Federal Urdu University, KarachiProf. G.R. Pasha, Bahauddin Zakariya University, MultanMr. Shameel Ahmad Zubairi, University of Karachi, KarachiMr. Imran Naveed, Joint Director., State Bank of Pakistan, KarachiMr. Qaisar Mufti, Chief executive, Qaisar Mufti Associates, Shahra-e-Iraq Saddar, Karachi.Ms. Afra Sajjad, Head of Education & Policy Development, ACCA Pakistan, Lahore 54660Dr. Khan Brohi, Director, Institute of Environmental Engineering and Management, JamshoroMr. Amir HussainEconomist WTO Cell, Trade Development Authority of Pakistan, KarachiMr. Tanveer Anjum, Department of Business Communications, Iqra UniversityDr. Arifa Farid, Department of Philosophy Ex-Dean Faculty of Arts, University of KarachiMr. Mushammad Asim, Department of Business Administration, KarachiMr. Kamal Udin, KarachiMr. Bhagwan Bharvani, Retired Internal Auditor, Pakistan International Airlines, KarachiMr. Muhammad Zubair, Department of Islamic History, University of Karachi, Karachi



INSTRUCTIONS TO AUTHORS(Research Section)

1. Papers must be in English.2 . Papers for publication should be sent in triplicate or by e-mail to:

Managing Editor, Pakistan Business ReviewInstitute of Business Management

Korangi Creek, Karachi- 75190, PakistanUAN: (9221) 111-002-004 Fax: (9221) 3509-0968, 3509-2658

E-mails: [email protected], [email protected]

Submission of a paper will be held to imply that it contains original unpublished work and is notbeing submitted for publication elsewhere. The Editors do not accept responsibility for damages orloss of papers submitted.

3 . PBR is a multi-disciplinary journal covering all subject areas of relevance to business inPakistan. Research in the areas of Finance, Human Resources, Management, Informatics,Marketing, Psychology, Economics and issues related to governance is specially encouraged.

4 . Manuscripts should be typewritten on one side of the page only, double spaced with widemargins. All pages should be numbered consecutively, titles and subtitles should be short.References, tables and legends for figures should be typed on separate pages. The legends andtitles on tables and figures must be sufficiently descriptive such that they are understandablewithout reference to the text. The dimension of figure axes and the body of tables must beclearly labelled in English.

5 . The first page of the manuscript should contain the following information; (i) the title; (ii)the name(s) and institutional affiliation(s); (iii) an abstract of not more than 100 words. Afootnote on the same sheet should give the name and present address of the author to whomreprints will be sent.

6 . Acknowledgements and information on grants received can be given before the references orin a first footnote, which should not be included in the consecutive numbering of footnotes.

7 . Important formulae (displayed) should be numbered consecutively throughout the manuscriptas (1), (2), etc., on the right hand side of the page where the derivation of formula has beenabbreviated, it is of great help to referees if the full derivation can be presented on a separatesheet (not to be published).

8 . Footnotes should be kept to a minimum and be numbered consecutively throughout the textwith superscript arabic numerals.

9 . The references should include only the most relevant papers. In the text, references topublications should appear as follows: “Khan (1978) reported that….” Or “This problem hasbeen a subject in literature before [e.g., Khan (1978) p. 102].” The author should make surethat there is a strict “one-to-one correspondence” between the names (years) in the text andthose on the list. At the end of the manuscript (after any appendices) the complete referencesshould be listed as:for monographs and books.Ahmad, Jaleel, 1978, Import substitution, trade and development, Amsterdam: North-Holland,For contributions to collective worksNewbery, Daved M.G., 1975,. The use of rental contract in peasant agriculture, in: Reynods,ed., Agriculture in development theory, New Haven: Yale University Press p. 3-40.

Continued next page



INSTRUCTIONS TO AUTHORS(Research Section)

From previous page:

For periodicalsBaumol, W.J., 1982, Applied fairness theory and rational policy, American EconomicReview, 72(4): 639561.Note that journal titles should not be abbreviated.

10 . Illustrations should be provided in triplicate (one original drawn in black ink on whitepaper and or with two photocopies). Care should be taken that lettering and symbolsare of a comparable size. The drawings should not be inserted in the text and shouldbe marked on the back with figure numbers, title of paper and name of author. Allgraphs and diagrams should be numbered consecutively in the text in arabic numerals.Graph paper should be ruled in blue and any grid lines to be shown should be inkedblack. Illustrations of insufficient quality which have to be redrawn by the publisherwill be charged to the author.

11 . All unessential tables should be eliminated from the manuscript. Tables should benumbered consecutively in the text in arabic numerals and typed on separate sheets.Any manuscript which does not conform to the instructions may be returned fornecessary revision before publication.

PAKISTAN BUSINESS REVIEW OCTOBER 2011 415

Motif Private Sector Responses to the Global Crisis

PRIVATE SECTORRESPONSES TO THE

GLOBAL CRISIS: THE CASEOF PAKISTAN

Sultan Ahmed Chawlaex-President FPCCI, Karachi

Introduction

This paper outlines the Pakistani private sectorsresponse to the challenges posed by the global economic crisiswhich began in late 2007 to the national economy. Part onepresents an analysis of the nature of this crises. Part twodiscusses current responses of both metropolitan and developingcountries to ameliorate the worst effects of this persistingeconomic downturn. Part three presents the proposals the privatesector has recently made to the Pakistan government to restoreinclusive sustainable growth to the national economy.

I-The Nature of the Crisis

The crises that begin in the American wake of thesubprime mortgage defaults in late 2007 is still with us and isusually interpreted as financial in nature and the typical policyresponse has been a somewhat mild tightening of financialregulatory regimes at the national level. This concern withrestoring financial balances and shoring up threatened financialinstitutions has obscured several important structuralcharacteristics of the global economy which have made this crisisso long lasting. It is these underlying structural characteristicsthat I will try to identify in this section.

The 2007 crisis certainly manifested itself as a financialphenomenon. During 2007-2009 several mega financialinstitutions were threatened by insolvency in the metropolitancountries. But very few were allowed to collapse and trillions of

Motif

Motif


Private Sector Responses to the Global Crisis

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dollars of tax payers’ money was pumped into the financial marketsin America and in several European countries to salvage them. Inresponse financial health was at least temporarily restored andmacroeconomic growth prospects revived in the United Statesand at least Western European countries.

However, since 2009 we have been confronted by threatsof sovergin insolvency as one Western European country afteranother finds itself unable to service its external debt. And ofcourse several non emergent developing countries — includingmy own —- are also on the brink of default. Pakistan’s externaldebt has increased by about 70 percent during the last five yearswhile its capacity to service this debt has if anything stagnated.

Moreover, the bailout initiatives of the metropolitangovernments do not seem to have done the trick. The recoverythat is occurring in Europe and America seems more and moredependent on continued and indeed expanded public support —hence both the United States and the European Union have in2010 continued to provide financial assistance of billions of dollarsto sustain recovery and to prevent both private sector andsovergin insolvency.

This continued need for state support illustrates theinadequacy of the response to the crisis. The most obviousevidence of this inadequacy is the jobless character of the growththat it is occurring in the metropolitan countries. This shows thatthe efforts that are being made to revive national economies areby passing the bulk of the population — specially the poor. Thuscapacity to participate in this recovery, through enhancedpurchasing power is not being enhanced. Income distributionpatterns which have become more and more unequal since theearly 1980s specially in America and in the core Europeaneconomies have if anything become more unequal during thecrisis years. This is because the massive bailout programmes areinvariably tax financed and represent a major transfer of resourcesfrom the general public to a small number of financial institutionswhose shareholders and office bearers are among the richestpeople in the world.



It is inadequately recognized that sustainable financialrecovery requires an upsurge in real economic activity — inindustry, in agriculture, in trade, in services. If growth in the realsector is stagnant financial recovery is also necessarilyunsustainable. The present crisis occurred primarily because ofthe overdevelopment of the global financial sector and thisoverdevelopment was itself a product of the stagnation of effectivedemand in the real sectors — agriculture, manufacturing andservices. Effective demand in these real sectors depends cruciallyupon the growth in the purchasing power of the broad masses.The rich are not and cannot be major consumers of food products,clothes and educational services — there are simply too few ofthem to make a major impact in these markets (and often they arealso ageing). The overdevelopment of the financial sector is asure sign that firms are not finding opportunities for profitableinvestment in the real markets. This is exactly what was happeningin Europe and America during 2002-2007. Real sector firms werereplete with surplus savings — corporate saving rates were high— but opportunities for real sector investment were constrainedby rising inequalities. And where effective demand was buoyant itwas sustained by borrowing not by the growth of real income.Hence firms turned to financial markets for availing lucrativeinvestment opportunities and their customers turned to financialmarkets for increasing purchasing power. Financial sectors becamemore and more overdeveloped in the sense that a mountain offinancial derivatives were precariously balanced on a diminishingreal base. The macro structure was stood on its head as thefollowing figures show:

Financial Sector Financial Sector

Real Sector Real Sector A Normal Economy A Crisis Prone Economy

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II- The Response

A striking feature of the response — both global andnational — to the present crisis is the non emergence of a newpolicy paradigm. Unlike previous crises period — following forexample 1873 and 1929 — no establishment voices are proposinga fundamental change in theoretical perspectives — there is noMarx, no Veblen, no Keynes in sight. Policy perspectives remainbroadly unaltered and the emphasisis on the development of amore effective regulatory regime rather than a restructuring oroverhaul of the system. The resort to neo Keynesian policies bythe Bush / Obama and several EU regimes is of an adhoc, characterand the underlying premises of this reform effort seems to be thatstate bail out and simulative efforts will necessarily be of a selfliquidating character. A time will soon come when such‘Keynesianism for the rich’ will no longer be necessary. Moresophisticated prudential regulation of the financial institutionsand an essentially symbolic — widening of the global structuresof policy co-ordination will prove sufficient for ensuringsustainable recovery and “business as usual”.

This approach does not address the fundamentalstructural deformity underlying this crisis which merely appearsas a crisis of finance but is at its core a crisis of the relativeoverdevelopment of the financial sector vis-à-vis the real sector.The crisis is thus in its essence a crisis provoked by the growinginequalities fortressed by the global and national policy regimesthat have been in place since the early 1980s, adopted both byconservative regimes and their social democratic successors inmost metropolitan and developing countries..

If this view is correct — if the crisis is fundamentallycaused by growing inequality — then those economies whichhave as yet been relatively lightly affected by the present crisisshould take heed. Inequality is rising rapidly in several emergenteconomies — especially in India, China, Brazil and Mexico.Moreover, subsumption of these regimes within globalizedstructures of regulation — as articulated why the FSF, the IMF,and the WTO etc. — ensures that the same pattern of relationshipsis built between the public and private sector in these emergent



economies that exist in the metropolitan economies. This meansthat overdevelopment of finance will characterize the growth ofthese emergent economies — capital will be pulled away fromagriculture, from manufacturing from services to money andcapital markets both home and abroad and the gulf between thehaves and havenots will widen. Moreover, since the poor anddispossessed in the developing countries are far worse off thanthe poor and dispossessed in the West, rising inequalities willhave much more serious consequences as far as political stabilityand social harmony is concerned in their countries. For growthto be sustainable in the developing countries it must be inclusivegrowth -— this is a political and social imperative which nogoverning elite in the emergent economies can afford to ignore.

A regulatory state abiding by the rules endorsed bymultilateral institutions such as the IMF and WTO will find itvery difficult to encourage real sector development in thedeveloping economies. Increasing inequalities have grown intandem with the globalization of the macro policy regimes —indeed financialization is often seen as a necessary consequenceof the globalization of national macro regulatory regimes. Thusif the developing countries are to develop a policy frameworkwhich focuses on the reduction of inequalities and the promotionof wide spread employment growth within the real sectors, theinternational macro regime must be redesigned to enable them toarticulate such macro strategies. The view that the minimalistNozickian state which confines its role to the regulation of privatemarkets — both financial and real — is optimal in the sense thatit enables every national economy to realize its economic potentialis not vindicated by empirical evidence and is theoreticallyincoherent. International economic policy co-ordination mustfind space for according legtimization to what Samuel Huntingtonchristened as “development states” in the 1970s. A developmentalstate does not confine itself to regulation. It actively participatesin all markets to ensure that equitable and efficient developmenttakes place on a sustainable basis.

III - What is to be done?

I will not attempt to outline changes in the global policyco-ordination regime that in my opinion are necessary to address

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the fundamental structural disjunctures that have bothparticipated and sustained this crisis. No doubt there are severalpeople at this august forum much more qualified to speak onthese issues than I am.

I am a representative of Pakistani business — I havejust completed a two year term as President of the Federation ofPakistan Chambers of Commerce and Industry and am nowserving as Vice President of the apex federation of business in theCentral and West Asia region – know as ECO and groupingtogether Pakistan, Iran, Turkey and the ex Soviet Central AsianRepublics. As President FPCCI I commissioned a comprehensivereport on challenges facing Pakistan’s manufacturing sector whichoutlined a set of policies that in our opinion the government ofPakistan should adopt if the manufacturing sector and overallmacroeconomic growth is to be stimulated in a manner whichmakes it both inclusive and equitable on the one hand andsustainable on the other. I now summarize these recommendations.

The FPCCI, President or his nominee should beincluded on the Board of Directors of the State Bankof Pakistan so that the formulation and execution ofmonetary policy measures should routinely andexplicitly take account of their implications forindustrial development.

An initiative should be taken to promote universalbanking in Pakistan. All financial institutions shouldbe given targets for total long term industrial sectorinvestment on an annual basis. The establishmentof sector specific banks and capital market fundsjointly owned by federal and provincial governmentwith private sector participation should beencouraged in a) the engineering sectors b) textileand apparel sectors.

The State Bank of Pakistan must reinstitute theformation of an indicative National Credit Plan onan annual basis. This plan should estimate the creditrequirements of major manufacturing sectors if they



are to grow at the required rate so that the desiredannual rate of growth of GDP is achieved. This willprovide benchmarks against which the actualadvances performance of the financial institutionscan be systematically monitored.

Public investment in large scale manufacturing andin mining must increase substantially. This isessential to reverse the near terminal decline of thecapital goods producing industries in Pakistan. Itis also necessary to increase the non tax revenuereceipts of the government. As the South Koreanand Japanese examples have shown publicenterprise profit can become a major source ofpublic development financing.

Government should attempt to evolve managementstructures linking public and private ownership andcontrol in both industry and finance. Much of thesuccess of the miracle economies of East Asia wasdue to successful interweaving of public andprivate management structures at the level of thefirm.

Initiatives are required to rekindle thenational project rehabilitation initiative –– whichhas been all but abandoned. The problem ofgrowing portfolio infection of the financial systemcannot be tackled without successful projectrehabilitation.

A policy benchmarking system must be establishedwithin the federal ministries of industry andcommerce to monitor changes in industry and tradespecific policies of our key trading partners –– theUSA, the European Union, China the UAE and SaudiArabia for example. This will identify opportunitiesand barriers in key markets and enable Pakistan toevolve “best practice” production, investment andmarketing strategies. It can also lead to the

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development of an appropriate policy supportsystem targeting specific markets.

The federal ministry of commerce should monitorWTO regulations and international qualitystandards continuously to identify scope forinterpretation of these regulations and standards ina manner which is in accordance with Pakistan’snational interests. We should acquire Chineseexpertise for this purpose and learn from Beijing theart of developing national standards and regulatoryframeworks which are within the ambit of globalcommitments but primarily designed to servenational needs.

Integrating trade and FDI investment strategies canyield rich dividends in sectors such as textiles,pharmaceuticals and automobiles. FDI facilitationshould be linked to export performance domesticresource use and technology transfer targets. Thefocus of trade and investment incentivizationstrategies should be on Pakistani communitiesresident in the Gulf, the USA and Europe.Institutional mechanisms for the establishment andstrengthening of Pakistani Chambers of Commercein the UAE, Saudi Arabia the UK and the USA withstrong policy implementation capabilities should beexplored and government funding should beprovided for this purpose.

I hope that these recommendations make clear what sortof policy reform is required to initiate and perpetuate sustainableand inclusive growth in Pakistan. Pakistan is a relatively largedeveloping country with a population of over 170 million. But itremains disparately poor with a per capita income less than $1,000 and a highly inequitable pattern of income and assetdistribution. Pakistan has been hit hard by the crisis —— realGDP growth fell from an average of over 6 percent during FY04 toFY08 to about 1 percent in FY09 and 3 percent in FY10. In FY11growth is forecast at about 2.5 percent. Pakistan suffered a major



financial upheaval in the first and second quarters of FY09 whenthe government had to spend billions of rupees to salvage majorbanks with foreign equity participation and management. Exportgrowth in both FY09 and FY10 was also severely affected by thecollapse in demand in Pakistan’s major export markets — theUSA and West Europe. Both direct and portfolio investmentplummeted during the crises years. On the other hand, thegovernment’s external debt grew rapidly and will exceed $60billion by the end of the present fiscal.

Since 1988 Pakistan has been participating in IMFstabilization programmes – the current one has been extendedup to Sept 2011. The commitments under these programmes havebeen investment growth constraining. During the crises yearsprivate investment has stagnated and public investment hasvirtually disappeared from the commodity producing sectors.There has been almost no macroeconomic structural change.The share of manufacturing value added in GDP has remainedstagnant at 12 percent for over two decades. Capital goodsindustries have been destroyed. Pakistan, one of the leadingtextile exporters of the world, produces no textile machinery.

The private sector calls for the state to take on adevelopment — not a hands off arms length regulatory — roleto institutionalize sustainable, inclusive growth. There must bea major revival of public industrial investment. Public and privatecorporate management structures must be interlinked. Trade andinvestment strategies must be integrated. The priority policyconcern must be the promotion of domestic demand. Afundamental orientation of the macropolicy paradigm is requiredif Pakistan and most developing countries are to increase them,crisis resilience and to institutionalize sustainable inclusivegrowths which realizes their full economic potential.


Germany’s South Asia Strategy: Implications for Pakistan Research

424

GERMANY’S SOUTH ASIASTRATEGY: IMPLICATIONS

FOR PAKISTAN

Bettina RobotkaCentre for Area and Policy Studies

Humboldt University, Berlin

I. Historical Background

Germany is a country that is traditionally highlyregarded in the countries of South Asia. The German people andGerman products are valued and generate a positive response inSouth Asia. This attitude of regard and even admiration is dueless to the real engagement of Germany in any of the SouthAsian countries; rather it has historical roots and is based onperceptions which seem to be transmitted in the region from onegeneration to the next.

Among the historical reasons for this favourable viewis the fact that Germany was never a colonial power in SouthAsia. On the contrary, Germany’s political rivalry with GreatBritain during the late 19th and the first half of the 20th centurycreated the impression among the nationalist and anti-colonialpopular movements that “the enemy of my enemy should be myfriend”. That was the reason why during World War I there wasa group of young Indian nationalists in Berlin who had come forstudies and who tried to influence the German public in favourof the Indian freedom movement hoping to get some politicaland material support. Those hopes of course never materialized.In a second ‘wave’ it was Netaji Subhas Chandra Bose whoduring World War II contacted Hitler and his government askingfor support in his fight against British colonial rule. He had toleave Germany without any result. All initiatives which were takenby German foreign policy to act in South Asia such as theencouragement of the ‘reshmi rumal’ plot or the German supportfor the fakir of Ipi were weak and ill funded and were neversuccessful.

Research

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Germany’s South Asia Strategy: Implications for Pakistan

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Germany’s disinterest in colonial expansion in the 18th

and early 19th century was not so much an expression of its missingaggressiveness but much more due to the economic and politicalweakness of Germany at the time and a result of missing Germanunification. This gave an opportunity to German intellectuals, poetsand writers to develop a rather romantic picture of the Orient. Oneof the most famous representatives of this romantic view of theOrient is the German poet Johann Wolfgang von Goethe. Living ata time in Germany, when the idea of nationalism which eventuallywould close the minds of the people for the achievements of othercultures had not yet taken root. He was a real Weltbuerger - aglobal citizen. A strong believer in God but a critic of Christianreligious tradition and church he took strong interest in ideas notChristian at all, philosophies, religions, poetry from far-awayregions such as the Orient. For Goethe the Orient was the placewhere the wonderfully smelling spices come from, where goodand righteous rulers ruled, where a highly sophisticated cultureand civilization was producing deep philosophical wisdom,fabulous wealth, exotic textiles, perfumes, ornaments andsurrealistically romantic stories and poetry. His “West-EasternDivan”, a collection of poems published first in 1819 reflecteddeep interest in the East. His studies of the Koran, the firsttranslations of poems of the Persian poet Hafiz and the firsttranslation of the Sanskrit drama ‘Shakuntala’ are landmarks inGerman Oriental scholarship of that time. Another example of thisromantic view about India is the German Max Mueller who studiedSanskrit and became famous for translating the Vedas which hethought to be the source of the wisdom of the East. He nevervisited India during his life; may be the harsh Indian realty ofpoverty, dir t and repression may have destroyed hisromanticism.1Needless to say that this romantic view of the Eastcurrent in the 19th and early 20th century vanished after Germanunification in 1871 and its growing eagerness to join the rest ofEurope in the push for colonies, cheap labour and resources andis largely absent in today’s Germany. The only left-over from thatperiod is an extraordinary large number of Sanskrit studies andtraditional Islam studies in German universities. Even more, thepersisting 18th century view about the East and ancient India inacademics could be one of the reasons for the missing politicalconceptualization of German foreign policy with regard to SouthAsia and the realties there.



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II. The Current Situation

After the second World War Germany emerged as adivided country struggling to overcome the disastrous economic,political and psychological consequences of the military defeat.The division of the post-war world into a capitalist and acommunist part and the beginning of the cold war era made itdifficult for the two Germanies to overcome the fall-out of thatwar and its consequences.2 With regard to their foreign policiesboth German states became dependent on the victors of that warwho were not interested in an independent role for Germans inforeign policy. That may be the main reason why only in 1993 afirst Asia concept of the Federal Republic of (re-united) Germanywas formulated which looked at Asia as a whole and did notspecify regional policies within Asia. This first concept wasstrongly focussed on the economic interests of the former FRG3.East Germany during its existence had been even more dependenton Soviet guidelines for its foreign policy and did not developany independent concept.

East and West German foreign policy was tilted towardsIndia as the largest country with the largest economy and maybe also because of the mentioned historical romantic traditionsidealizing India. In addition, East Germany had a preference forIndia because of India’s attachment to the Soviet Union throughthe treaty of friendship and mutual cooperation concluded in1972.4 West Germany had mainly economic reasons for their tilttowards India. Pakistan was viewed as a US ally by East Germanyand, therefore, had a low priority in its foreign relations. It cameinto focus of West Germany policy in the nineteen sixties duringAyub Khan’s rule when a rather active economic developmentaid program was run in Pakistan. Pakistan during that time wasregarded as an example of successful development policy.

Gradually German foreign policy in Asia according totheir own evaluation5 has given a growing emphasis to the exportof political institutions and ideas of democracy, human rightsand other enlightenment values to Asia even if this in somecases would hamper their economic interests. After 9/11 all Asiarelated policies of the West and of Germany came under an

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increasing focus of security related issues. A specified foreignpolicy concept for South Asia was for the first time in Germanhistory developed and presented to the public in 2002 on theoccasion of an event named “Asia Day of the German ForeignOffice – German foreign policy after 9/11” on the 25th June 2002 inBerlin. The document which is available on the webpage of theGerman Foreign Office6 formulates in 17 pages the priorities ofGerman foreign policy in South Asia for the medium-termperspective. A closer look at the text reveals no basic changes inthe concept from the earlier policy. The focus on India which isseen as the new upcoming world power is obvious and has beendeclared to be one of the basic principles of German foreign policyin the region. Indo-German relations are based on an “Agenda forGerman-Indian partnership in the 21st century” signed in 2000. AGerman-Indian parliamentarian group and a German-Indianconsultation group containing publically well known personalitiesof the two countries are among the planned initiatives. Pakistan –at that time under a Musharraf-led government- was promisedsupport on the way towards a return to democracy, but apart frompolitical advising and support in education, human rights and thelike promoted through the German political foundations active inPakistan and NGOs, no concrete measures, especially no economicinitiatives or investments have been envisaged. With regard toeconomic cooperation the paper says that Pakistan is unattractivefor direct investment plans but some scope for cooperation in thefields of telecommunication and engineering are identified in ageneral way. Though accepted in 2002 the concept does notelaborate on the war in Afghanistan and how it might influencemutual relations. A policy update might have been made but isnot displayed on the webpage of the Foreign Office.

On the basis of this foreign policy concept Germany istrying to manage its relations with South Asia including Pakistanand Afghanistan. It can be said that this is a rather defensivepolicy concept without a clear vision for the region as a wholeand with a heavy tilt towards India. It seems that even more thansixty years after the end of WW II and twenty years after thereunification of Germany the restraint that was put on Germanforeign policy has not fully been overcome. In addition, the focusof Germany today seems to be more on the EU and EU extension



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problems and right now on economic difficulties at home.Pakistani expectations of a closer cooperation with and relianceon Germany face, therefore, a rather dim outlook for success.That has apart from the conceptual restraints practical and home-grown reasons.

Against all hopes and expectations, since 2002 theeconomic and political situation in Pakistan has destabilized ratherthan improved. Pakistan’s active involvement in the ‘War againstTerror’ has resulted in a destabilization of this country which isanyway troubled with a weak state apparatus. The ordeal aroundthe dismissal of the Chief Justice of Pakistan and the fataltreatment of the Lal Masjid crisis in 2007 have added to theundermining of state institutions and have spread militancy fromthe tribal into the settled areas and the cities of Pakistan. ThePPP government in place since 2008 is busy undoing the fewattempts of the Musharraf era for stabilizing the political systemsuch as democratization of the inner party structures throughintra-party elections, accountability and promotion of highereducation. The judiciary which has been under direct attack inPakistan since 1998 by both the governments of Nawaz Sharifand Musharraf is now being undermined by the PPP government.The verdict of the Supreme Court of Pakistan on the NRO whichhas been declared null and void ad initio is not implemented bythe government given the consequences for their sittingrepresentatives. The scandal of fake degrees of quite a numberof parliamentarians from all parties is undermining the creditabilityof the National Assembly. For Germany which is so much moreinterested in the transfer of Western values and institutions toSouth Asia than it is in economic aid or investment this is a clearsign that their focus away from Pakistan is right. Growingcorruption in all walks of Pakistani life, deterioration of thesecurity situation and the promotion of non-issues like the re-naming of provinces instead of dealing effectively with theeconomic downturn is unlikely to urge Germans to ‘do more’ forPakistan.

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III. The ideological background of Germany’s foreign policy

It is important to understand the mindset behind thisGerman attitude in order to be able to understand political prioritiesand attitudes and to develop a suitable strategy. This is right notonly with regard to Germany and German policy but also withregard to European policy in general and it also partly explainsAmerican attitudes. One of the amazingly insightful and clearexpressions of this was General McChrystal’s remark in hisassessment of the situation in Afghanistan in 2009 that “the conflictin Afghanistan is not a war in the conventional sense but a war ofideas and perceptions.”7

As a result of Enlightenment which took place in WesternEurope in the course of the 18th century certain values becameprevalent in European thinking and world view and on the basisof this, corresponding political institutions were developed. Someof these values are ‘reason’ (meaning that everything in this worldshould be logical and understandable through human reason),secularism (meaning the separation between church as arepresentative of God which is regarded as unreasonable and thestate and life in this world which should be organized accordingto human reason) and thirdly, individualism (meaning that theindividual and his/her needs and rights carry prevalence over allothers including those of the community). This state of affairswas the result of a specific development in European thinkingfrom the classical time and the specific role the Christian churchhad played in European history as well as the devolution of thetraditional community-based European society by the economicdevelopment of capitalism. On the basis of this Europeandevelopment of Enlightenment and the French revolution whichshaped first French and later European societies according tothose enlightenment values a world view was created whichdefined ‘progress’ as material progress exclusively and looked athuman development from a universalist point of view. That meantthat the European model of development was thought to be thedefining concept of progress. This had to be the road the rest ofthe world had to take in order to ‘progress’. The fact that theintellectual development of Enlightenment was limited to WesternEurope and that its ideas were ‘exported’ to the colonies America,



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Canada, Australia and New Zealand through European migrationonly while the rest of the world such as Africa, Asia, parts ofEastern Europe and South America had not experienced such adevelopment and accordingly were holding on to very differentvalues and world views is conveniently forgotten anddisregarded by the West today.

This should explain why the West in general andGermany in particular is so interested in universalizingenlightenment values and the institutions based on them to therest of the world: it is in the first place to spread ‘progress’ andit is in the second place to secure a leadership role over thosecountries and people who had to be enlightened with theseideas. This leadership role would of course come handy whenthe economic interests of the West are to be secured. Colonialrule from the 18th century had been justified by this world viewregarding it as a ‘civilizing mission’ to spread Enlightenmentvalues and ‘progress’ to territories lacking them and convenientlyhiding economic self-interest behind this curtain ofEnlightenment expansion. Since the end of World War II withthe downfall of the old colonial empires and their Europeanrepresentatives Great Britain, France, Germany, Belgium and theNetherlands the initiative has shifted to the US to take the leadin creating a new strategy of neo-colonial domination of theworld. While Germany and “old Europe” (quote of former USDefence Secretary Donald Rumsfeld) have lost the initiative inthis ‘war of ideas’ they still represent those same values and theagenda to spread them in order to make ‘progress’ possible inthe rest of the world. After the collapse of communism which iswidely perceived as a victory of Enlightenment values many ofthe Eastern European as well as Asian countries haveenthusiastically taken to democracy and market economy. Thisis taken as proof that this model of parliamentary democracycombined with market economy is the right and the only waytowards ‘progress’, which is why efforts to promote these valuesand institutions in countries like Pakistan and even Iraq andAfghanistan are strengthened.

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There is another facet to this also. European modernityin its conviction that it is the only right path towards ‘progress’has developed quite an amount of aggressiveness towards thatpart of the world which had to be converted to its values andinstitutions. This aggressiveness was visible during colonial rulein the colonies and even outside direct colonial rule. This is theimperialist design which wants to impose its ‘progressive ideasand structures’ through military power. After the collapse oftraditional colonial domination after World War II under the newleadership of the US many such imperialist wars to extend thepolitical, economic and ideological domination of West have beenfought. Korea, Vietnam, Iraq, Afghanistan are examples of this.8

While ‘old Europe’ and especially Germany has not taken a leadingrole in this - Germany avoided participation in the Iran-Iraq war –it could not uphold this position under intense American pressureas the wars in Iraq and Afghanistan show quite clearly. The newNATO strategy called ‘NATO 2020’ developed under the leadershipof the former US Secretary of State Madeleine Albright is anothersign that this attitude is not going to be revised even in futuredespite the disastrous situation of the war in Afghanistan. In 2002/3 there was a strong mass-based anti-war movement in manywestern countries including the US with millions of people goinginto the streets to protest against a war in Iraq which wasdisregarded by the respective democratic governments and finallyfizzled out. This clearly showed that in this post-modernist erademocracy has become less expressive of the will of the peopleand is occasionally manipulated. There is no such pressure ofstreet power visible today in Europe or the US – on the contrary,nine years of propaganda of nurturing fears of Islam and Muslimshave resulted in a situation where Islamic symbols like the holyprophet of Islam can be officially maligned under the cover offreedom of expression, the dress code of Muslim women living inEuropean countries is interfered with by the law and Germany forinstance is trying to create something like a ‘united church ofIslam’ so as to deal with Muslims residing in Germany.

IV. The way forward

In 2007 during Germany’s presidency in the EU theFriedrich-Ebert- Stiftung, the political foundation of the Social-



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Democratic Party of Germany, initiated a project on the future ofGerman foreign policy under the title ‘Compass 2020’.9 The authorshave selected those regions of the world which they thoughtwould be the important ones within this timeframe. In Asia theyhave focused their attention on China, ASEAN, Central Asia andIndia – not South Asia. Pakistan and Afghanistan are left out.This shows that even for the foreseeable future Germany is notplanning to change its focus with regard to South Asia andPakistan. India is envisaged to be at the center of German foreignpolicy attention. The reason for this is clearly mentioned in thepaper which is available on the webpage of the Foundation: Thisreason is India’s growth rate at an average of 8 per cent and aperceived sharing of interest in an international order based ondemocracy and human rights.10 In the article about the importanceof the ASEAN the authors again point at the main reasons forthis selection: The “strategic pivotal function,” which the GermanEU Council Presidency in 2007 has attributed to ASEAN, ultimatelyresults from the political weight attached to the approximately560 million consumers comprising this market as well as to thepolitical role ASEAN countries are playing in the region.11

How to proceed from here? Any revised relationshipbetween Pakistan and Germany would need changing attitudesand conditions on both sides. Given the domestic situation inboth countries and the pressures arising from that as well as theirintegration into political and military alliances - Pakistan withinthe US war against terror and Germany within EU and NATO - noshort-term substantial changes can be reasonably be expected.All that could be done is to recommend ways for an improvedunderstanding of each other’s positions and of ways towardspractical implementation of some new initiatives. This is attemptedin the following for both sides.

Germany

As has been stated Germany’s foreign policy focus onIndia is a long-term decision grounded in the sheer size, theeconomic potential and the rising political importance of thatcountry. It is an expression of the huge opportunities the Indianmarket is offering and of the rapid economic development of

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India during the last decade. Therefore, it would be unreasonableto expect any change in this policy orientation.

Germany’s political focus in Pakistan so far is directedat the promotion of Enlightenment values like human rights andsecularism and at Enlightenment institutions like parliamentarydemocracy. As has been demonstrated there has been noEnlightenment in South Asia and as a consequence, Pakistanisociety is based not on individuation but on communities suchas tribes, castes and biradris. The family and extended familysystem is almost entirely intact and when talking about the rightsof individuals we have to recognize that those rights are secondaryto the right of the community in cases of clashes between thetwo. A secularization process has never taken place in Pakistan.Therefore, promotion of Enlightenment values presupposes achange in the social fabric of Pakistani society which is as yetnon existent or at most minuscule..

How did this social change occur in Europe? Togetherwith a movement known as the ‘renaissance’ in the ideologicalfield it was triggered through the change in the economic systemand the development of capitalism. Therefore, in order to promotesocial change in Pakistan, changes in the economy should bepromoted, both in an improvement and intensification ofagriculture as well as in the development of new industries andthe improvement of existing industries so as to make themcompatible in the international market. This would at the sametime fight poverty by creating jobs, enhance food security andpromote training and education of the work force.

So far German economic interaction with Pakistan isfocussed on aid not on investment and trade and on sectors suchas healthcare, basic education and renewable energy instead ofagriculture and industry. This focus should be shifted from aid toinvestment or aid should at least be supplemented by investmentprojects in both agriculture and industry which would createsustainable development and employment opportunities.

So far projects have been focussing on remote andunderdeveloped areas like Balochistan and Khyber Pakhtunkhwa



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(KP). Given the precarious security situation in those areas todayfuture projects should be initiated instead in the underdevelopedareas of Sindh and of the Seraiki belt which are more peacefulwhile civil war is going on in the tribal regions. Successfulconstructive work is hardly possible in a destructive surroundingas the Afghan situation is showing.

With regard to the basic aims of German foreign policysuch as the promotion of Enlightenment values it might be usefulto initiate a discussion at home regarding Enlightenment valuesand the whether European conception of ‘progress’ is trulyuniversal and the only option. Can the development that hadtaken place in Europe centuries ago possibly be repeated inSouth Asia? In the face of a society based on different communalstructures and in the absence of secularization the completesubstitution of the values connected with this different situationseems to be either impossible or a very long-term project. Suchcognition would open the way for an attitude towards acceptingthe different structure of Pakistani society and its values as givenand taking them into account while designing foreign policy andpractical steps within their context.

Another possible mode of dealing with Pakistan couldbe to see it not so much as the break-away part of India but as apart of the political region comprising of Turkey, Iran,Afghanistan, Pakistan and the Central Asian republics. Thereare many good reasons for taking this view. Historically andethnically Turkish and Iranian influences in the shape of political,economic and cultural contacts between those regions as wellas exchange of population have been characteristic over manycenturies. Mughal rule which was of Turko-Mongolian ethnicityand central Asian culture has promoted this connection overseveral centuries. Equally close has been the interaction withneighbouring Afghanistan with many Pashtun tribes crossinginto the subcontinent and ruling parts of northern India. Iranianshave come and settled in the subcontinent as administrators,craftsmen and Islamic proselytizers. The ancient silk routeconnected those territories and people with each other and withChina rather than with today’s India. The on-going war inAfghanistan is also vividly illustrating this connection; the war-

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waging parties are more and more realizing that a solution of theconflict is impossible without the involvement of Iran, Pakistanand the adjoining Central Asian republics. Therefore, it makesgood sense to view Pakistan as a part of this region which isstrategically situated at the intersection of the Near East, CentralAsia, Russia, China and India. Peace and economic developmentin this region is a precondition for European and German projectslike energy security and strengthening of independence fromRussian energy supplies. In that sense Germany could re-evaluatePakistan’s role and importance and German involvement inPakistan.

Pakistan

The German foreign policy strategy in Pakistan or anychange in it is of course not a one-way affair. It would require achange in Pakistani positions as well which is not an easy demand.While one of the areas where change would be needed was ofcourse the relationship between India and Pakistan there is also arealization that this is not going to happen soon because it needsthe willingness of both sides. The deep distrust and enmitybetween the two will not vanish as a result of sporadic rounds ofbilateral talks.

Another issue in this regard is the factual non-functioning of SAARC. As can be seen in the German foreignpolicy concept for South-East Asia for instance, Germans preferto deal with ASEAN so as not split forces too much. They wouldprefer a well-functioning SAARC also. But this is not in sight asyet. It is this situation which should make Pakistan on its siderealize that while efforts to come to terms with India and withinSAARC should not be given up a turn towards the westernneighbours specially the ECO countries would offer new vistasand opportunities for economic and trade development.

Partly this has already been realized with regard to Iran.The IPI power project which has generated strong resistancefrom the US has been persisted on and signed by Pakistan. Thereis some cooperation between the two countries in the securityfield especially with regard to checking the growth of the terrorist



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group Jundullah which operates in the frontier region betweenthe two countries and is said to be aided by the CIA. But there ismuch more room for improving and developing relations withIran. Iran has from the very beginning of Pakistan’s existencebeen a good neighbour having recognized Pakistan as one ofthe first countries in the world.

Pakistan’s relations with Afghanistan have traditionallybeen difficult which is in the first place due to of the disputednature of the borderline. The war in Afghanistan is anotherproblem which makes the relationship between the twoneighbours ambivalent. And last but not least Indian efforts tocreate and nurture anti-Pakistani feelings and attitudes are animpart factor. But again, there is growing realization that the fateof both countries is interconnected: peace and stability inPakistan depend to a great amount on peace and stability inAfghanistan. It is quite clear that the economic development ofPakistan is also closely connected to Afghan cooperation; so isthe extension of those relations towards central Asia.

In 1985 the Economic Cooperation Organization (ECO)was formed with Pakistan, Iran, and Turkey as its only members,but Afghanistan, Azerbaijan, Kyrgyzstan, Tajikistan,Turkmenistan, and Uzbekistan joined in 1992. This has been abeginning on which Pakistan could base its revised policy infuture. The ECO given time and attention could emerge as apotential Muslim common market. So far political rivalries,especially between Iran and Turkey, have limited its effectiveness.But with Turkey’s economy developing quite forcefully while itsprospects of being admitted as a member of the European Unionremaining rather bleak it can be expected that Turkey will as aconsequence turn towards its eastern neighbours which wouldgreatly help raise the efficiency of ECO. Pakistan’s relationshipwith Turkey has traditionally been friendly and close; there is alot of potential in the economic as well as in the political spherefor its promotion.

Within Pakistan one of the problems hampering Germanengagement is bad governance and the presence of corruptionin all fields including in government institutions. The fact that

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the Pakistani state is weak and law and order is deteriorating doesof course not encourage German enthusiasm. The destructiverole of the sitting government in the degree fraud matter for instancedoes substantial harm to goodwill and trust in the Pakistaniestablishment and in their will to fight corruption and fraud. Itdestroys the image of official Pakistan, its parliament and itsgovernment in a degree that nobody seems to realize or to careabout. Notions of Pakistan being a ‘failed state’ are created bysuch failures more than by real insufficiencies in materialconditions.

V. Conclusion

The need to bring peace and stability to the region ofwhich Pakistan is a significant part should be the driving force fora re-consideration of Germany’s South Asia policy concepts. Thiswill be if at all a gradual process which also includes the need toend the war in Afghanistan. But with the enthusiasm for this wardiminishing and the 2011 withdrawal date of the US forces insight it may be the right time to start thinking about what comesnext. Germany has not lost all of the good-will which it used toown in the region and especially in Pakistan. Therefore, Germanycould play a leading role in the process of healing the woundswhich the war has caused not only in Afghanistan but in Pakistanas well. For this a new concept is needed based on the realties ofthe present. The time of Goethe and Mueller is gone and it will notcome back. It would be unreasonable to try to build foreign policyconcepts on it. But what about the Enlightenment values to whichGermany is subscribing? Equality is one of them. A focus on thisidea of equality and balance in the dealings with the country andthe people could be a ground on which a new policy conceptcould be based. The proposed inclusion of Pakistan into theregion Iran/Afghanistan/Central Asia could be a viable way forrestructuring foreign policy concepts.

In order to realize the idea of equality it will be necessaryto re-think the presumed universality of Enlightenment valuesand the ways to reach them. This needs a discussion which partlyhad been started by Heidegger and some other Germanphilosophers. History shows that economic development can



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take place without Enlightenment values as China, Japan, Indiaand even Turkey show vividly. That means that the cultural andreligious traditions of those countries have not hampered theireconomic progress which could mean that there is no need towesternize these societies. We may concentrate on the economicsphere with technology transfer, opening of markets andinvestment in agriculture and industry.

Notes

1.It is a telling fact that Germany is represented culturally inPakistan by Goethe- Institutes and in India by Max-Muller-Bhavans.

2. The first Secretary General of NATO H. L. Ismay once notedthat the task of the Nato was to keep the Americans in, theRussians out and the Germans small. http://www.presseportal.de/pm/59019

3.Bundeszentrale fuer politische Bildung http://www.bpb.de/veranstaltungen/YZSD32.html

4. As an East German I had the impression in 1989 that while EastGermany had a preference for India West 5- Germany shouldhave one for Pakistan which turned out to be wrong

5. See http://www.bpb.de/veranstaltungen/YZSD32.html

6. http://www.bpb.de/files/PTSRIL.pdf

7.Commanders initial assessment, 30 August 2009, http://media.washingtonpost.com/wp- srv/politics/documents/Assessment_Redacted_092109.pdf

8. The problem of terrorism or countering terrorism is connectedto this but is outside the scope of this article.

9. www.fes.de/kompass2020/regionen.htm

10. www.fes.de/kompass2020/pdf/Indien.htm


Research Testing the Validity of CAPM and APT

TESTING THE VALIDITY OFCAPM AND APT IN THE

OIL, GAS AND FERTILIZERCOMPANIES LISTED ON THE

KARACHI STOCKEXCHANGE

H. Jamal Zubairi, Shazia FarooqDepartment of Finance and Accounting

College of Business Management, Karachi

Abstract

The Capital Asset Pricing Model (CAPM) and Arbitrage PortfolioTheory (APT) have been commonly used techniques in the globalinvesting community for calculating the required return of a riskyasset. This paper investigates whether CAPM and APT arevalid models for determining price/return of the fertilizer and theoil & gas sector companies listed on the Karachi Stock Exchange(KSE). The purpose of the research is also to identify plausiblereasons for deviations from the theories. The conclusions arrivedat through data analysis reveal weak correlation between realizedexcess returns (i.e. actual returns over and above the risk freerate) and the expected return based on CAPM. With respect toAPT model, the study reflects that macroeconomic factorsincluding changes in GDP, inflation, exchange rate and marketreturn do not serve as valid determinants of returns on oil, gasand fertilizer stocks.

Key Words: Asset pricing theory, Capital Asset Pricing Model,Arbitrage Pricing Model, macroeconomic factors, Karachi StockExchange.

JEL Classification: G11, G12

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Testing the Validity of CAPM and APT

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I. Introduction

The Capital Asset Pricing Model (CAPM) has been oneof the most widely used techniques in the global investingcommunity for calculating the required return of a risky asset.This paper aims to test whether CAPM is a valid model forpredicting the price/return of the fertilizer and the oil & gas sectorcompanies listed on the Karachi Stock Exchange (KSE). Also weinvestigate, whether there appear to be some deviations from themodel and look for plausible reasons to explain these. For thepurpose of the research, actual quarterly returns of samplecompanies listed on KSE for the period January 2004 to December20091 are compared with the CAPM based (predicted) returns forthe corresponding time period. The benchmark for the risk freerate Rf is taken as Karachi Interbank Offer Rate (KIBOR)2

corresponding to the relevant monthly and quarterly time periods.For estimating market return Rm, changes in the KSE-100 index foreach relevant time period is used. Stability tests are also conductedto assess the consistency of results over the entire range of data.

The paper also attempts to empirically compare CAPMwith Arbitrage Portfolio Theory (APT) to find out which of thetwo is a better method for predicting stock returns of companiesbelonging to the above mentioned sectors on KSE. Theconclusions arrived at through data analysis might lead to usefulrecommendations about how and to what extent CAPM/APT canbe used as tools for predicting stock returns and facilitatinginvestment decisions, in general, and particularly for the fertilizerand the oil & gas sector companies in Pakistan.

1 excluding the last two quarters of 2008 due to a floor set for stockprices to halt a plunge that wiped out $36.9 billion of market value sinceApril 2008

2 KIBOR could be considered a good proxy for risk free rate, given itshigh degree of certainty



II. The Theory and Literature Review

CAPM developed by Sharpe (1964), Lintner (1965) andMossini (1965) builds upon the “Portfolio Theory” introduced byHarry Markowitz (1959). CAPM presents the basis for determiningthe required rate of return on all risky assets. CAPM theory isbuilt upon the assumptions of the Portfolio Theory plus someadditional ones. The major factor that allowed Portfolio Theory todevelop into CAPM Theory is the concept of the risk free asset.The inclusion of the risk free asset resulted in the derivation of aCapital Market Line (CML) which was referred to as the new efficientfrontier. The required rate of return on a risky asset (Ri) wasderived as a function of the risk free rate (Rf) and risk premium ofthe individual asset. The risk premium is the product of systematicrisk of the asset referred to as beta (βi) and the current market riskpremium. Market risk premium is defined as the difference betweenreturn on the market (Rm) and Rf. The CAPM equation is as follows:

Ri = Rf + βi (Rm - Rf) (I)

Systematic risks are those market risks which cannot bediversified such as interest rates, inflation and economicdownturns. On the other hand, unsystematic risk can be diversifiedby increasing the number of stocks in the portfolio. According toCAPM, the only relevant measure of stock risk is beta. Itdetermines the sensitivity of the stock to the market i.e. by howmuch will the price of the stock go up or down in relation to specificup and down movements of the stock market. The equation for Βiis:

Βi = Cov (i,m) (II) Var(m)where,Cov (i,m) = Covariance between the returns on a risky asset i andthe stock marketVar(m) = Variance of the market

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Ansari, Naeem and Zubairi (2005) stated that, accordingto CAPM, the market rewards risk bearing, since people aregenerally risk averse. The risk premium for the aggregate of allrisky assets must be positive to induce people to hold the totalamount of risky assets in a financial system. The market (accordingto CAPM theory) rewards only efficient risk bearing. The riskpremium on any individual security is not related to its own riskbut to its contribution to the total risk of an efficiently diversifiedportfolio.

The two fundamental assumptions underlying the CAPMcan be stated as:

All investors have the same forecast of mean expectedrates of return and its associated standard deviationand correlation of rates of return of risky assets; thereforethey hold risky assets in the same proportion.

When investors are optimally holding these riskportfolios, the aggregate demand for each security isequal to its supply and the financial market is inequilibrium.

When testing the validity of the CAPM in the real world,there are two key questions. First, how stable is beta? It isimportant to establish the validity of past betas for predictingstock returns in the future, since beta measures the only riskunder consideration. Second, is there a positive linear relationshipas hypothesized between beta and the rate of return on riskyassets? More specifically, how far is the CAPM equation able toexplain stock market returns.

A number of studies have examined the stability of betaand generally concluded that the estimates were more stable forportfolio of stocks compared to individual securities. Further, thehigher the number of stocks (e.g. over 50 stocks) and longer theperiod (over 26 weeks), the more stable the beta value of theportfolio.3

3 Frank Reilly, Investment Analysis and Portfolio Management,7th

Ed.



Various tests have also been conducted to test theusefulness of CAPM in explaining returns on risky assets andthe existence of a significant positive linear relationship betweenbeta and stock returns. A study by Douglas (1969) showed thatintercepts were larger than existing risk free rates and thecoefficients for the systematic risk were not significant. Sharpeand Cooper (1972) discovered a positive return and riskrelationship between NYSE common stocks during the period1931-67, although it was not completely linear.

Black, Jensen and Scholes (1972) studied the risk andreturn relationship for portfolio of stocks and found a positivelinear relationship between monthly excess return i.e. return overand above the risk free rate and portfolio beta, although theintercept was higher than the expected value.

Fama and French (2004) revealed that empirical worksince the late 1970s challenged the Black version of the CAPM.Specifically, evidence mounts that much of the variation inexpected return is unrelated to market beta.

A study by Basu (1977) showed that when commonstocks were sorted on the basis of earnings/price ratios, futurereturns on high E/P stocks were higher than those predicted bythe CAPM. Banz (1981) documented a size effect; when stockswere sorted on the basis of market capitalization (price timesshares outstanding), average returns on small stocks were higherthan those predicted by the CAPM. Bhandari (1988) found thathigh debt-equity ratios (book value of debt over the market valueof equity, a measure of leverage) also helped explain the crosssection of average returns after both beta and size are considered.A study by Fama and French (1992) concluded that during theperiod 1963 to 1990, beta was not relevant. The study alsoshowed that the most significant predictor variables were bookto market value and size.

Another problem was raised by Roll (1981) whocontended that it was not possible to empirically derive a truemarket portfolio, due to which it is not possible to test the CAPMmodel properly or to use the model to evaluate the market portfolio.

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Ross (1979) developed the Arbitrage Portfolio Theory(APT) which was both simpler and also had fewer and morerealistic assumptions as compared to CAPM. Unlike CAPM, APTdid not assume the following:

A market portfolio contains all risky assets and is mean-variance efficient

Normally distributed security returns Quadratic utility function

The theory assumes that stock returns depend onpervasive macroeconomic influences. The return is assumed tohave the following simple relationship:

ikkiii bbbE ...22110 (III)

Where,

Ei = Return on the risky asset i

0 = expected return on asset with zero systematic risk – risk freerate is generally taken as the proxy for this rate of return

k = the risk premium related to each of the commonmacroeconomic factors - for example the risk premium related tointerest rate risk

bik = the pricing relationship between the risk premium and asseti, i.e. how responsive is asset i to the common factor k



APT does not offer any guidance as to how many factorsshould be used to explain return and what these factors shouldbe. These factors may also differ from one period to the next.There could be an oil price factor, an exchange rate factor, and soon. The return on the market portfolio might also serve as one ofthe factors.

Empirical tests of CAPM and APT have been conductedin different markets. Yang and Donghui (2006) concluded thatCAPM does not give a valid description of the Chinese StockMarket. The test was conducted on 100 companies listed on theShanghai Stock Exchange during the period 2000-05. Inaccordance with CAPM model, the excepted returns and betaswere linearly related with each other during the entire period.However, the results offered evidence against CAPM hypothesisfor the intercept, which should equal zero and the slope thatshould equal to the average risk premium.

The results of the tests conducted by Michailidis,Tsopoglou, Papanastasiou, and Mariola (2006) on data of 100companies listed on the Athens Stock Exchange for the periodof 1998-2002 provided evidence against the CAPM. The testsrefuted the CAPM’s prediction that the intercept should equalzero and the slope should equal the excess returns on the marketportfolio. However, their findings did not present evidence insupport of any alternative model.

Canegrati (2008) studied the relationship between thesign of market returns and beta coefficients within six sectors ofstocks listed on the Milan Stock Exchange. The evidence showedthat the intercept was equal to zero, supporting CAPM theorywhich assumes that the only relevant variable in the regressionis the excess return on the market portfolio. As a consequence ofthis, it was concluded that betas completely capture the crosssectional variation of expected excess returns and can be seenas a measure of asset risk. Tests using a fifteen-year sample ofmonthly returns examined the relation between the sign of marketreturns and beta coefficients and detected existence of an expost positive (when the market is at an Up state) and negative

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(when the market is at a Low state) relationships between returnsand betas.

Nguyen (2010) examined the stock price behavior of theStock Exchange of Thailand (SET), by applying APT. Employingthe data for the period before the Asian financial crisis of 1997-98,i.e. between January 1987 and December 1996, the researchinvestigated the relationship between stock returns in Thailandand some economic fundamentals, namely returns on the SET-Index, changes in exchange rates, industrial production growthrates, unexpected changes in inflation, changes in the currentaccount balance, differences between domestic interest rates andinternational interest rates and changes in domestic interest rates.The test results showed that the APT does hold in the stockmarket of Thailand, while the CAPM fails to do so.

Dash and Rao (2009) studied a sample of fifty stockslisted on the National Stock Exchange (NSE), belonging to eightmost flourishing industries in the Indian economy. The objectivesof the study were to compare and assess applicability of theCAPM and APT to Indian capital markets, and to find out howmacroeconomic variables affect the returns of different securities.The results of the study show that the APT does not have asignificantly better explanatory power over the CAPM for Indiancapital markets.

In Pakistan, Javid and Ahmad (2008) investigated therisk and return relationship of 49 companies listed on the KarachiStock Exchange (KSE) during the period July 1993 to December2004. The empirical findings did not support the standard CAPMas a model for explaining asset pricing in the Pakistani equitymarket. The critical condition of CAPM—that there is a positivetrade-off between risk and return—was rejected and some role ofresidual risk was identified in pricing risky assets. The empiricalresults of this study partially vindicated the conditional CAPM,with time variation in market risk and risk premium. The resultsconfirmed the hypothesis that risk premium was time-varyingtype in Pakistani stock market and strengthened the notion that



rational asset pricing exists, although inefficiencies were alsopresent in unconditional and conditional settings.

Iqbal, Brooks and Galagedera (2008) investigatedwhether allowing the CAPM parameters to vary improves theperformance of the CAPM and the Fama-French model. The datacomprised of monthly closing prices of 101 stocks and theKarachi Stock Exchange 100 index (KSE-100) during the periodOctober 1992 to March 2006. The findings of the study revealedthat conditional asset pricing models scaled by conditionalvariables such as trading volume and dividend yield, generallyresulted in small pricing errors. However, a graphical analysisshowed that the predictions of conditional models are generallyupward biased. They found that the unconditional Fama-Frenchmodel augmented with a cubic market factor performed the bestamong the competing models.

Nikolaos (2009) analysed 39 stocks from London StockExchange on monthly basis for the period of January 1980 toFebruary 1998, to test the validity of CAPM. Results of thestudy indicated that CAPM was not valid, although beta wasfound to be compatible to the model as it was a significantcoefficient for measuring returns.

Hanif and Bhatti (2010) have also rejected the CAPMmodel in the local institutional frame work based on their studyof 360 companies in the Pakistani market during the period 2003-08. Their findings suggested that CAPM showed accurate resultsfor a limited period and for few companies only - out of 360observations only 28 results supported the theory. Anotherstudy conducted by Hanif (2010) on tobacco sector companieslisted on stock exchanges in Pakistan presented similar resultsfor the period 2004-07. The study showed that beta calculationdepicted different results for different periods. Monthlyrelationship between actual and CAPM forecast returns wasfound to be stronger than a similar relationship based on weeklydata since beta with smaller period observations was found tobe higher than that for longer period observations.

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Krish (2010) tested the validity of CAPM theory in Indiancapital market & the stability of beta. The study was conductedon 10 stocks & 10 sectoral indices listed on the Bombay StockExchange (BSE), for a period of 4 years (January 2005 to December2008). The study provides evidence against the CAPM hypothesisas well as the stability of systematic risk.

Empirical tests on CAPM conducted so far have yieldedmixed results, largely indicating inapplicability of the model in itsoriginal form. However, the tests mainly uphold the basic riskand return principle underlying CAPM theory. Although the APTmodel requires fewer assumptions and includes multiple factorsfor explaining the risk of an asset, the CAPM has an advantage inthat its single risk factor is well defined.

I. Methodology and Sample

This section describes the variables used in the study,null hypotheses tested and methodology used to test thehypotheses. Furthermore, various measures of the variables alongwith the sources of data are also presented. Following is a briefdiscussion of the variables employed to estimate Ri, the requiredrate of return as per the CAPM equation

(Ri = Rf + βi (Rm - Rf) stated as Equation 1.

Risk-Free Rate of Return (Rf)

Rf represents the compensation received by the investorfor placing money in an asset with almost entirely certain expected(nominal) return. In other words, the standard deviation of thenominal return expected on such an asset equals zero. The returnon government securities is generally used as a proxy for thisreturn. For the purpose of this study, Karachi Interbank OfferRate (KIBOR) was used as the risk free rate given the fact it is anactively used benchmark with a high degree of certainty. KIBORwas also used as a proxy for measuring expected return on anasset with zero systematic risk while calculating the required rateof return using the APT equation.



Return on Market (Rm)

Rm is the expected rate of return on the stock market. Inthis study, KSE 100 index was selected as an appropriate proxyfor the Pakistani stock market. Quarterly change in thisbenchmark was taken as a measure for expected rate of return onthe market for the purpose of this study.

Beta( i)

Beta is a measure of systematic or non-diversifiablerisk of the asset. Beta was calculated by dividing covariancebetween quarterly stock and market returns during the period2004-09 with the variance of the market over the same period.Beta was assumed to be constant while calculating CAPM basedreturns during each quarter.

Return on Risky Asset (Ri)

The required rate of return (Ri) was calculated for eachquarter and then compared with corresponding actual return onthe stock to assess the validity of CAPM. Actual quarterlyreturns on stock were determined using change in stocks pricesi.e. difference between the opening and closing price divided bythe opening price. The effect of dividends was not taken intoaccount while calculating actual stock returns due to difficultyin gathering data.

The APT equation to calculate Ri (the dependentvariable) for the purpose of this study was expressed as afunction of the following four factors (independent variables):

Table 1: Determinants of the APT Equation

Factor t Measured by Real GDP (R1) Change in GDP Exchange rate (R2) Change in value of Pak Rupee relative to US Dollar Inflation (R3) Change in CPI Index Market Return (R4) Change in KSE-100 Index

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The equation for estimating stock return for this research can bestated as follows:

Ri = Rf + β1 (R1 - Rf) + β2 (R2 - Rf) + β3 (R3 - Rf) + β4 (R4 - Rf) (IV)

Where,Ri = Return on risky asset as explained aboveR1, R2, R3 and R4= Return on each factor (Rfactor) measured asmentioned in Table 1Rfactor - Rf = Risk premium associated with each factorβ1, β2, β3 & β4 = Sensitivity of the risky asset to each factorrisk calculated by dividing covariance between the return on thefactor and the risky asset by the variance of the factor return.

The main objective of this research is to determine theexplanatory power of CAPM and APT in predicting returns of oil,gas and fertilizer companies listed on the Karachi Stock Exchange.In order to achieve this objective, the realized excess return wasmeasured applying the following statistical model on actual returnRi and the return calculated using the CAPM equation.

Ri - Rf = α + βi (Rm - Rf) (V)

where ± termed as intercept should be zero if CAPM equationwas imposed on the data.Similarly, the model when applied to APT equation based returnwill be as follows;

Ri - Rf = α + β1 (R1 - Rf) + β2 (R2 - Rf) + β3 (R3 - Rf) + β4 (R4 - Rf) (VI)

The validity of CAPM and APT was tested bydetermining whether the alpha of any security as determinedthrough equations V and VI was statistically different from zero.The regression was run with available stock returns data in orderto test the following two hypotheses:



Ho: The intercept when CAPM is imposed on the stock returnsdata is equal to zero.Ho: The intercept when APT is imposed on the stock returnsdata is equal to zero.

Under the alternative hypothesis, the intercept or alphais not equal to zero. The standard test is a t-test on the interceptof the regression. If the intercept is more than 2 standard errorsfrom zero (or having a t-statistic greater than 2), then there isevidence against the null hypothesis or the validity of CAPMand APT.

The study is limited to testing the validity of CAPMand APT in explaining returns on fertilizer, oil and gas companieslisted on the Karachi Stock Exchange for the period 2004-09,excluding the last two quarters of 2008 when a floor was imposedon the market. A sample of 17 companies was taken resulting in361 observations. Quarterly opening/closing data of stock pricesand KSE100 index were taken from the website of Karachi StockExchange. KIBOR and macroeconomic data were sourced fromthe State Bank of Pakistan.

I. Empirical Results

This section presents the results of the regressionanalysis. The interpretation and detailed discussion of theempirical findings are also reported in this section. Finally, apossible explanation, on the basis of the financial theory reviewedabove, is presented to explicate the empirical findings.

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Table 2: Pooled Regression Results (CAPM)

The computed t-statistic reveals a significance level of10% at which the intercept value is very high. Additionally, lowR-squared value implies that only 1.9% variation in realized excessreturn is explained by CAPM. F- statistic is significant at 1%whereas DW statistics shows no auto-correlation problem. Highstandard deviation of realized excess return shows that there isno consistency in stock price performance of oil, gas and fertilizercompanies listed on the KSE. The above results show that theCAPM model does not explain variations in realized excess return.Inefficiency and volatility in emerging markets such as Pakistanmay be the underlying reasons for this behavior.

Similarly, we have taken the expected excess returnbased on APT as the determinant of realized excess return to testthe validity of the APT theory. The results are shown in Table 3.

Dependent Variable: Realized Excess Return Variable Coefficient Std. Error t-Statistic Prob. C(intercept) 5.780885 2.999115 1.92753 0.0547 CAPM 0.320824 0.119987 2.673812 0.0078

R-squared 0.019526 Mean dependent var 7.687368 Adjusted R-squared 0.016794 S.D. dependent var 55.82007 S.E. of regression 55.34935 Akaike info criterion 10.87073 Sum squared resid 1099815 Schwarz criterion 10.89228 Log likelihood -1960.17 F-statistic 7.14927 Durbin-Watson stat 2.095235 Prob(F-statistic) 0.007842



Table 3: Pooled Regression Results (APT)

The computed t-statistic implies that the nullhypothesis (that the intercept ± when APT is imposed on thestock returns data is equal to zero) is rejected at 5% level ofsignificance. Similarly, low R-squared value (only 3%) implies aweak relationship between excess return based on APT andrealized excess return. F-statistic is significant at 1% while DWstatistics shows no statistical problem signifying satisfactoryresults. High standard deviation of realized excess return in thiscase also shows that there is no consistency in stock priceperformance of oil, gas and fertilizer companies listed on theKSE.

The results are broadly the same for expected excessreturns based on both CAPM and APT theories – neither provideany explanation of variation in expected excess return.

Dependent Variable: Realized Excess Return Variable Coefficient Std. Error t-Statistic Prob. C 6.900988 2.891915 2.386304 0.0175 APT 0.189472 0.049843 3.801371 0.0002

R-squared 0.038694 Mean dependent var .687368 Adjusted R-squared 0.036017 S.D. dependent var 55.82007 S.E. of regression 54.80563 Akaike info criterion 10.85099 Sum squared resid 1078313 Schwarz criterion 10.87253 Log likelihood -1956.6 F-statistic 14.45042 Durbin-Watson stat 2.075036 Prob(F-statistic) 0.000169

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I. Conclusions

In this study, data of a sample of 17 oil, gas and fertilizersectors companies listed on KSE was analyzed through a pooledregression model to determine whether CAPM and APT modelsare valid determinants of the realized excess return on thesecompanies. The study was based on quarterly data for the period2004-2009, excluding the last two quarters of 2008 during which afloor was imposed on the market. This resulted in 361 observationsfor the regression analysis. The data analysis reveals almost nocorrelation between realized excess returns and the expected returnbased on CAPM. With respect to APT model, the study reflectsthat changes in GDP, inflation, exchange rate and market returndo not serve as valid determinants of returns on oil, gas andfertilizer stocks. These results are generally in line with otherstudies conducted on listed companies in Pakistan, while minordifferences are observed when the same results are comparedwith those of similar studies conducted on stock exchanges ofother developed and developing countries.

As discussed in the literature review, a similar studyconducted by Dash and Rishika (2009) revealed low R-squaredvalues of 16% and 24% respectively when CAPM and APT modelswere applied to 50 companies on NSE in India, implying that themodels do not have sufficient explanatory power. Furthermore,standard CAPM does not appear to be a valid model for predictingstock returns based on the results of other studies discussedearlier, mostly pertaining to emerging markets including Greece,Bucharest, Thailand and Pakistan. The table below summarizesthe tests/findings of the recent studies on CAPM and APT,reviewed by us:



Study Tests/Findings

Testing the CAPM Model -- A study of the Chinese Stock Market

t-tests were used. CAPM does not fully hold good in the Chinese Stock Market during the period 2000- 2005.

Testing the Capital Asset Pricing Model (CAPM): The Case of the Emerging Greek Securities Market

t-tests were used primarily to test the data. The tests refuted the CAPM’s prediction that the intercept should equal zero and the slope should equal the excess returns on the market portfolio. However, their findings did not present evidence in support of any alternative model.

Testing the CAPM: Evidences from Italian Equity Markets

Regressions were run to test the data Results of the work seem to confirm the validity of the three Sharpe-Lintner CAPM empirical tests.

Testing CAPM on Stocks traded at Bucharest Stock Exchange

The coefficient t-statistic – to measure the level of the significance of beta Adjusted R-squared – to check the goodness of the model Durbin-Watson coefficient – to check for serial in residuals; Pattern of residuals – to check the noise in data. Power of beta as an estimate of risk was not very strong, given the resulting readings of adjusted R-squared

Asset Pricing Models in Indian Capital Markets

The study uses the standard two-step regression method to estimate the CAPM and the APT using the sample scrips. To test for the significance of the difference between the CAPM and the APT, the F-test was employed. The results of the study show that the APT does not have better explanatory power over the CAPM for Indian capital markets.

Validity of Capital Asset Pricing Model & Stability of Systematic Risk (Beta): An Empirical Study on Indian Stock Market

t-tests were used. The studies provide evidence against the CAPM hypothesis and the stability of systematic risk.

Thai Stock Market t-tests were used primarily to test the data. APT does hold in the stock market of Thailand, while the CAPM fails to do so.

Table 3: Summary of Results of Other Studies on CAPM and APT

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An Empirical Evaluation of CAPM’s Validity in the British Stock Exchange

Two step regression procedure was used. Results indicated that CAPM was not valid, although beta was compatible to the model.

Testing Conditional Asset Pricing Models: An Emerging Market Perspective (Pakistan)

Wald Test, Chi square, p-values, t-tests Conditional asset pricing models scaled by conditional variables such as Trading Volume and Dividend Yield generally result in small pricing errors. However, a graphical analysis shows that the predictions of conditional models are generally upward biased.

The Conditional Capital Asset Pricing Model: Evidence from Karachi Stock Exchange

Generalised Method of Moment approach and Generalised Least Square (GLS) approaches are used to test the data The empirical findings do not support the standard CAPM model as a model to explain assets pricing in Pakistani equity market. The empirical results of the conditional CAPM, with time variation in market risk and risk premium, are more supported by the KSE data, where lagged macroeconomic variables, mostly containing business cycle information, are used for conditioning information.

Validity of Capital Assets Pricing Model: Evidence from KSE-Pakistan

Absolute difference between CAPM and actual returns was analysed. CAPM gives accurate results for a limited period for a few companies only. Out of 360 observations only 28 results supporting CAPM while 332 are against it, hence model is rejected in this institutional frame work.

Testing Application of CAP Model on KSE- Pakistan A Case Study on Tobacco Sector

Absolute difference between CAPM and actual returns was analysed. Findings raised questions about the validity of CAPM Theory. Security returns are not as per the demand of the model.



Market inefficiency and uncertain political/economicsituation in the country appear to be major factors responsiblefor the inapplicability of these models on local scrips. Volatilemarket conditions result in unexpected changes in systematicrisk due to which predictability of returns based on constantbeta values tends to result in deviations of actual returns fromvalues determined through these models. Also it may be thecase that stock prices are subject to manipulation by a smallnumber of key players.

It is pertinent to mention here that the study has somelimitations such as a small size of 17 companies belonging toonly oil, gas and fertilizer sectors. Further, the study wasrestricted to unconditional version of CAPM not taking intoaccount other factors like size and book to market value factors.

1References

Ansari, Naeem & Zubairi (2005), Financial Management inPakistan

Canegrati, Emanuele (2008), Testing the CAPM: Evidences fromItalian Equity Markets

Darasteanu, C.C. (2002), Testing CAPM on Stocks traded atBucharest Stock Exchange

Dash, Mihir & Rao, Rishika (2009), Asset Pricing Models inIndian Capital Markets

Fama, E.F. and French, K.R. (2004), The Capital Asset PricingModel: Theory and Evidence

Hanif, Muhammad (2010), Testing Application of CAP Modelon KSE- Pakistan - A Case Study on Tobacco Sector

Hanif, Muhammad & Bhatti, Uzair (2010), Validity of CapitalAssets Pricing Model: Evidence from KSE-Pakistan

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Harvey, C.R. (1995), Asset Pricing and Risk Management

Iqbal, J., Brooks, R. & Galagedera, D.U.A. (2008), TestingConditional Asset Pricing Models: An Emerging MarketPerspective

Javid, A.Y. and Ahmad, E. (2008), The Conditional Capital AssetPricing Model: Evidence from Karachi Stock Exchange

Krish (2010), Validity of Capital Asset Pricing Model & Stabilityof Systematic Risk (Beta): An Empirical Study on Indian StockMarket

Michailidis, G., Tsopoglou, S., Papanastasiou, D. & Mariola, E.(2006), Testing the Capital Asset Pricing Model (CAPM): TheCase of the Emerging Greek Securities Market

Nguyen, Tho Dinh (2010), Arbitrage Pricing Theory: Evidencefrom an Emerging Stock Market

Nikolaos, Loukeris (2009), An Empirical Evaluation of CAPM’sValidity in the British Stock Exchange

Reilly, F.K. & Brown, K.C. (2002), Investment Analysis andPortfolio Management, 7th Ed. Pp 260 -264

Yang, Xi & Xu, Donghui (2006), Testing the CAPM Model — AStudy of the Chinese Stock Market


Students’ Prior Degree Performance as Predictor of their PerformanceResearch

STUDENTS’ PRIOR DEGREEPERFORMANCE AS

PREDICTOR OF THEIRPERFORMANCE AT MBA

LEVELAli Asghar Malik

Department of Communication and LanguagesCollege of Business Management, Karachi

This paper describes the performance of students at SSC,Intermediate, and degree levels as predictors of their performancein MBA. Sixty (60) students who graduated in 2009 from IoBMformed sample for the study. The data was collected personallyby the researcher from the official records of the University.Regression Analysis and ANOVA were used for the analysis ofdata. SPSS was used to analyze the data. The study concludedthat performance of students at Bachelor level was the strongestpredictor of CGPA at MBA level. When performance at Bachelorlevel was analyzed, only the male performance was a significantpredictor of the CGPA in MBA.. Significant differences werefound between the contribution of the pre-admission performanceof the BBA, B.com. and B.sc. groups as predictors of CGPA inMBA. The BBA performance of the male students was a strongpredictor of CGPA at MBA level.The paper takes the positionthat there is a need for better collaboration and improvement inthe curriculum at all the levels in general and at Bachelor level inparticular. In view of the contribution of the students’performance at Bachelor level in predicting their performance inMBA , the paper suggests giving Bachelor level performancesuitable weightage in the Admission Criteria for admission inMBA programmes.

Key Words: Prior degree Performance; Predictor; MBA level:SSC level ( Secondary School Certificate level ); Intermediatelevel; Degree level; CGPA ( Cumulative Grade Point Average).JEL Classification: Z0000

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Introduction and Literature Review

In the study I have investigated students’ performancein pre-requisite examinations that included Bachelor, Intermediate,& SSC levels and their subsequent performance at MBA level. Ialso studied the male-female and subject group differences inperformances as predictors of students’ performance at MBA level.This study sought to provide evidence to guide decisions inrelation to the utilization of students’ performance data in the pre-requisite examinations for admission into MBA programmes,based on empirical evidence. In Pakistan, generally the marksobtained by students in pre-requisite examinations, admissiontest and interviews are used as a basis for students’ admissionsinto different professional education programmes. In this study,the relationship between students’ performance in the pre-requisite examinations as reflected in their marks (percentages)and their performance as reflected in their CGPA at MBA level hasbeen studied. This study seeks to identify the predictive value ofundergraduate performance for success in professionalprogrammes of education . Thus it would also provide an empiricalbasis for devising better criteria for admission.. In previousresearch into the predictors of academic performance in differentareas, researchers have considered the effect of age, ethnicity,gender, grade point average (GPA) and admission test scores onperformance of students. (James and Chilvers, 2001; Wilkinsonwelland Bushnell, 2004).

Roth et al. (1996) examined the relationship between theobjective pre-medical credentials and performance on Step 2 onthe United States Medical Licensing Examination (USMLE) of480 students at Virginia Commonwealth University, School ofMedicine. The purpose of the study was to identify those selectioncriteria that might best predict performance on an examinationdesigned to assess problem- solving skills, the essence of clinicalmedicine. Pre-medical data from classes of 1993 and 1994 wereanalyzed, and a regression equation was used to calculatetheoretical USMLE Step 2 scores for the students in the class of1995, who had not yet taken this examination. The pre-medicalvariables were scores on the verbal and math sections of theScholastic Aptitude Test (SAT) scores on the six sections of the



pre-1991 Medical College Admission Test (MCAT) grade pointaverage (GPA) in science courses required of pre-medical studentsand undergraduate major. Once the class of 1995 had taken theUSMLE Step 2, the equation was cross validated, and the theoreticaland actual scores of the class of 1995 were correlated. Thecorrelation between the theoretical and actual scores was r=.443.In the analysis for the classes of 1993 and 1994, the single variableshighly predictive of USMLE performance were scores on the verbalsection of the SAT (r=.317) and the Skills Analysis: reading sectionof the MCAT (r=.331).

In the final regression analysis, the MCAT scores wereexcluded . The resulting regression equation using SAT verbalsection and pre-medical GPA accounted for 21.2% of the variancein performance for the class of 1995.

Roth et al.(1996) concluded that students’ performanceon the verbal section of the SAT as a predictive factor was stronglyrelated to pre-medical GPA score. They also suggested that highverbal aptitude serves well even when coping with complexscientific concepts.

In another study, Evans et al. (2007) investigated theextent to which Medical College Admission Test (MCAT) subscores predict overall academic performance of osteopathic medicalstudents. The researchers examined the value of MCAT sub-scoresin predicting students’ global academic performance in osteopathicmedical school as defined by the grade point average in basicsciences (Basic GPA), clinical instruction (Clinical GPA), cumulativegrade point average (Total GPA) and National LicensingExamination, (COMLEX-USA), Level 1 and Level 2.

The subjects for the Evans et al. (2007) study were 434medical students of the Oklahoma State University, College ofOsteopathic medicine in Tulsa who graduated or were expected tograduate between 1999 and 2003. Standard multivariate linearregression analyses were conducted for each of the fiveperformance variables. The results of the study demonstrated thatUGPA was the most important significant predictor (beta=.13-.33)

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in overall student academic performance for all five analyzedvariables.Less predictive of overall academic performance (beta=-01-.21) were MCAT sub-scores.

However, Evans et al. (2007) results showed that theMCAT biological sciences sub-score was a significant predictorof basic GPA (beta=.14) , the MCAT physical sciences sub-scoresignificantly predicted COMLEX-USA Level 1 scores(beta=.15),and the MCAT verbal reasoning sub-score significantly predictedCOMLEX-USA Level 2 scores (beta= .21). The sub-score for theMCAT writing sample was not a significant predictor of overallacademic performance. Evans et al. (2007) concluded that totalundergraduate GPA had the highest predictive value for academicperformance as measured by basic GPA, clinical GPA, total GPAand COMLEX-USA Level 1 and Level 2 scores. The study foundthat MCAT sub-scores were of limited predictive value indetermining global academic performance.

Julian (2005) reported that in his study he investigatedthe extent to which MCAT scores supplement the power ofundergraduate grade point average (UGPA) to predict success inmedical school, United States Medical Licensing Examination(USMLE)Step scores, and academic distinction or difficulty.Julian’s study followed two cohorts from entrance to medicalschool through residency. Students from 14 medical colleges 1992and 1993 entering classes provided data for predicting medicalschool grades and academic difficulty / distinction, while theirpeers from all the US medical colleges were included in the studyto predict performance on USMLE Step1,2 and 3.

Regression analysis assessed the predictive power ofthe combination of MCAT scores and UGPAs, with MCAT scoresproviding a substantial increment over UGPAs scores alone.MCAT scores ,according to the findings of the study, were strongpredictors of scores for all three step examinations, particularlyStep 1. Julian (2005) concluded that MCT scores almost doublethe proportion of variance in medical school grades explained byUGPAs , and essentially replace the need for UGPAs in theirimpressive prediction of Step scores.



In another study Dixon (2004) investigated therelationship between pre-admission academic variables ,osteopathic medical school performance in the first two years,and performance on the comprehensive Osteopathic MedicalLicensing Examination (COMLEX-USA) Levels 1 and 2. Thestudy group comprised 174 students in the class of 2001 of NewYork College of Osteopathic Medicine.

Pre-admission academic variables were the MedicalCollege Admission Test (MCAT) sub-scores and undergraduategrade point average (UGPA). Physical sciences (Physical MCAT)and biological sciences (Biological MCAT) sub-scores weresignificantly correlated with Level 2 performance. COMLEX USALevel 2 performance was correlated with the year 1 GPA (0.64)and the year 2 GPA (0.68).

Strong correlation existed between all year 1 and mostyear 2 course grades and COMLEX-USA Level 1 scores.

Silver and Hodgson (1997) examined the relationshipsamong undergraduate student characteristics, standardizedindicators of medical school academic performances and clinicalperformance at University of California , Riverside (UCR) , Schoolof Medicine, Los Angeles. The data were collected in 1993 forthe 1990-93 classes of the Bio-medical science programme. Allthese students had completed their undergraduate studies atUCR. Data were collected with regard to the students’demographic characteristics , undergraduate grade-pointaverage (UGPAs) , Medical College Admission Test (MCAT)scores, National Board of Medical Examiners Part 1 (NBME 1)scores and clinical performance as measured by core clerkshipgrades. Regression analysis was used to evaluate the relationshipbetween clinical performances and data available at admissionon the same variables. Top and bottom 25% of each class wereidentified by UGPAs and compared by their NBME 1 scores andclinical performances to determine whether differences noted atadmission continued to separate the students. Independent twotailed t-tests were used to study the differences. Of the 92 students

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data were available for 88 (96%). 39% were female and 38% wereforeign-born. The sample was fairly heterogeneous in terms ofUGPAs, MCAT scores, clinical performance grades, and NBME 1scores.

The results of the first regression analysis indicated thatmean clinical performance was not related to any of theundergraduate predictors of performance, or the students’demographics. The second regression analysis indicated thatMCAT scores and cumulative science UGPAs were related totheir performance on the NBME 1, but not in their clinicalperformances.

Silver and Hodgson (1997) concluded that althoughUGPAs and MCAT scores are good indicators of NBME 1performance , they are not useful in predicting clinicalperformance, even where students’ data are taken from the sameundergraduate institution.

Truell and Woosley.(2008) investigated whether collegeof business admission criteria and other variables predictedundergraduate college of business student graduation.Thespecific variables examined included gender, race/ethnicity, mathacademic college aptitude score, verbal academic aptitude score,college of business accounting GPA,college of business computerproficiency GPA, college of business economics GPA, college ofbusiness statistics GPA, required English GPA, and required mathGPA.The results of the study demonstrated that college ofbusiness (COB) statistics GPA was positively associated withhigh probability of graduation. 87% of the students meeting theCOB admission criteria who began studies in Fall 2000, graduatedby July 2005.

Many universities have selective admission tests.Theyuse some type of criterion to determine which applicants will beaccepted and which rejected. Ideally, the process shoulddifferentiate and admit those students who are likely to succeed.According to Hawkins & Clinedinst (2006),’ the main factors in



the admission process continued to be (in order): grades incollege preparatory courses, standardized admission tests, andoverall high school grade point average. Class rank and theapplication essay was placed fourth to fifth while teacher/counselor recommendations were sixth. A student’sdemonstrated interest in attending an institution also constitutesa key factor in admission’.

Berry & Sackett (2009) demonstrated in their studythat the validity of SAT scores and high school grade pointaverage (GPA) as predictors of academic performance has beenunderestimated because of previous studies’ flawed performanceindicators (i.e. college GPA) that are contaminated by the effectsof individual differences in course choice. They controlled thecontamination by predicting individual course grades, insteadof GPAs, in a data set containing more than five million collegegrades for 176,816 students representing entry classes at 41colleges in 1995 through 1997. The researchers calculatedcorrelations of SAT scores and high school GPAs with ICGs (Individual course grades). The sample included grades from145000 + courses without excluding negative correlations. Theycompared how well SAT scores and high school GPAs predictedICGs with how well they predicted two common GPA criteria:College freshman GPA and cumulative GPA throughout thecollege career. They also assessed the validity of SAT scoresand high school GPAs when used in conjunction to predict ICGs,as most colleges use same combination of the two in theadmission process. The researchers concluded that percentageof variance accounted for by SAT scores and high school GPAswas 30 to 40% lower when the criteria were individual coursegrades .SAT scores and high school GPAs together accountedfor between 44 and 62% of the variance in college grades.

Naik and Ragothaman (2004) evaluated the ability ofthree different models namely logistic regression, probit analysis,and neural networks, to predict MBA performance.

Gayle and Jones (1973), and Baird (1975) found asignificant positive relationship between Graduate Record

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Examination (GRE) scores and graduate grade point average (GPA)in graduate studies.

Ahmadi et.al. (1997) used bi-variate regression modelsto examine the relationship between graduate GPA and a numberof factors and found that undergraduate GPA and GMAT weresignificant variables in predicting academic success. They reporteda study done by Edwards (1990) who surveyed 657 accreditedinstitutions to study the admission process for their MBAprogrammes. Out of 333 responses received, all but one of theresponding schools used some sort of admission testing. Theresearcher found that John Hopkins does not require candidatesto submit pre-admission test scores such as GMAT. Some othergraduate programmes including Standford, Boston College, andUniversity of Indiana, at Bloomington require submission ofGMAT score for consideration, but do not mandate a minimumacceptable score. The most popular decision method for mostMBA programmes was an index system based on GMAT scoreand undergraduate GPAs. From the responding schools, 177respondents used an index, 81 imposed a minimum test score inaddition to applying an index, and the rest used a minimum testscore without applying an index. Naik et. al. (2004) in their reviewof research reported that Paolillo (1982) employed step by stepregression in his study and found that the applicant’s junior andsenior undergraduate grade point average was the first variableto enter into the equation; Schwan (1988) found GGPA to besignificantly correlated with GMAT scores, undergraduate gradepoint average, and junior/senior grade point average amongMurray State University MBA students. However, Wright andPalmer (1997) used analysis of variance to examine GMAT scoresamong groups of graduate students and concluded that the useof total GMAT scores in the admission process may be misleadingand more attention should be paid to specific verbal andquantitative components.

Murray (1972) compared a group of MBA students whohad graduated from the programme at Hofstra University in June,1970 and February, 1971, with a group of 17 students who hadwithdrawn from the programme at earlier points. Five predictor



variables were identified: undergraduate GPA; undergraduatebusiness concentration GPA; total, quantitative scores on theATGSB ( Admission Test for Graduate Study in Business).;graduation versus withdrawal; and overall graduate GPA. Theresults of the study show that undergraduate GPA andundergraduate business concentration GPA are the most effectivesuccess predictors. ATGSB, however, proved to be the leasteffective predictor.

Malik (2010) studied the scores (percentage marks) ofstudents at SSC, Intermediate, and degree levels as predictorsof their performance in MBA. Sixty (60) students who graduatedin 2009 from IoBM Karachi, formed sample for the study. Thedata was collected personally by the researcher from the officialrecords of the University. Regression Analysis and ANOVA wereused for the analysis of data. SPSS was used to analyze the data.The study concluded that performance of students at Bachelorlevel was the strongest predictor of CGPA at MBA level. Whenperformance at Bachelor level was analyzed, only the maleperformance was a significant predictor of the CGPA in MBA..Significant differences were found between the contribution ofthe pre-degree performance of the BBA, B.com. and B.sc. groupsas predictors of CGPA in MBA. The BBA performance of themale students was a strong predictor of CGPA at MBA level.

Summary of the predictors of the students’ performancein medicine and business administration (MBA) based on thereview of research is presented in Summary table 9.

II. Methodology

This paper aims at studying the students’ performancein the pre –admission variables (Percentage in SSC, Intermediate,and Bachelor degree) as predictors of their performance at MBAlevel. The study tested the following null hypotheses:

1. Students’ scores at SSC, Intermediate, and Bachelorlevels are not significant predictors of CGPA at MBA level.

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2. Subjects’ scores at SSC, Intermediate, and Bachelor levels arenot significantly different predictors of CGPA in MBA.3. Scores of male and female subjects at SSC, Intermediate andBachelor levels are not significant predictors of CGPA in MBA4. Scores of male and female subjects at SSC, Intermediate, andBachelor levels are not significantly different predictors of CGPAat MBA level.5. SSC, Intermediate, and Bachelor level scores of the BBA, B.com,and B.sc. groups are not significant predictors of CGPA at MBAlevel.6.SSC , Intermediate, and Bachelor level scores of the BBA andB.com. groups are not significantly different predictors of CGPAin MBA.7.SSC, Intermediate, and Bachelor level scores of the B.com. andB.sc. groups are not significantly different predictors of CGPA atMBA level.8.SSC, Intermediate, and Bachelor level scores of the BBA, B.com.and B.sc. groups are not significantly different predictors of theCGPA at MBA level.

The following procedure was used to test the researchhypotheses of the study:

Selection of Subjects

A group of sixty (60)MBA students (30 male and 30female) were randomly selected from the IoBM graduatingstudents’ list, 2009. Systematic random sampling was used forthe selection of the sample.

Collection of data

The official records of the MBA students was procuredfrom the University, and the relevant data was personally recorded.The data included the students’ percentage marks obtained atBachelor, Intermediate, and SSC levels, students’ gender and theirsubject groups at Bachelor level namely BBA, B.com., and B.sc.groups.



Analysis of data

Regression analysis and Analysis of Variance wereused for the analysis of data. The SPSS was used for Regressionanalysis and ANOVA..

Findings, Results and Conclusions

The findings, results ,and conclusions that emergedfrom the study were summarized and presented in the final sectionof this paper.

III. Results

Null hypothesis 1: Subjects’ scores at SSC, Intermediate, andBachelor levels are not significant predictors of CGPA at MBAlevel.

Table 1 : Analysis of variance: Subjects’ performance in SSC,Intermediate, and Bachelor (Percentages) as Predictor of CGPAin MBA

Variable SS squares Df Mean squares F Sig. Model-1 Regression

.425 3 .142 4.439* .05

.076 Residual

1.789 56 .032

Total 2.215 59

*p<.05

a. Predictors: (constant), Percentage in Bachelor degree,Percentage in Intermediate, Percentage in SSC.b. Dependent variable: CGPA in MBA.

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Table 1 shows that the F-value (F=4.439 ; 3,56) issignificant at .05 level of significance. The null hypothesis isrejected. There is significant contribution of the subjects’performance at Bachelor, Intermediate, and SSC levels in theresulting variance in the subjects’ CGPAs in MBA. The subjects’scores in the pre-admission variables are significant predictors oftheir CGPA at MBA level.

Null hypothesis 2: Subjects’ scores at SSC, Intermediate, andBachelor levels are not significantly different predictors of CGPAin MBA.

Table 2 : Regression Analysis: Predicting CGPA in MBA on thesubjects’ performance at Bachelor, Intermediate, and SSC levels.

Variable B St. error Beta t Sig.. Model-1 (un-

standardized Coefficients)

(standardized Coefficients)

(constant) 2.672 .300 8.912 .05 Percentage in SSC

.000 .004 -.037 -.258 .797

Percentage in Intermediate

.004 .003 .162 1.140 .259

Percentage in Bachelor

.006 .002 .406 3.298* .05

*p>.05 a. Predictors: (constant), Percentage in Bachelor degree, Percentage inIntermediate, Percentage in SSC.b. Dependent Variable: CGPA in MBA.



Table 2 shows that regression B coefficient for subjects’performance at Bachelor level was significant at .05 level ofsignificance. (B =.406; t=3.298). The B coefficient for subjects’performance at Intermediate and SSC levels was not significantat .05 level of significance. The null hypothesis was thereforepartially accepted . The performance at Bachelor level was astrong predictor of the CGPA at MBA level. The performance atIntermediate level was a modest predictor of CGPA in MBA(B=.162; t=1.140).The performance at SSC level was the weakestpredictor of the three pre-admission variables included in thestudy.

Null hypothesis3: Scores of male and female subjects at SSC,Intermediate, and Bachelor levels are not significant predictorsof CGPA at MBA level.

Table 3 : R2 value for male-female comparison of thesubjects’ performance accounted for the variance in CGPA atMBA level.

Variable R R square Adjusted R Square

St. error of the estimates

Model -1 Male .758 .575 .526* .13025 Female .306 .093 -.011 .20235

a. Predictors: (constant),Percentage in Bachelor degree,Percentage in SSC, Percentage in Intermediate.b. Predictors(constant). Percentage in Bachelor degree,Percentage in Intermediate, Percentage in SSC.c. Dependent variable:: GPA in MBA

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Table 3 shows that in the male group, their performance(percentage) in pre admission variables accounted for 52% of thevariance in CGPA at MBA level . In the female group, theircontribution accounted for in the variance in CGPA at MBA levelis not significant. The performance of the male group at SSC,Intermediate, and Bachelor levels is a significant predictor of CGPAin MBA.

(Male R2=.526; Female R2=-.011)

Null hypothesis 4: Scores of male and female subjects at SSC,Intermediate, and Bachelor levels are not significantly differentpredictors of CGPA at MBA level.

Table 4 (a) Analysis of variance : Predicting CGPA inMBA on subjects’ performanceat Bachelor, Intermediate, and SSC levels: male-femalecomparisons.

Variable SS df MS F Sig. Model-1

Male Regression .596 3 .199 11.712* .05 Residual .441 26 .017

Total 1.037 29 Female Regression .110 3 0.37 .892 .458 Residual 1.065 26 0.41 Total 1.174

*p<05a. Predictors: (constant). Percentage in Bachelor degree,percentage in SSC, percentage in Intermediate.b. Predictors: (constant). Percentage in Bachelor, percentagein Intermediate, percentage in SSC.



Table 4(a) shows that the two groups (male and female)were significantly different at .05 level of significance. The Fvalue for the male group was significant F(3,26)=11.712 but itwas not significant for the female group. The results suggestthat the male group performance at Bachelor, Intermediate ,andSSC levels significantly affected their performance at MBA leveland it was a strong predictor of CGPA in MBA .However, theperformance of the female group in the pre-admission variablesshowed no significant effect on their performance at MBA leveland it was a weak predictor of CGPA in MBA.

Table4(b): Regression Analysis: Predicting CGPA in MBA onthe subjects’ performance at Bachelor, Intermediate, and SSClevels——Male-female comparisons.

Variable B St. error Beta T Sig.. Model-1 Male

(un-standardized Coefficients)

(standardized Coefficients)

(constant) 2.488 .339 7.342 .05 Percentage in SSC

-.004 .005 -.151 .815 .422


.001

.004

.065

.347

.732


.14 .003 .714 5.016* .05

Female(constant) 2.606 .491 5.305 .05 Percentage in SSC

.003 .005 .107 .524 .604


.003 .005 .139 .686 .499


.003 .003 .265 1.393 1.76

*p>.05Dependent variable: CGPA in MBA

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Table 4(b) shows that standardized Beta coefficient formale subjects’ performance at Bachelor level was significant at.05 level of significance. (B =.714; t=5.016*). The Beta coefficientfor female subjects’ performance in all the pre-admission variableswas not significant at .05 level of significance. The nullhypothesis was therefore partially accepted . Only the maleperformance at Bachelor level was a significant predictor of theCGPA at MBA level.

Null hypothesis 5: Scores at SSC, Intermediate, andBachelor levels for the BBA, B.com., and B.sc. groups are notsignificant predictors of CGPA at MBA level.

Table5: R2 value of pre-admission performance ofBBA,B.Com. and B.sc. groups in predicting CGPA at MBA level.

Variable Model R R square Adjusted R squire Standard error of the estimate

Group-1 BBA 1 .723 a .523 .479* .1347 Group-2 B.Com. 1. .702 b .492 .323 * .1478 Group-3 B.sc. 1 .433 b .188 -.218 .2034

*p>05a. Predictors: (constant). Percentage in Bachelor degree, Percentage in SSC,Percentage in Intermediate.b. Predictors: (constant). Percentage in Bachelor degree, Percentage inIntermediate, Percentage in SSC.



Table 5 shows that in BBA group, the students’performance at Bachelor , Intermediate and SSC levels accountedfor 47.9% of the variance in the CGPA at MBA level. In the B.Com.group, students’ performance at Bachelor, Intermediate and SSClevels accounted for 32.3%. The performance of the B.sc. groupin the pre-admission variables accounted for -.21.8%. Hence, thenull hypothesis was rejected. There was a significant differencein the contribution of pre-admission performance in the variancein the subjects’ CGPA at MBA level.

( BBA R2 = .479; B.Com. R2=.323; B.sc. R2 =-.218)

Null hypothesis 6: SSC, Intermediate, and Bachelor level scoresof the BBA and B.com. groups are not significantly differentpredictors of CGPA at MBA level.

Table 6: Analysis of variance : Predicting CGPA inMBA on subjects’ performance at Bachelor, Intermediate, andSSC levels: ——BBA and B.Com. comparisons.

Variable SS Df MS F Sig. Model-1 BBA Regression .656 3 .219 12.048* a

.05 Residual .599 33 .o18 2.907 b

.094

Total 1.255 36 B.Com. Regression .190 3 .063 . Residual .197 9 .022 Total 1.174

*p<05a. Predictors: (constant). Percentage in Bachelor degree,percentage in SSC, percentage in Intermediate.b.Predictors: (constant). Percentage in Bachelor degree,percentage in Intermediate, percentage in SSC.d. Dependent variable: CGPA in MBA

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Table 6 shows the two groups (BBA and B.Com.) were significantlydifferent at .05 level of significance. The F value for the BBAgroup was significant F(3,33)=12.048) but it was not significantfor the B.com. group. The results suggest that the BBA groupperformance at Bachelor, Intermediate ,and SSC levels significantlyaffected their performance at MBA level and was a strongpredictor of CGPA in MBA.. However, the performance of theB.com. group in the pre-admission variables showed no significanteffect on their performance at MBA level and was a weak predictorof CGPA in MBA.

Null hypothesis7: SSC, Intermediate, and Bachelor level scoresof the B.com. and B.sc. groups are not significantly differentpredictors of CGPA at MBA level.

Table 7: Analysis of variance : Predicting CGPA in MBA onsubjects’ performance at Bachelor, Intermediate, and SSC levels—

Variable SS Df MS F Sig. Model-1 B.Com. Total

.387

12

B.sc Regression

.057 3 .019 .462 b .719

Residual .248 6 .o41

Total .306 9

*p>05bPredictors: (constant). Percentage in Bachelor degree,percentage in Intermediate, percentage in SSCc.Dependent variable: CGPA in MBA



Table 7 shows that the B.Com. and B.sc. groups werenot significantly different. The F value for the B.Com. and B.scgroups was not significant at .05 level of significance. The resultssuggest that the performance of the two groups at Bachelor,Intermediate ,and SSC levels had no significant effect on theirperformance at MBA level and was a weak predictor of their CGPAin MBA.

Null hypothesis 8: SSC, Intermediate, and Bachelor level scoresof the BBA, B.com., and B.sc. groups are not significantly differentpredictors of CGPA at MBA level.

Table 8:Regression Analysis: Predicting CGPA in MBAon subjects’ performance at Bachelor, Intermediate, and SSC levels:——— BBA, B.Com. and Bsc. groups comparison

The three pre-admission variables were used in aregression model to predict MBA CGPA. Table 8 shows that theBachelor level performance score was significant predictorvariable for MBA performance in the BBA group at .05 level ofsignificance.

(B=.671; t=5.438). SSC level performance was significantpredictor for MBA performance in the B.com. group. ( B=.731; t=2.347). The performance in the pre-admission variables was notsignificant predictor for MBA performance in the B.sc. group.

s.

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Variable Un-standardized coefficients B

St. error

Standardized coefficients Beta

T Sig.

Model-1 BBA (constant).

2.533

.302

Percentage in SSC

-.005 .003 -.207 -1.505 .142


.002 .003 .110 .787 .437

Percentage in Bachelor degree B.Com –Model -1 (constant)

.014 1.821

.003 .624

.671 5.438* 2.919

.05 .17

Percentage in SSC

. 017 .007 .731 2.347* .05


8.741 .007 .004 .013 .990

Percentage in Bachelor degree

.001 .003 .069 .253 .806

B.sc. –Model-1 (constant) Percentage in SSC Percentage in Intermediate Percentage in Bachelor degree

3.202 -.009 .004 .006

1.509 .019 .016 .014

-

-.384 .175 .225

2.122 -.471 .230 .456

.078 .654 .825 .665

*p>05b. Predictors: (constant). Percentage in Bachelor degree, percentage in Intermediate,percentage in SSCc. Dependent variable: CGPA in MBA



Summary Table 9 Predictive Variables for Performance

in Professional subjects(Medical & MBA)

Predictive Variables (Independent Variables) Dependent Variables 1. (a) SAT (verbal portion) scores USMLE (US Medical Licensing Examination) (b) MCAT : Reading---Skills analysis (Medical College Admission Test) (Roth et.al.. (1996) 2. Undergraduate GPA Medical School GPA a) Basic GPA b) Clinical GPA c) Total GPA d)COMLEX-USA Level 1 & 2 Scores ( Evanset et. al. (2007) 3. MCAT GPA/grades (Medical School) (Julian, (2005) 4. UGPAs NBME-1 MCAT (Silver & Hodgson, (1997) 5 SAT score High School GPA CGPA in MBA (Berry & Sacket, (2009) 6. UGPA Undergraduate Business Concentration GPA CGPA in MBA (Murray,(1972)

Table continued nex page.

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7.. College of Business Statistics GPA High probability of graduation from Undergraduate College of Business 8. GRE score CGPA in Graduate School ( Gayle and Jones, (1973) 9. UGPA GMAT Academic Success in Business School (Ahmadi et. al. (1997) 10 UGPA Academic Success in Business School ( Paolillo, (1982)

11. Amount of work experience Success in Business School (Adams and Hancock, (2000) GPA and GMAT Undergraduate performance in Business School (Brauntein, (2002)

Table continued nex page.



12 Bachelor level performance CGPA in MBA Performance at Bachelor, CGPA in MBA for Intermediate the male and SSC levels Male performance at CGPA in MBA Bachelor level Male and female performance CGPA in MBA significantly different Performance of BBA, B.com., CGPA in MBA and B.sc. significantly different BBA group performance CGPA in MBA (strong predictor) (accounted for 47.9% of the variance in CGPA in MBA) B.com. Group performance (Accounted for 32.3% of the Variance in CGPA in MBA) SSC level performance in CGPA in MBA The B.com. group

Malik, (2010)

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1V. Conclusions

The conclusions of the study are summarized below:

1. Performance of students at Bachelor level was thestrongest predictor of CGPA at MBA level. There washowever, a significant difference between at Bachelor,Intermediate, and SSC level performance as predictorsof CGPA at MBA level on gender basis. Whenperformance at Bachelor level as predictor of CGPA inMBA was analyzed, only the male performance atBachelor level was a significant predictor and accountedfor 52% of the variance in CGPA at MBA level. On theother hand the the female contribution as predictor wasnot significant at Bachelor level.Overall, the subjects’performance at Bachelor, Intermediate, and SSC levelswas stronger predictor of CGPA in MBA for the malerather than the female group.

2. There was a significant difference between thecontribution of the pre-admission performance of theBBA, B.com., and B.sc.groups as predictors of CGPAin MBA.There was a statistically significant differencebetween the BBA and B.com. groups. The BBAperformance was the stronger predictor of theperformance at MBA level. However for the B.com.group, SSC performance was a strong predictor of CGPAin MBA. There was no significant difference betweenthe B.com. and B.sc. groups as predictors of CGPA atMBA level.

3. In the BBA group, subjects’ performance in the pre-admission variables accounted for 47.9% of thevariance in CGPA at MBA level. In the B.com. group,



subjects’ performance in the pre-admission variablesaccounted for 32.3% of the variance in CGPA at MBAlevel.The BBA group performance in the pre-admissionvariables was stronger predictor of CGPA in MBA thanthe B.com. group performance.

4. Bachelor level performance emerged as a strong predictorof performance in MBA. This needs to be reflected inthe admission criteria for MBA programmes. Thesignificant contribution of the BBA group performanceas predictor of CGPA in MBA could be explained by thepositive role of the related subjects studied at BBA leveland the students’ familiarity with the system of studyand evaluation. .

5. The present study demonstrates the need for updatingthe curriculum at all levels in general and at Bachelorlevel in particular. The curriculum at BBA and B.com.levels need to be coordinated and improved to make itmore useful, current and effective for the prospectiveMBA students.

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Aggregate Imports And Expenditure Components In Pakistan

AGGREGATE IMPORTS ANDEXPENDITURE

COMPONENTS IN PAKISTAN:AN EMPIRICAL ANALYSIS

Ch. Sohail AhmedDepartment of Economics

College of Economics and Social Development, Karachi

Abstract

The main purpose of this study is to examine the determinants ofimports in case of Pakistan by using the cointegration method. Itinvestigates the long-run relationship between Pakistan’saggregate imports and the major macroeconomic components offinal expenditure (GDP aggregate expenditure). This study isdivided into two parts. In the first part this study examines thetotal aggregate import demand function, and in the second partthe disaggregate import demand functions are investigated (i.e.import demand function of raw material, fuel and machinery).This study uses Abbott et al. (1996) framework for empiricalevidence. The empirical finding shows that private consumptionexpenditure is the major determinant of import demand in Pakistanfor all categories of import except for vehicle import.

Key Words: Import demand function, cointegation, ECM,Pakistan

JEL Classification: F1, F4

I. Introduction

In the present decade the size of aggregate import hasbecome very large so that the trade deficit has became alarmingfor Pakistan. In the case of Pakistan, GDP growth has beenstrongly associated with import growth particularly of machinerytechnical know-how, fuel and essential food items. Over the lastfew years Pakistan’s import bill has been high for engineering

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Research Aggregate Imports And Expenditure Components In Pakistan

goods, but this was not due to large capital good imports. It washigh due to imported automobiles imported by rich people.

According to several empirical studies the basic importdemand model relates import demand to relative prices and grossdomestic product. It is assumed that the import content of publicand private expenditure is the same. But, if different componentsof total national expenditure have different import content, thenthe use of a single variable in aggregate demand function will leadto aggregation bias ( Abbott and Seddighi, 1996).

There are many research studies which attempt to examinethe linkage between aggregate imports and macroeconomiccomponents of expenditure such as private and publicconsumption expenditure, investment and export expenditures.In these studies authors have estimated import elasticities bothat the aggregate and disaggregated levels for developed anddeveloping countries.

Disaggregated estimates of import elasticities areimportant for quantifying the influence of the variousdeterminants of import demand and to provide a scientific basisfor policy decisions, particularly for those related to demandrestraint, devaluation, tariffs, etc.(Sarmad , 1989).

When each macro-component of final expenditure has aspecific import content, different compositions of expenditurecorrespond to different aggregate propensities to import. But inmost economies, this composition of total expenditure tends tochange over time and there is no stable relationship betweenimports and aggregate expenditures as measured by GDP.

The organization of the paper is as follows. In Section II,we present an eclectic literature review. Section III develops thetheoretical framework, and Section IV presents empirical results.In Section V, we highlight the main findings and conclusions.

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II. Literature Review

This section presents a brief review of some of the studieswhich examine the aggregate import demand function for Pakistanand some other countries.

Hafeez ur Rehman (2007) has conducted a similar studyfor Pakistan. This study attempts to estimate the aggregate importdemand function for Pakistan by employing the Johenson andJuselius cointegration technique using annual data during 1975 -2005. He followed the Doroodian et al. (1994) model for importdemand. This is a log linear model in which he regressed the volumeof import on real income, import prices, domestic prices, and leggedvolume of imports. He applied ADF test and the Phillips Parren(PP) test to determine the order of integration. Both trace andeigenvalue tests give the same results i.e. the null hypothesis ofno cointegration is rejected for r =0 at 5% level of significance. Healso applied an ECM to estimate short run as well as long-runelasticities. The results indicate that only real income (0.06947)and import price (-0.3602) elasticities are significant in the longrun. The inelastic long run income elasticity implies that aggregateimports can be regarded as necessary goods in Pakistan. But inthe short run the level of imports is not affected by the level of realincome, domestic prices level, and import prices.

Rehman also applied CUSUM and CUSUM of square(Brown, Durbin and Evans 1975) tests and Recursive coefficientsto estimate stability of the import demand function. The results ofthe stability tests show that the import demand functions remainstable during the sample period.

Mohammad Afzal (2006) presented a study estimatinglong-run trade elasticities in Pakistan using the cointegrationapproach. The objective of the paper was to estimate the Marshall-Lerner condition for Pakistan by employing the cointegrationtechnique using annual data for the period 1960-2003. In this studyhe developed two models in log linear form, one for export demandand other for import demand.



In the export demand model real exports are regressedon the ratio of unit value of Pakistan’s export in US dollars to unitvalue of world exports in US dollars, to world real income, and tonominal exchange rate (domestic price of the foreign currency).

In the import demand model he regressed real value ofimport on relative price ratio of unit value of imports to wholesaleprice index of Pakistan; and to Pakistan’s real GDP ( 1990 =100base) and to nominal exchange rate (domestic price of the foreigncurrency). All variables were in natural logarithm and in constant(1989-90 =100) prices.

The empirical findings show that for export demandfunction, relative price elasiticity is -2.92; and world real incomeelasticity is 3.78; and nominal exchange rate has elasticity of 0.043.The import demand function shows that Pakistan’s Real GDP haselasticity of 3.19; relative price ratio of - 5.26 and nominal exchangerate has -2.27.

The result of this study found that devaluation shouldimprove the trade balance in Pakistan. But empirical evidenceshows that following devaluation trade balance usually does notimprove. This may be because devaluation sets in motion otherforces that tend to neutralize the positive effect of devaluation onthe trade balance. Some studies have reported that devaluationwould improve the trade balance and is expansionary; while othersconcluded that devaluation is contractionary and will not improvethe trade balance.

Sarmad (1989) examined the factors influencing thedemand for Pakistan’s imports both at aggregate and disaggregatelevel during the period 1959-60 to 1985-86. The functional form ofthe import equations was determined empirically. The results showthat there is strong evidence to support the use of the log-linearform as the appropriate functional form of the import equation,both at the aggregate and disaggregated levels.

Empirical findings show that the income, relative price,and foreign exchange availability elasticities have the ‘right’ sign.

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The vast majority of them are significantly different from zero atthe 10% level of significance. The aggregate income and priceelasticities are on the low side, 0.631 and -0.669 respectively,while the foreign exchange elasticities is only 0.191. At thedisaggregated level, the income elasticity ranges from 1.4 forimport of oils and fats to as low as 0.45 for import of fuels. Therelative price elasticities range from -1.2 for imports of machineryand transport to -0.42 for imports of oils and fats.

Abbott and Seddighi (1996) used the cointegrationapproach of (Johansen and Juselius, 1990) and error correctionmodels (Engel and Granger, 1987) to estimate an import demandmodel for the UK. Their results show that consumptionexpenditure has the largest impact on import demand withelasticity of 1.3, followed by investment expenditure with elasticity0.3 and expenditure on exports has the elasticity of 0.1. Therelative import price ratio to domestic price also has an elasticityof 0.1.

Dutta and Ahmed (1999) used Engle-Granger’s (1987)and Johansen’s multivariate approaches to estimate the aggregateimport demand function for Bangladesh using quarterly datafrom 1974 to 1994. In this study, Bangladesh’s aggregate importdemand and its determinants, real import prices, real grossdomestic product (GDP) and real foreign exchange reserves, werecointegrated. The estimated long-run elasticities of theexplanatory variables based on Engle-Granger’s (1987) approachwere –0.52 (for relative prices), 1.63 (for real GDP) and –0.10 (forreal foreign exchange reserves, but this variable was insignificantat the 10 percent level). A dummy variable was incorporated forthe introduction of liberalization policies, but it was found to beinsignificant.

Mohammed and Tang (2000) estimated the determinantsof aggregate import demand for Malaysia by using Johansenand Juselius cointegration technique over the period 1970-1998.The empirical results show that all expenditure components haveelasticities less than 1 and have inelastic effect on import demandin the long run. Investment expenditure had the elasticity of 0.78



with imports followed by final consumption expenditure withelasticity of 0.72. For expenditure on exports, it was found that ithad the smallest elasticity of 0.38 with import demand. For relativeprices they found a negative and inelastic relationship withelasticity of -0.69 with import demand.

Tang and Nair (2002) re-investigated the aggregateimport demand function for Malaysia using the bounds testingapproach (Pesaran et al., 1996). This study used annual data from1970 to 1998 as employed by Tang and Alias (2000). The result ofthe bounds test indicated that the volume of imports, real incomeand relative price were cointegrated. The empirical results showthat the estimated income and price elasticities were 1.5 and –1.3,respectively. The positive sign of income elasticity shows that anincrease in income leads to increased imports, but as it is elasticthis means that imports are not regarded as necessary goods inMalaysia. The estimated parameter elasticities were consistentwith those of Tang and Alias (2000). However, Tang and Alias(2000) found that import volume, real income and relative pricewere not cointegrated based on the insignificance of the estimatederror correction term (see Kremers et al., 1992).

Sinha’s (1997) study found one cointegrating vector inThailand’s aggregate import demand function using Johansen’smultivariate procedure for the period 1953 to 1990. The studyfound that Thailand’s aggregate import demand was price inelastic(-0.77) and cross-price inelastic (0.3) but highly income elastic(2.15).

Bahmani-Oskooee (1998) estimated import and exportdemand equations for six developing countries (Greece, Korea,Pakistan, the Philippines, Singapore and South Africa) using along-run approach (Johansen’sapproach). In this study, thevolume of imports was related to relative prices, domestic incomeand the nominal effective exchange rate. The sample periodcovered quarterly data from 1973 to 1990.

The study concluded that the Marshall-Lerner conditionwas satisfied and revealed that devaluation could improve the

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trade balances of these countries. The import demand for thesecountries was found to be price elastic except for Singapore (0.15,with incorrect sign). The real income variable was found to be elastic,but not in the case of Korea (0.31, and insignificant). The importdemand for these countries was exchange rate inelastic (between 0.002and 0.33) except for Singapore (-1.66, with incorrect sign).

Mohammad et al. (2001) examined the long-run relationshipbetween imports and expenditure components of five ASEANcountries (Malaysia, Indonesia, the Philippines, Singapore andThailand) through the use of Johansen multivariate cointegrationanalysis (Johansen 1988; Johansen et al. 1991). Annual data for theperiod 1968-1998 were used for the countries (except Singapore, witha shorter period 1974-1998). The disaggregated model, in which thefinal demand expenditure is split up into three major components, isused. The results reveal that import demand is cointegrated with itsdeterminants for all five countries.

Min et al. (2002) estimated South Korea’s import demandfunction using the Johansen and Juselius (1990) approach over the1963-1998 period. They found evidence for the existence of a long runelastic (1.04) impact of final consumption expenditure on import demandand inelastic (0.49) impact of export expenditure on import demand.Both results were statistically significant at the 1 percent level.However, the impact of investment expenditure was found it to benegatively related with import demand, but it was statisticallyinsignificant.

Tang (2003) estimated China’s import demand function usingthe bounds testing approach to cointegration. In the long run, hefound expenditure on exports having the largest elasticity with imports(0.51), followed by investment expenditure (0.40) and finalconsumption expenditure (0.17). The relative price variable appearedwith a coefficient of 0.6, implying that an increase in relative pricesinduces a 0.6 per cent fall in the demand for imports.

Ho (2004) has estimated the import demand function ofMacao by testing both aggregated and disaggregated import demandmodels with the components of aggregate expenditure using quarterly



data over the 1970 to 1986 period. Using JJ-Maximum likelihoodcointegration and error correction techniques, Ho (2004) foundsignificant partial elasticities of import demand with respect toinvestment (0.1396), exports (1.4810) and relative prices (-0.3041)with their expected signs implied by economic theory in thedisaggregated model.

Narayan and Narayan (2005) applied the bounds testingapproach to cointegration to estimate the long-run disaggregatedimport demand model for Fiji using relative prices, totalconsumption, investment expenditure, and export expenditurevariables over the period 1970 to 2000. Their results indicated along run cointegration relationship among the variables whenimport demand is the dependent variable. The results revealedlong run elasticities of 0.69 for both export expenditure and totalconsumption expenditure respectively, followed by relative prices(0.38) and investment expenditure (0.17).

III. The Model And Data

In this study we follow the formulation used by (Abbottat el. 1996), according to which import demand function is asfollows:

M = f (CG, INVT, EXPT, ( Pm / Pd) ) ……. (1)

Where M is imports at constant prices. The variable CGis the sum of private and public consumption expenditures; INVTis expenditure on investment goods including gross domesticfixed capital formation. EXPT is export expenditure. The variablePm/Pd is the relative price ratio. Pm is the import price deflatordefined as ratio of imports in current prices over imports in constantprices and Pd is an index of domestic prices measured by the GDPdeflator. For export expenditure we use another variable” Exportas a capacity to import” as proxy.

We applied this model for Pakistan with a littlemodification in which we further decomposed total consumptionexpenditure CG into private and public consumption expenditure.

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This will show the partial effect on both components. Anotherimportant change in this study is that, EXPT is representing anew variable known as ‘Export as a capacity to import’. Export asa capacity to import equals the current price value of exports ofgoods and services deflated by the import price index.

The reason for using this variable is that we want toknow how much our export earnings contribute to aggregateimport demand i.e. whether this has significant relationship withimport demand or not.

The model in logarithmic form in which all the variablesare measured at constant prices can be expressed in equation asfollows:

Ln M = β0 + β1 ln PCE + β2 ln GCE + β3 ln INVT + β4 ln EXPT+ β5 ln( Pm/Pd) …………….. ( 2 ).

Where M is measuring the volume of imports at constantprices. The PCE is measuring private consumption expendituresat constant prices; GCE is the public consumption expendituresat constant prices; and INVT is expenditure on investment goodsincluding gross domestic fixed capital formation at constantprices. The variable EXPT is measuring export as a capacity toimport. The calculated data values for this variable are availableand taken from the World Development Indicators of the WorldBank. Pm is the import price deflator defined as ratio of importsin current prices over imports in constant prices and Pd is anindex of domestic prices measured by the GDP deflator. The dataused in this study is annual data in billion Rs. from 1970 to 2008.The values are based on 2000 = 100 prices.

Data for macroeconomic components of expenditure ismostly taken from WDI 2009 and as well as from some issues ofEconomic Surveys. Data also collected from the Economic Survey2008-09. Data for raw material, fuel, machinery and vehicle istaken from 25 years Statistics of Pakistan, various issues ofStatistical Year Book of Pakistan, Monthly Billiton of Statistics,Statistics Division; and from various issues of Foreign Trade



Statistics of Pakistan, FBS; Handbook of Statistics on PakistanEconomy, SBP Pakistan.

IV. Results

IV. 1. Long Run Behavior of Pakistan’s Aggregate Imports

Using cointegration analysis, the import demand functioncan be estimated to show whether there exists a long run“equilibrium” relationship linking the import demand variable tothe variables defined in the model in equation (2).

For a long-run relationship to exist all the variablesincluded in the model must form a unique cointegrating vector,which could be investigated by employing the maximum likelihoodestimation technique developed by Johansen. We applied thistechnique sequentially.

The first step in the cointegration analysis is to test theorder of integration for each variable of the model. For this purposewe used the standard ADF test. The empirical findings of theADF test are shown in Table 1.

The ADF test provides strong evidence to reject thenull hypothesis that the estimated residual has a unit root. Thisimplies that the residuals are stationary.

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Variables ADF test at 5% Volume of Import (M) ∆ M Private Consumption Expenditure (PCE) ∆ PCE Govt. Consumption Expenditure (GCE) Exp on Investment ( INVT) ∆ INVT Exp on Export ( EXPT) ∆ EXPT Relative Price Ratio (PmPd) ∆ PmPd Raw Material Import ( RMAT) ∆ RMAT Fuel Import ( FUEL) ∆ FUEL Machinery Import ( MACH) ∆ MACH Vehicle Import ( VECH ) ∆ VECH

0.65775 (-2.941145)

-5.131627

(-3.536601)

-0.183370 (-2.943427)

-5.688068

(-2.945842)

-1.228889 (-3.536601)

--1.487548 (-3.533083)

-4.353280

(-3.536601)

-0.319727 (-2.943427)

-6.181654

(-2.948404)

--1.575283 (-2.943427)

--5.648813 (-3.548490)

-0.737734

(-2.945842)

-8.187054 (-2.945842)

-0.007166 (-2.941145)

-6.034673

(-2.943427)

-2.029540 (-2.945842)

-6.415746

(-2.945842)

-2.520568 (-3.533083)

-5.581319

(-3.536601)

Table-1 Unit root test results for all variables.

Note: t-values are given in the parenthesis. ( )



The null hypothesis in each case is that the variable inquestion is I (1): the 95% critical values are given in brackets andderived from Fuller. From the result of test it is clear that all levelvariables are integrated of order one, ~ I (1). i.e., first differencingis required to ensure a stationary process. ADF tests for eachvariable confirm that the first differences are stationary.

After confirming that each variable in the model is I(1),we were in a position to carry out the cointegration tests with theuse of the Johensen technique. The choice of lag length wasbased on the Schwarz Criteria and the optimal lag length was 2years.

Table 2 presents the results of the trace test derivedfrom the Johansen maximum likelihood procedure. Here weproceeded sequentially, first testing for Ho: r < 0 , and than for r <1 and so on, until the null hypothesis could be rejected, where r isthe number of cointegrating vectors.

Test Statistics Null Hypothesis Cointegration Test Statistics Critical Value at 5%

Trace Statistics

Ho : r = 0 Ho : r ≤ 1 Ho : r ≤ 2 Ho : r ≤ 3 Ho : r ≤ 4 H0 : r ≤ 5

237.457 138.543 80.811 43.305 16.132 5.481

107.346 79.341 55.245 35.011 18.397 3.841

Maximal-eigenvalue Statistics


98.913 57.733 37.504 27.172 10.651 5.481

43.419 37.163 30.815 24.252 17.147 3.841

Table 2: Result of JJ cointegration

Note: According to the optimum model selection criteria, the JJ Assumption-5 isselected.

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Both tests indicate that there are four cointegratingvectors with respect to the variables defined in the model at 5%level of significance. Table 3 shows the long run coefficientestimates.

Dependent Variable = M Regressors Coefficients T-statistic

PCE 1.981 12.329 GCE 0.621 13.637

LINVT 0.248 2.804 EXPT -0.471 -9.149 PMPD -1.017 -20.873

Table 3 : Long Run Coefficients

Table 3 above shows the values of long run coefficientestimates of each independent variable with their respectivesignificant t-values.

On the basis of this unique cointegrating vector, whichalso presents coefficient estimates normalized on aggregateimports, the equation representing the long run relationshipbetween variables identified in the model is

Ln M = 1.98158 Ln PCE + 0.62039 Ln GCE + 0.24813 Ln INVT- 0.47127 Ln EXPT – 1.01758 Ln PmPd ……………………

…( 3 )Equation (3) shows the long run relationship between

aggregate import and macroeconomic components of finalexpenditure. We see that all variables included in the model havecoefficients with expected signs and with significant t – ratiosexcept for the variable EXPT, i.e. “Export as a capacity to import”.We used this variable to estimate exports contribution to importexpenditure. This variable shows negative relationship withaggregate import demand.

Furthermore, the long run relationship also indicatesthat both private and public consumption expenditure contributeto aggregate import demand, but private consumptionexpenditure is the major determinant of Pakistan’s aggregate



imports in the long run. It has positive elasticity value of almost 2which indicates that an increase in private consumptionexpenditure leads to a relatively larger increase in import demandin the long run, compared to the increase in public expenditure.

On the other hand, the elasticity coefficient for publicexpenditure is only about one third of that for private consumptionexpenditure. This leads to the very significant findings that anincrease in public consumption does not have a large impact onthe growth of the trade deficit. Similarly, the elasticity coefficientof the investment variable is extremely low – one tenth of thevalue of private consumption import elasticity. Investment growthin Pakistan is thus not import dependent and is probably mainlydomestically sourced – this is again a very significant finding.

The sign of price of imports to the prices of domesticallyproduced goods shows a negative relationship with the level ofimports in the long run. It is approximately unitary elastic withimport demand.

IV. 2 The Short – Run Behavior of Pakistan Aggregate Imports

The short run behavior of Pakistan’s aggregate importscan be studied by developing an ECM model. The general form ofthe ECM model is shown below. For this purpose the laggedresidual error derived from the cointegrating vector wasincorporated.The general short run dynamic model is represented as follow:

Mt = αo + α1i PCE t -i + α2i GCE t -i + α3i INVTt -i

+ α4i EXPT t -i + α5i PmPdt-i + α6i Mt-i + α7 ECM t-1 +

error term ………(4)

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In the above equation all variables are the same asdefined in equation 2 but here they are expressed in differenceform and a lagged residual term is also included.

Error Correction Model Results

From the empirical results, we found that the short runECM equation can be represented as

Mt = - 0.054207+ 1.548805 PCEt + 0.424425 GCE t (5.114) (3.018) + 0.286773 INVT t - 0.022013 EXP T t (0.986) (-0.166) - 0.358296 PmPd t - 0.340994 ECM t-1 …… ( 5 ) (-3.050) (-2.015)

R2 = 0.70 DW = 2.24

We see that in the short run private and governmentconsumption expenditures are positive determinants of aggregateimports, but elasticity coefficients of both private andgovernment consumption expenditure have been reduced in theshort run.

Furthermore, investment expenditure has no significantrelationship to imports in the short run. Also export as a capacityto import has a negative sign of its elasticity coefficient and isinsignificant in the short run. Relative import price variable alsoshows a negative sign and is significant over the short run.

IV. 3 Disaggregated Analyses

In this study we extended our findings to examine thelong run relationship of aggregate imports of raw material, fuel,machinery, vehicle and the major macroeconomic componentsof final expenditure. The data for total imports of these categoriesis taken for the period 1970 to 2008 at constant prices of 2000.



Disaggregate Models

A. Raw Material Imports

For cointegration analysis, the empirical findings of theADF test are shown in Table1. The ADF test provides strongevidence to reject the null hypothesis that the estimated residualhas a unit root. This implies that the residuals are stationary.

After confirming that each variable included in the modelis I (1), we now carry out the cointegration tests with use of theJohensen technique. The choice of lag length was based on theSchwarz Criteria and the optimal lag length was 2 years.

Table 4 presents the results of the trace test derived fromthe Johansen maximum likelihood procedure. Here we proceededsequentially, first testing for Ho : r < 0, and than for r < 1 and so on,until the null hypothesis could be rejected, where r is the numberof cointegrating vectors.


Trace Statistics


169.5195 84.93969 54.00418 27.61599 12.36021 4.335075

103.84731 76.97277 54.07904 35.19275 20.26184

9.16454

Table 4 : Result of JJ cointegration for Raw Material

Note: Trend assumption: No deterministic trend (restricted constant)

The cointegration results for long run relationship areshown below.

Ln RMAT = Ln PCE + Ln GCE + Ln Expt + Ln INVT + LPmPdLn RMAT = 1.093 LnPCE - 0.517 Ln CGE + 0.627 Ln Expt + (8.09) (-4.13) (4.93)0.165 Ln INVT + 0.697 Ln PmPd .....(6) (2.01) ( 4.23)t-values in Parenthesis

The above equation shows the long run relationshipbetween import of raw material and macro economiccomponents

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of final expenditure. We see that the variables PCE (privateconsumption expenditure), EXPT (export as a capacity to import),INVT (expenditure on investment including fixed capitalformation, PmPd (price of import to prices of domesticallyproduced goods) have positive sign where as GCE (publicconsumption expenditure) has a negative sign.

The long run relationship also indicates that privateconsumption expenditures contribute to aggregate raw materialimport demand and is the major determinant of Pakistan’saggregate raw material imports in the long run. It has positiveunit (1.1) elasticity value which indicates that an increase inprivate consumption expenditure leads to an equal increase inimport demand in the long run.

The elasticity coefficient of the investment variable,though positive is extremely low – one tenth of the value ofprivate consumption import elasticity. Investment growth inPakistan is not significantly raw material import dependent. Thesign of price of imports to the prices of domestically producedgoods shows a positive relationship with the level of raw materialimports in the long run and having the elasticity of 0.69.

B. Fuel Imports

The empirical findings of the ADF test are shown onTable 1. The ADF test provides strong evidence that theresiduals are stationary. It confirms that each variable includedin the model is I (1). We now carry out the cointegration testswith use of the Johensen technique. The choice of lag lengthwas based on the Schwarz Criteria and the optimal lag lengthwas 2 years.

Table 5 presents the results of the trace test derivedfrom the Johansen maximum likelihood procedure. Here weproceeded sequentially, first testing for Ho : r < 0, and thenfor r < 1 and so on, until the null hypothesis could be rejected,where r is the number of cointegrating vectors.




Trace Statistics


121.4798 72.04629 42.92568 24.69620 10.12278

2.700452

95.75366 69.81889 47.85613 29.79707 15.49471 3.84146

Table 5 : Result of JJ cointegration for FUEL

Note : Trend assumption: Linear deterministic trend

The cointegration results for long run relationship are shownbelow.

Ln Fuel = Ln PCE + Ln GCE + Ln Expt + Ln INVT + Ln PmPdLn Fuel = 1.44 LnPCE + 0.035 Ln CGE - 0.445 Ln Expt + ( 14.4) ( 0.35) (-4.45)0.468 Ln INVT - 0.160 Ln PmPd ……(7) (4.25) (-1.33)t-values in Parenthesis

The above equation shows the long run relationshipbetween aggregate fuel import and macroeconomic componentsof final expenditure. We see that variables PCE, GCE, and INVT inthe model have positive coefficients with expected sign, but GCEhas insignificant t-value. The coefficient of EXPT is negativewith significant t – ratio.

The long run relationship also indicates that both privateand public consumption expenditures contribute to aggregatefuel import demand, but private consumption expenditure is themajor determinant of Pakistan’s aggregate imports in the longrun. It has positive elasticity value of 1.44 which indicates that anincrease in private consumption expenditure leads to a relativelylarge increase in fuel import demand in the long run. GCE withelasiticity 0.035 indicates that an increase in governmentconsumption expenditure leads to very low increase in fuel importdemand in the long run. On the other hand, the elasticity

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Trace Statistics


131.6381 81.90962 52.55538 24.81415 9.689445 1.686830

95.75366 69.81889 47.85613 29.79707 15.49471 3.841466

Table 6 : Result of JJ cointegration for Machinery

Note: Trend assumption: Linear deterministic trend

coefficient for public expenditure is only about 1/30 of that forprivate consumption expenditure. This leads to the verysignificant findings that an increase in public consumption doesnot make a large impact on the growth of trade deficit. Similarly,the elasticity coefficient of the investment variable is low (0.47)– one third of the value of private consumption import elasticity.Investment growth in Pakistan is a little bit fuel import dependentand is mainly domestically sourced. It is again a significantfinding.

The sign of price of imports to the prices of domesticallyproduced goods shows a negative relationship with the level offuel imports in the long run. It is inelastic with fuel import demand.

C. Machinery Imports

The empirical findings of the ADF test are shown onTable 1. The ADF test provides strong evidence that the residualsare stationary. It confirms that each variable included in the modelis I (1). We now carry out the cointegration tests with use of theJohensen technique. The choice of lag length was based on theSchwarz Criteria and the optimal lag length was 2 years.

Table 6 presents the results of the trace test derivedfrom the Johansen maximum likelihood procedure. Here weproceeded sequentially, first testing for Ho : r < 0, and thenfor r < 1 and so on, until the null hypothesis could be rejected,where r is the number of cointegrating vectors.



The cointegration results for long run relationship are shownbelow.

Ln Mach = Ln PCE + Ln GCE + Ln Expt + Ln INVT + Ln PmPdLn Mach = 1.875 Ln PCE + 0.826 Ln CGE – 0.965 Ln Expt ( 5.00 ) ( 2.39) (-9.08)+ 1.677 Ln INVT - 0.728 Ln PmPd ……………..(8) (4.28) (-1.61) t-values in Parenthesis

The above equation shows the long run relationshipbetween aggregate machinery import and macroeconomiccomponents of final expenditure. We see that all variables includedin the model have coefficients with expected signs except thevariable EXPT. This variable shows negative relationship withaggregate machinery imports.

Furthermore, the long run relationship also indicates thatboth private and public consumption expenditures contribute toaggregate machinery import demand, but private consumptionexpenditure is the major determinant of Pakistan’s aggregatemachinery imports in the long run. It has positive elasticity valueof almost 2 which indicates that an increase in private consumptionexpenditure leads to a relatively large increase in machinery importdemand in the long run.

On the other hand, the elasticity coefficient for publicexpenditure is only about half of that for private consumptionexpenditure. This leads to the very significant finding that anincrease in public consumption does not have a large impact onthe growth of trade deficit. The elasticity coefficient of theinvestment variable is relatively high (1.67). This shows thatinvestment is another major determinant of Pakistan’s aggregatemachinery imports in the long run. Investment growth in Pakistanis machinery import dependent. The sign of price of imports tothe prices of domestically produced goods shows a negativerelationship with the level of machinery imports in the long run. Ithas the value of 0.72.

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The cointegration results for long run relationship are shownbelow:Ln Vech = Ln PCE + Ln GCE + Ln Expt + Ln INVT + Ln PmPdLn Vech = 0.578 Ln PCE + 2.10 Ln CGE + 0.84 Ln Expt (1.41) (5.38) (-11.34)+3.714 Ln INVT – 2.328 Ln PmPd …….(9) (8.18) (-4.79)t-values in Parenthesis

The above equation shows the long run relationshipbetween aggregate vehicle import and macroeconomic

D. Vehicle Imports

The empirical findings of the ADF test are shown onTable 1. The ADF test provides strong evidence that the residualsare stationary. It confirms that each variable included in the modelis I (1). We now carry out the cointegration tests with use of theJohensen technique. The choice of lag length was based on theSchwarz Criteria and the optimal lag length was 2 years.

Table 7 presents the results of the trace test derivedfrom the Johansen maximum likelihood procedure. Here weproceeded sequentially, first testing for Ho : r < 0, and then forr < 1 and so on, until the null hypothesis could be rejected,where r is the number of cointegrating vectors.


Trace Statistics


134.7480 80.53642 50.10239 24.89261 11.82701 1.70125

95.75366 69.81889 47.85613 29.79707 15.49471

3.841466

Table 7 : Result of JJ cointegration

Note: Trend assumption: Linear deterministic trend



components of final expenditure. We see that all variables included inthe model have coefficients with expected signs. Although the variablePCE ( private consumption expenditure) has positive elasticitycoefficient (0.57). It has insignificant t – ratio, which means that privateconsumption expenditures is not a major determinant of aggregatevehicle import. The long run relationship also indicates that publicconsumption expenditures, export as capacity to import, and investmentexpenditures contribute to aggregate vehicle import demand, butinvestment expenditure is the major determinant having an elasticityvalue of 3.7. This shows that investment growth in Pakistan is vehicleimport dependent. The sign of price of imports to the prices ofdomestically produced goods shows a negative relationship with thelevel of vehicle imports in the long run.

Two points may be made: Firstly, the small privateconsumption elasticity estimate may be explained by the fact that theconsumption of people who buy vehicles as a proportion of totalprivate consumption is very small – since people who buy vehicle arevery few. Secondly, it would make sense to include auto loans as adeterminant of vehicle import.

V. Summary and Conclusions

The purpose of this study was to make empirical analysis ofthe determinants of import at aggregate and disaggregate level inPakistan. For this purpose we carried out a multivariate cointegrationanalysis to examine the long run relationship. An ECM model wasused for assessing the short run relationship between aggregateimports and the main components of final expenditure. We divide ourstudy into an aggregated and disaggregated level. Our empiricalinvestigation suggests that at the aggregate level there exists a stablelong-run relationship between aggregate imports and the maincomponents of final expenditure and the relative price term. Privateconsumption expenditure, in particular appears to be the majordeterminant of Pakistan’s aggregate imports. However, the exportsexpenditure for which we use a proxy varable” export as capacity toimport” is not positively associated with aggregate imports demand.Also, both public consumption expenditure and aggregate investmenthave vey low import elasticities. In the short run, an error correction

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model also suggests that private consumption expenditure isthe major determinant of import demand.

At the disaggregated level, we developed an importdemand model for raw materials, fuel, machinery and vehicles.Our findings show that, again private consumption expenditureis the major determinant except for vehicle imports. The variablepublic consumption expenditure is showing a negativerelationship only with raw material import demand function. Thevariable export as a capacity to import is showing a negativerelationship with fuel and machinery import demand function.The variable investment expenditure is showing a positiverelationship with all the import demand functions, but has highelasticity value for machinery and vehicle import demandfunction.

References :

1. Abbott,-A-J and H.R Seddigh, (1996), “AggregateImports and Expenditure Components in the UK: An EmpiricalAnalysis”, Applied-Economics, September 1996; 28(9): 1119-1125.

2. Bahmani-Oskooee, M. (1998), “Cointegrationapproach to estimate the longrun elasticities in LDCs”,International Economic Journal, Volume 61, pp. 101-109.

3. Dutta, D. and N. Ahmed (1999), “An aggregate importdemand function of Bangladesh : A cointegration approach.”.Applied Economics, Volume 31, pp. 465-472.

4. Dutta,-Dilip; Ahmed,-Nasiruddin, (2001), “AnAggregate Impor t Demand Funct ion for India: ACointegration Analysis”. Australian National University,Australia South Asia Research Centre, ASARC WorkingPapers, 2001; 12



5. Ho, W.S, (2004), “Estimating Macao’s import demandfunction”, monetary authority of Macao.6. Hafeez Ur Rehman (2007), “An econometric estimationof traditional import demand function for Pakistan”. PakistanDevelopment Review Vol.45 No.2 pp 245-256.

7. Mohammad Afzal (2004), “Estimating long run tradeelasticities in Pakitistn- Cointegration Approach”. PakistanDevelopment Review Vol.43 No.4.pp 757-770.

8. Mohammad Haji Alias & Tuck Cheong Tang, SumberPertumbuhan Sektor Pertanian di Malaysia: Satu AnalisisSebab-Menyebab, Seminar Dimensi Baru Dalam PertanianNegara, Anjuran Fakulti Ekonomi, Universiti KebangsaanMalaysia, October 6-8, (2000), Equatorial Hill, C. Highlands,Malaysia. Pascasidang,( 2003), p. 29-42 [Mohammad Haji Alias– Presenter].

9. Mohammad, H. A., T. C. Tang and J. Othman (2001),“Aggregate import demand and expenditure components infive ASEAN countries: An empirical study”. Journal EkonomiMalaysia, Volume 35, pp. 37-60.

10. Mohammad, H.A and T.C Tang, (2000), “AggregateImports and Expenditure Components in Malaysia: ACointegration and Error Correction Analysis”, ASEAN-Economic-Bulletin. December 2000; 17(3): 257-269.

11. Min, B.S , H.A Mohammed (2002) , “An analysis ofSouth Korea import demand. J.Asia Specific Affairs, 4 : 1-17.

12. Narayan,-Paresh-Kumar; Smyth,-Russell (2005), “ TheDeterminants of Aggregate Import Demand in BruneiDarussalam: An Empirical Assessment Using a Cointegration

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and Error Correction Approach”. Singapore-Economic-Review.October 2005; 50(2): 197-210.13. Pakistan Economic Survey ( various issues).

14. Sinha,-Dipendra (1997), “ Determinants of ImportDemand in Thailand”.International-Economic-Journal. Winter1997; 11(4): 73-83.

15. Sarmad,-Khwaja, (1989), “The Determinants of ImportDemand in Pakistan”.World-Development, October 1989; 17(10):1619-25.

16. Tang, T.C., and M. Nair (2002), “A CointegrationAnalysis of the Malaysian Import Demand Funct ion:Reassessment From the Bounds Test”, Applied EconomicsLetters, 9, 293-296.

17. Tang TC (2003),”An Empirical Analysis of China’sAggregate Import Demand Function”, China Econ. Rev., 12(2):142-63.

18. World Development Indicators (2009).


Research Schizophrenia: The Exterminating Angel - A Deleuzoguttarrian Critique

SCHIZOPHRENIA: THEEXTERMINATING ANGELA DELEUZOGUTTARRIAN

CRITIQUES.M.Mahboob-ul-Hassan Bukhari

Department of PhilosophyUniversity of Karachi, Karachi

Abstract

Deleuze thinks that capitalism functions immanently. Capitalismhas provided liberation from traditional practices and bondage.People are not bound to their family, religion or land lord incapitalism. They are free to move as they please provided theycan afford it. Deleuze points out the dual impact of capitalism.On the one hand, it prevents traditional forms of oppression; onthe other hand it brings the liberated forms into the prison ofcapitalist order. When capitalism decodes it is liberating whereaswhen it recodes it enslaves. Schizophrenia, Deleuze and Guattarihold, is a way out.

Capitalism decodes and deterritorializes, it reaches a limit at whichit must artificially reterritorialize by augmenting the stateapparatus, and repressive bureaucratic and symbolic regimes.The schizophrenic never reaches such a limit. It resists suchreterritorialization, just as it resists the symbolic and despoticterritorialization of the oedipalizing psychotherapist. Deleuze andGuatarri disagree with Jameson’s argument that schizophreniareinforces and contributes to the hegemony of capitalism. InsteadDeleuze and Guattari see schizophrenic as capitalism’sexterminating angel. The schizo is a radical, revolutionarynomadic wanderer who resists all forms of oppressive powers.Schizophrenic sensibilities can replace ideological and dogmaticpolitical goals with a radical form of political desire. Desiringproduction marks the schizophrenic potential in everyone toresist the power of despotic signifiers and capitalistreterritorialization.

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The present paper seeks to evaluate the problem of theschizophrenic’s transcendence from capitalism. Can theschizophrenic survive without capital? Deleuze conceivedschizoid as an expression of liberation from the oppressivestructures of capitalism. For this he developed a new ontologyand metaphysics of becoming-other or pure difference. Thispresumes immanence rather than transcendence. This paper isdivided into the following sections:

a. Becoming and Immanenceb. Machinic Ontologyc. Capitalism and Immanenced. Freedom and Becominge. Schizophrenia: an exterminating anglef. Critical evaluation

The first section seeks to explore the rules of becomingwhich will lead to the formulation of machinic ontology in secondsection. The third will throw light on capitalism in the context ofcapitalism which will reinforce freedom. The fifth section will showthe external limit of capitalism which will subsequently be criticallyevaluated. This will excavate the possibility of freedom inschizophrenic model which was absent in capitalism.

Key Words: Coding, recoding, decoding, schizophrenia,Immanence, Body without Organs,

Jel Classification: B30

a. Becoming and Immanence

Deleuze writes in “Nietzsche and Philosophy”, “The ideaof another world, of a supersensible world in all its forms (God,essence, the good, truth), the idea of values superior to life, is notone example among many but the constitutive element of all fiction(Deleuze 1983, p147). He is indicating the parameters of hisphilosophy of difference in the above mentioned statement. Forhim, transcendence is fiction and will not be the framework throughwhich he will philosophize. Instead he chooses immanence. Beingis not something other than the world we live in. It is that worldwhich will be navigated through Deleuzean philosophy. Moreover,



temporal thinking is yet another parameter. Temporal thinking canpenetrate that world to show us what those appearances might bemade of, and how they might become different. For Deleuze, toconceive living is to conceive both what is and what might be. Inan ontology worthy of the name, the two are entwined. The worldis more than we may realize. It is rich with difference.

In mainstream philosophy, the project of ontology hasalways been to focus upon what is? So far as what might be hasbeen ignored. Only at the margins, according to Deleuze, havethere been figures that have offered a different vision. Spinoza,Bergson, and Nietzsche are among them, presenting us withconcepts from which we might build a new ontology, one thatdoes not reinforce a tired conformism but points the way toward amore open, vibrant conception of the world and of living in it(May2005,p71). Deleuze traces a new ontology, a new way ofconceiving being, the world, or what there is. Instead of abandoningthe questions of being that have been badly posed by so many ofthe philosophical ancestors, he chooses to raise them again, butto pose them differently. Being is not a puzzle to be solved but aproblem to be engaged in. It is to be engaged through a thoughtthat moves as comfortably among problems as it does amongsolutions, as fluidly among differences as it does among identities.The world as Deleuze conceives it is a living world, a vital world(May2005, p71).

Deleuze is inspired by three philosophers to formulatean ontology of difference. These three thinkers are SpinozaBergson and Nietzsche. He carries out experiments with theirthought which would eventually lead him to liberation. Deleuzeacknowledges that “Spinoza is the Christ of philosophers, and thegreatest philosophers are hardly more than apostles who distancethemselves or draw near this mystery” (Deleuze & Guattari 1994,p60). He draws immanence from Spinoza, duration from Bergson,and affirmation from Nietzsche. He sets these concepts as thestandard for his ontology of difference.

Ontology, according to Deleuze, becomes the firstrequirement of the ontology of difference. Philosophy can no longer

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function on the presumption of transcendence. Deleuze & Guatarriwrite “We must draw up a list of . . . illusions and take theirmeasure, just as Nietzsche, following Spinoza, listed the ‘fourgreat errors.’ But the list is infinite. First of all there is the illusionof transcendence, which, perhaps, comes before all the others”(Deleuze & Guattari 1994, p49). Deleuze argues that transcendencerequires two presumptions. First, the existence of at least twoontological substances. Second, one of these two substances besuperior to the other. This superiority is presumed both in powerand value. One substance gives rise to the other. The formerprovides life to the other. The transcended substance dependsupon the transcending substance for its origin. The transcendingpower brings the world into full swing, liberating it from the prisonof its incapacity and its impotence. The commitment totranscendence is to allow the universe to be explained in such away as to privilege one substance at the expense of other, toreserve the superiority of certain features and to denigrate others.Todd May notes that “what is important for Deleuze’s thought iswhat is to be denigrated: the physical, the chaotic, that whichresists identity. Physicality, chaos, difference that cannot besubsumed into categories of identity: all these must denythemselves if they would seek to be recognized in the privilegedcompany of the superior substance” (May 2005, p31). Thecommitments of transcendence, to two substances and to aprivileging of one of them, lead us to the questions of theinteraction between the two substances. Spinoza fascinatesDeleuze as he had successfully changed the subject oftranscendence by the concept of expression. According toDeleuze, emanation has an affinity with expression; “they producewhile remaining in themselves” (Deleuze 1990, 171). However ,this affinity of emanation with expression does not bring anyimportant changes in the picture. In emanation what is transcendedremains distinct and different from the creator. Moreover, thetranscending substance enjoys privilege with regard to its creator.Deleuze expresses it as “Emanation thus serves as the principleof a universe rendered hierarchical . . . each term is as it were theimage of the superior term that precedes it, and is defined by thedegree of distance that separates it from the first cause or the firstprinciple”(Deleuze 1990, p173). Hence emanation carries the two



commitments of transcendence: the existence of two substancesand the superiority of one of those substances to the other :“the themes of creation or emanation cannot do without a minimaltranscendence, which bars ‘expressionism’ from proceeding allthe way to the immanence it implies” (Deleuze 1990, p180).Spinoza’s contribution lies, according to Deleuze, in theconstruction of an ontology of immanence.

The ontology of immanence requires the univocity ofbeing. Deleuze writes “expressive immanence can not besustained unless it is accompanied by a thoroughgoingconception of univocity, a thoroughgoing affirmation of univocalbeing” (Deleuze 1990, p178). The substance of being is one andindivisible which amounts to be saying that all hierarchy anddivision is banished from ontology. By univocity of being ,Deleuze means that “the term “being” or “Being” is said in oneand the same sense of everything of which it is said” (May2005,p34). By the introduction of univocity of being Deleuze isable to get rid of transcendence. According to him, it is onlythrough the rigorous commitment to the univocity of being thatan ontology can be created. “The significance of Spinozism seemsto me to be this: it asserts immanence as a principle and freesexpression from any subordination to emanative or exemplarycausality. . . . And such a result can be obtained only within aperspective of univocity” (Deleuze 1990, p180). Univocity ofbeing leads to equality of all beings.

Substance expresses itself in attributes. Among theattributes accessible to human consciousness are the only two:thought and extension. Deleuze writes, “Attributes are, forSpinoza, dynamic and active forms. And here at once we havewhat seems essential: attributes are no longer attributed, butthey are in some sense “attributive.” . . . As long as we conceivethe attribute as something attributed, we thereby conceive asubstance of the same species or genus; such a substance . . . isdependent on the goodwill of a transcendent God . . .On theother hand, as soon as we posit the attribute as “attributive” weconceive it as attributing its essence to something that remainsidentical for all attributes, that is, to necessarily existing

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substance” (Deleuze 1990, p45). Substance expresses itself inattributes. Attributes are not things that emanate from substance.Instead they are substance expressing itself. “What do [attributes]attribute, what do they express? Each attribute attributes an infiniteessence, that is, an unlimited quality” (Deleuze 1990, p45). “ForDeleuze, Todd May writes, “there are two differences betweenthis picture of the relation of substance and attributes andSpinoza’s. First, substance is woven into the attributes that expressit. Second, substance is not like a thing that gives birth to otherthings. It is more like a process of expression (May 2005, p37).

According to Deleuze, substance has a temporalcharacter. It is bound up with time. Substance must be seen as aprocess not as a finished product. May explicates “Substancefolds, unfolds, and refolds itself in its attributes and in its modes,to which it remains immanent. It is always substance that, infolding and unfolding itself, remains within these folds. Being isunivocal: there is no distinction between layers, levels, or typesof being. There is no transcendence, only immanence (May 2005,p38). Deleuze elaborates being as “Being is said in a single andsame sense of everything of which it is said, but that of which itis said differs: it is said of difference itself (Deleuze 1994, p36).

Deleuze develops his conception of immanence throughSpinoza. Three concepts allow Deleuze to philosophizeimmanence. They are: the univocity of being, immanence, andexpression. Deleuze argues that to think in terms of univocity,immanence, and expression is to reject the division of being intonatural kinds. This scheme of thought also opens up the horizonof a thought that embraces both its temporal fluidity and itsresistance to rigid classification. Hence Deleuze makessubmission, copying and judgment of to transcendent beingunthinkable logically or metaphysically. This is what makesSpinoza, according to Deleuze, the Christ of philosophers.Deleuze’s Spinoza speaks “To be is to express oneself, to expresssomething else, or to be expressed” (Deleuze 1990, p 253). Toexplore the character of being’s expression; Deleuze draws fromBergson’s conception of time. He holds that the expression ofbeing is temporal.



Deleuze argues that Spinoza’s immanence andBergson’s duration can be brought together in constructing aphilosophy that allows seeing living more vitally than everbefore. Deleuze thinks that expression occurs temporaltemporally. He needs a concept of time which facilitates his“expression” of being. His expression, he contends, can’t operatewith circular, linear, or existentialist conceptions of time.

Linear conception of time is inconsistent, since itfunctions and operates at the model of transcendence. Lineartime is regarded as a container (a spatial term) in which thingstake place. It serves as a narrative form through which modernlife is organized. Circular view of time’s basic slogan is ‘historyrepeats itself’. Things once happened will occur and recur overand over again just like the repetition of the seasons.

Expression may find its home in the existentialist viewof time. What begins in the past expresses itself in the futurethrough the present. The future becomes an expression of thepast which is not mere repetition but that unfolds it, or folds it, orrefolds it. Deleuze is uncomfortable with the existentialconception of time. Because existential approach emphasizes orconceived at all or presumes the human. This approach issubjectively grounded . What provides the future its privilegeas a dimension of time is that “we” humans, who are characterizedby our aims, objectives, projects, by the goals and aspirationswe (humans) place before ourselves. It is “we” the humans whoare defined by our futures. This way of defining time is to put itin the salvage of human beings. The existentialist conception oftime denies, according to Deleuze, the multiplicity of the “one”.It freezes the “one” into a humanistic model.

Deleuze argues that this is not done by mistake but bydesign. He doesn’t seek to create an ontology centered on humanambitions and perceptions or human orientation toward the world.He seeks to conceive temporality in a way that both captures thehuman living of time and does not subordinate and subsume allof temporality to human living. “It is only to the extent thatmovement is grasped as belonging to things as much as to

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consciousness that it ceases to be confused with psychologicalduration, whose point of application it will displace, therebynecessitating that things participate directly in duration itself(Deleuze 1988, p48).

This conception of time reinforces and extends theconcept of immanence; it allows a way to comprehend howexpression happens. If expression is temporal, then temporalityrequires to be conceived temporally rather than spatially. Theconcept of duration (duree) facilitates us to do that.

Deleuze writes “ The past and the present do not denotetwo successive moments, but two elements which coexist: One isthe present, which does not cease to pass, and the other is thepast, which does not cease to be but through which all presentspass. . . . The past does not follow the present, but on the contrary,is presupposed by it as the pure condition without which it wouldnot pass” (Deleuze 1988, p59). The present passes. In order forthis to take place, there must be a past for the present to passinto. The past must exist as certainly as does the present. Thepast does not exist in the similar way as the present. Bergsonconceives it as existing in a very different way. He holds that itexists in virtuality, in contrast to the actuality of the present.

Deleuze argues “Strictly speaking, the psychological isthe present. Only the present is ‘psychological’; but the past ispure ontology; pure recollection has only ontologicalsignificance” (Deleuze1988, p56). Bergson’s concept of the pastis the ontological source from which psychological memorysprings. There is one past, a single past in which all psychologicalmemory participates. The past does not exist in the similar fashionas the present does. The present exists in actuality. The past, theontological past, exists virtually.

Deleuze thinks that virtual is as real as the actual. Thedistinction between the virtual and the actual is different from thedistinction between the possible and the real. Deleuze draws twodifferences between virtual and possible. First, the possible doesnot exist, where as the virtual does. It is real. “The virtual is real



in so far as it is virtual.” (Deleuze1994, p208) The seconddifference, according to him, is that the possible is a mirror of thereal, while the virtual does not mirror the actual. Hence heconcludes that the past is altogether different from the present.It is structured differently. Substance actualizes itself in attributesand modes. Its way of being as the virtual is not simply therepresentation or imitation of its way of being. This distinction(actual/virtual) facilitates Deleuze to distance himself fromtranscendent ways of thinking. The ideas of model and copyand of resemblance carry transcendence in themselves whichleads to the denigration of existent things. Deleuze rejects thisdenigration of existent things. Deleuze seeks to create such anontology which judges existence immanently without presumingany kind of transcendence. This distinction (actual/virtual) pavesthe way for this. The virtual is the part of the real in a very similarfashion as actuality is.

To live is to comprehend a historically given worldwhich is not of one’s own making. The past exists in me in sucha way that it appears at each moment of my engagement with theworld. Here in this engagement with the world that theactualization of virtual occurs. The past and present are mingled.The past unfolds whereas the present creates and invents.Present always actualises the past. At every moment the pastactualizes. “In this way a psychological unconscious, distinctfrom the ontological unconscious, is defined. The lattercorresponds to a recollection that is pure, virtual, impassive,inactive, in itself. The former represents the movement ofrecollection in the course of actualizing itself” (Deleuze 1988,p71). The actualizing past exists ontologically andpsychologically. Both the psychological and ontological areinseparable. It is a process in which substance expresses itself.The past is viewed and colored by things which logically had noconnection with it. The past is not something which hadhappened or is over. Deleuze contends “What characterizesduration is not logical connection; nor is it relation among similarelements, nor is it identification or imitation or resemblance. It isdifference that characterizes duration: “Duration is that whichdiffers with itself “(Deleuze1956 ,p88). The past which is duration,

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according o Deleuze, is characterized by a particular kind ofdifference, a kind of difference that is irreducible to the categoriesof Identity.

The past is not composed of identical elements. Henceit has not any particular identity. The past differs with itself.Deleuze thinks of difference in terms of temporality. All differenceslike Hegelian oppositions or identity resemblances are spatialand hence are away from reality. Deleuze sometimes calls“multiplicity” for difference. He writes that “there are two typesof multiplicity. One is represented by space . . . It is a multiplicityof exteriority, of simultaneity, of juxtaposition, of order, ofquantitative differentiation, of difference in degree; it is a numericalmultiplicity, discontinuous and actual. The other type ofmultiplicity appears in pure duration: It is an internal multiplicityof succession, of fusion, of organization, of heterogeneity, ofqualitative discrimination, or of difference in kind; it is a virtualand continuous multiplicity that cannot be reduced to numbers”(Deleuze1988, p38). Deleuze highlights that the problem is “Peoplehave seen only differences in degree where there are differencesin kind” (Deleuze 1988, p23). Hence “the Bergsonian revolution isclear: We do not move from the present to the past, fromperception to recollection, but from the past to the present, fromrecollection to perception” (Deleuze 1988, p63). Deleuze urges usto think temporally rather than spatially because this will allowvirtual differences to make more sense. The present is not simplyan ideal now, but a surplus beyond what is directly experienced.The present is always more than it reveals to us. The virtualdifference is immanent to the present.

Ontology, for Deleuze, is not limited to the study ofstable, frozen, fixed identities of things but extends to whatunsettles and destabilize it. The present is more than what itappears to be. Virtual differences are immanent in it. His ontologyillustrates the overflowing nature of reality. Deleuze usually statesthat one does not know what the body is capable of. It is nottranscendence and spatiality that are the proper terms andadequate vocabulary for ontological thinking. It is immanenceand temporality by which, Deleuze thinks, transcendence andspatiality can be overcome.



Deleuze admires Nietzsche as “Marx and Freud, perhapsdo represent the dawn of our culture, but Nietzsche is somethingentirely different: the dawn of counterculture” (Deleuze 1977,p142). Deleuze uses another term from the history of philosophy:eternal return. This was earlier used by Nietzsche. Eternal returnis not taken in usual context and meaning as Deleuze often does.He gives different meanings to the conventional terms. Eternalreturn doesn’t mean the cycling back of the same things overthe course of time. “According to Nietzsche the eternal return isin no sense a thought of the identical but rather a thought ofsynthesis, a thought of the absolutely different . . . It is not the‘same’ or the ‘one’ which comes back in the eternal return butreturn is itself the one which ought to belong to diversity and tothat which differs (Deleuze 1983, p46). Return is the return ofdifference. He further elaborates it “Return is the being of thatwhich becomes. Return is the being of becoming itself, the beingwhich is affirmed in becoming”(Deleuze 1983,p24). According toDeleuze, becoming is real which is becoming multiplicity. Deleuzeargues “for there is no being beyond becoming, nothing beyondmultiplicity; neither multiplicity nor becoming are appearancesor illusions. . . . Multiplicity is the inseparable manifestation,essential transformation and constant symptom of unity.Multiplicity is the affirmation of unity; becoming is the affirmationof being” (Deleuze 1983, pp23-4). Substance is not a constantand persistent identity that stands behind the modes andattributes. It is becoming and difference. Duration is difference.May elaborates “It is difference, difference that may actualizeitself into specific identities, but that remains difference evenwithin those identities (May 2005, p60). Return is the being ofbecoming and difference. It is the difference that recurs or returnseternally.

For Deleuze, the Past is never gone or over. He writes“The passing moment could never pass if it were not alreadypast and yet to come – at the same time as being present”(Deleuze1983,p48). Duration is unity of past, present and future.They are interwoven. What returns is the virtuality which isbehind as well as within those identities. Deleuze explicates “Itis not being that returns but rather the returning itself that

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constitutes being insofar as it is affirmed of becoming and of thatwhich passes. It is not some one thing which returns but ratherreturning itself is the one thing which is affirmed of diversity ormultiplicity. In other words, identity in the return does not describethe nature of that which returns but, on the contrary, the fact ofreturning for that which differs (Deleuze 1983, p48). The future isfull to overflowing. It is not empty and always recurs in the formof virtual differences. Todd May notes “The past is duration; thepresent is actualization; the future is eternal return. But within allthese, constitutive of them, is difference. Difference in kindconstitutes duration. Actualized difference constitutes thepresent. The return of difference constitutes the future (May2005, p62).

Deleuze discusses the dice throw as “the game has twomoments which are those of a dice throw – the dice that is thrownand the dice that falls back. . . . The dice which are thrown onceare the affirmation of chance, the combination which they formon falling is the affirmation of necessity” (Deleuze1983, p25-6).The future is the eternal return which is nothing but the return ofdifference. The future is virtual difference that is waiting toactualize itself into a particular present. This is the throw of thedice. It is mere chance. The future, too, actualizes itself in a present,as does the past. May writes “The return crystallizes into identities.Pure temporality becomes also spatiality. We are faced with aparticular situation that has emerged from the multiplicity thathas returned. That is the combination, the dice that falls back. It isnecessity” (May 2005, p63). Necessity does not mean things hadto happen in that particular way and not otherwise. The presentis not guided by any transcendence to materialize any particularfuture. Deleuze intends to overturn this thinking that this particularfuture will become present and not otherwise.Todd May pointsout three faultsin it. “First, it implies that the future is constitutedby particular identities, instead of being a virtual multiplicity ofthe kind Bergson conceives. Second, it implies that that futureexists as a possibility before it becomes a reality, whereas Deleuzecontrasts possibility with virtuality. Third, it implies guidance,which seems to require transcendence rather than immanence. Inimmanence, there is folding, unfolding, refolding. But there is noguiding force, no invisible hand” (May 2005, p63).



The eternal return is the throw of dice. They are alwaysthrown, at every moment, at every instant. The future is alwayswith us in a similar way as the past is. A pair of dice is thrownwith the multiplicity which is duration. The dice fall back. Theyshow a combination. The past is always a part of every present.“The bad player counts on several throws of the dice, on a greatnumber of throws. In this way he makes use of causality andprobability to produce a combination that he sees as desirable.He posits this combination itself as an end to be obtained, hiddenbehind causality” (Deleuze1983, p26-7). Deleuze urges to affirmchance and necessity. He thinks that bad players seek particularcombinations. Good players do not seek particular future. Hewrites “But, in this way, all that will ever be obtained are more orless probable relative numbers. That the universe has nopurpose, that is has no end to hope for any more than it hascauses to be known – this is the certainty necessary to playwell”(Deleuze1983, p27). Good players do not play for a particularcombination. They play knowingly that the combinations areinfinite, and are not up to them. Deleuze writes “To affirm is notto take responsibility for, to take on the burden of what is, butto release, to set free what lives. To affirm is to unburden: not toload life with the weight of higher values, but to create newvalues which are those of life, which make life light and active.There is creation, properly speaking, only insofar as we canmake use of excess in order to invent new forms of life ratherthan separating life from what it can do (Deleuze1983, p185). Toaffirm, Deleuze argues, is to carry out experiments without anyprior knowledge about the results of one’s experimenting. In thisway the virtual will be excavated.

Deleuze argues that things are composed of forces:active and reactive. “Every force which goes to the limit of itspower is . . . active” (Deleuze 1983, p59). An active force goes tothe limit of what it is able to do. It does whatever is in its powerand capacity to the extent of its ability. Active forces are creativeand productive to make whatever can be made of themselves.All creativity is conducting experiment. Creativity may bechanneled in undermined unexpected directions. One throwsthe dice without knowing what will fall back. Reactive forces

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“proceed in an entirely different way – they decompose; theyseparate active force from what it can do; they take away a partor almost all of its power (Deleuze 1983, p57). Reactive forcesundermine active forces. They do not produce; they limit thecreativity of active forces.

We, Deleuze argues, are composed of forces which seekto go the limit of what they can do, and forces that seek to separatethose forces from what they can do. His view is that Active forcesaffirm difference and lead to productivity. Deleuze urges that Goodplayers of dice affirm active forces and affirm chance andnecessity, the difference that is both past and future and theactualization of difference. To affirm the eternal return is torecognize a world of virtual difference which is behind and beyondthe particularities of our present which will set free the activeforces of creativity and productivity to refuse to separate thoseforces from what they can do.

To sum up Spinoza, Bergson, and Nietzsche provide thethree concepts which, after interpretation, allow Deleuze toformulate his dynamic, instable, temporal, immanent ontology.These three concepts are: immanence, duration, and the affirmationof difference. These concepts make the ontology of differencepossible and bring its overflowing nature to the fore. This alsomakes the three concepts: submission, copying and judgmentillogical and metaphysically impossible.

b. Machinic Ontology

Deleuze conceives politics on the basis of a more fluidontology, one that would allow for political change andexperimentation on a variety of levels, rather than privileging onelevel or another. In their collaborative work Deleuze and Guattarioffer a variety of starting places. One of the concepts they rely onthe most is that of the machine. “Everywhere it [what Freudcalled the id] is machines – real ones, not figurative ones: machinesdriving other machines, machines being driven by other machines,with all the necessary couplings and connections. . . . we are allhandymen: each with his little machines.”(Deleuze & Guattari



1977, p1). The concept of machines provide them ontologicalmobility, and through which they can overthrow the dogmaticimage of political thought. Claire Colebrook writes “In Anti-Oedipus and A Thousand Plateaus Deleuze and Guattari use aterminology of machines, assemblages, connections andproductions. . . . “An organism is a bounded whole with anidentity and an end. A mechanism is a closed machine with aspecific function. A machine, however, is nothing more than itsconnections; it is not made by anything, is not for anything, andhas no closed identity (Colebrook 2002, p56). An organism is awhole which is self-regulating. Each of its parts supports othersin such a way that in the harmony of those parts make whole. Weshould think of being as mobile machines that may connect tothe environment in a variety of ways. There is no transcendentunit of analysis. To think machinically is to consider the relationof individuals to society as only one level of connections. Thereare others to be considered. One can also discuss pre-individualconnections and supra-individual connections. Theseconnections may be discerned in their fluidity.

Machinic connections are productive and creative.Deleuze and Guattari compare machinic connections in Anti-Oedipus with psychoanalytic thinking. For psychoanalysis,desire is a lack. It is conceived in terms of lack. I desire what Iwant what I do not have. If I think of desire machinically, however,it will replace lack with creativity. Desire is a creator ofconnections, not a lack. To desire is to connect, create andproduce with others. These connections can be formed sexually,politically, athletically, gastronomically, and vocationally. “Thebreast is a machine that produces milk, and the mouth a machinecoupled to it. The mouth of an anorexic wavers between severalfunctions: its possessor is uncertain as to whether it is an eating-machine, an anal machine, a talking-machine, or a breathingmachine (asthma attacks)” (Deleuze & Guattari 1977, p1).Machines create through connections but not in a pre-givenfashion. Machines create in unpredictable and often novel ways.Machines are mobile creators of connections. These connectionsare irreducible to any one set of connections, any particularidentity. Even when they are connected in a specific way theyare capable of other connections and other functions.

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Machines are irreducible to their actual connections.There is a virtuality in machinic connections that inheres in anyset of actual connections and that allows them to connect inother and novel ways. Todd May writes “The virtual character ofmachines, their mobility as machines and the mobility of theconcept machine, does not come from their transcendentcharacter” (May 2005, p126). The mobility of machines can not beupheld without their connectivity. Machines are no longermachines outside of its connections. It is perhaps within machinicconnections that machines are capable of producing otherconnections. “We define social formations by machinic processesand not by modes of production (these on the contrary dependon the processes) (Deleuze & Guatarri 1987, p435). There is noorganizing element to “desiring machines” that dictates particularmodes of connections from outside or above. The machine is aconcept that can be developed to form a Deleuzian politicalontology. This concept allows Deleuze to distance himself fromthe dogmatic image of thought which he believes structures liberalpolitical theory.

To accept the concept of the machine is to shift from afocus on the macropolitical to the micropolitical and to move fromthe molar to the molecular. This move is inevitable in order toapprehend how power works and how we are constructed. Forthis, however, we must turn from the grand scale to the smallerscale. Deleuze and Guattar i write, “the molecular, ormicroeconomics, micropolitics, is defined not by the smallness ofits elements but by the nature of its ‘mass’ – the quantum flow asopposed to the molar segmented line (Deleuze & Guatarri 1987,p217).

The terms molecular, microploitics must not mislead us.These terms are usually associated with smallness which isinadequate. A quantum flow is a virtual field. It is a machinicprocess. Genetic information is a quantum flow. Todd May notes“Quantum flows: fluid identities that arise from a chaotic andoften unpredictable folding, unfolding, and refolding of matter.Micropolitics is not an issue of the small; it is an issue of quantumflows. It is an issue of machines. To think machinically is to seek



for what escapes them. It means that one seeks for what escapesfrom them and within them. What Deleuze calls a line of flight isnot a leap into another realm; it is a production within the realmof that from which it takes flight” (May 2005, p 128).

Deleuze does not deny the existence of large entitieslike society. What he intends to establish is the primacy of themachinic. “Everything is political, but every politics issimultaneously a macropolitics and a micropolitics.” (Deleuze& Guattari 1987, p213). There is both a macropolitics and amicropolitics, but the micropolitics is primary and comes first.Take, for instance, the concept of social class: “social classesthemselves imply “masses” that do not have the same kind ofmovement, distribution, or objectives and do not wage the samekind of struggle. Attempts to distinguish the mass from the classeffectively tend toward this limit: the notion of mass is a molecularnotion operating according to a type of segmentation irreducibleto the molar segmentarity of class. Yet classes are indeedfashioned from masses; they crystallize them. And masses areconstantly flowing or leaking from classes” (Deleuze & Guattari1987, p213). He does not deny that there are sexes, nationalterritories and ethnic groups. What he urges is that we mustthink of these as relative stabilities, as products of machinicprocesses. These are all constructed through the formation ofconnections and overspill them from within.

If we start thinking machinically, we begin to see morethan what macropolitics shows us. Machines produceconnections not only to the state and the economy but alsoconnections that will only be visible if we turn away fromtraditional political thought. Deleuze does not hold that traditionalliberal thought is entirely wrong or self contradictory. The onlything he objects to is the inadequacy of the approach. Thisinadequacy can only be overcome by machinic metaphysics andrhizomtic epistemology.

The liberal political theory ignores many layers. Thefirst is that the transversal connections- connections that cutacross traditional political identities. He writes “imagine that

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between the West and the East a certain segmentarity isintroduced, opposed in a binary machine, arranged in stateapparatuses, over coded by an abstract machine as a sketch of aWorld Order. It is then from North to South that the destabilizationtakes place. . . . A Corsican here, elsewhere a Palestinian, a planehijacker, a tribal upsurge, a feminist movement, a Green ecologist,a Russian dissident – there will always be someone to rise up tothe south (Deleuze & Parnet 1987, p131)”. These differentconnections which are called transversal connections are onlyconceivable through machinic thinking.

There is another layer to which only machinic thinkingwill allow us access. We can look at some thing not only from onecorrect, a historical, transcendent perspective but from otherperspectives. This will help us to see different things. The antiglobalization movement is a particular type of imbalance cuttingacross ecosystems that tries to protect or restore particular typesof balance among them or within them. The anti globalizationmovement is, according to Deleuze, a deterritorialization that willallow for a new type of reterritorialization.

There are at least two insights we might get fromproviding an account that centers on the earth rather than uponindividuals. First, it allows us to see that just as the environmentis a political matter, politics is an environmental matter.Environmentalism is not only a movement of individuals in relationto the earth but also it is other than that. Since individuals arethemselves part of ecosystems, environmentalism is not only amovement about ecosystems but also a movement within them.Introduction of the earth as a political category facilitates us tounderstand this. Second, the move from individuals to the earthallows us to get away from traditional political categories. It helpsour thought to gain suppleness. This does not mean that wereplace the category of the earth for that of individuals inunderstanding the anti globalization movement. It is not an either/or situation. As Deleuze often writes in his later writings, it is and. . . and . . . and. We are not saying, “No, it’s not about individuals,it’s about the earth.” We are saying, “Yes, it is about individuals,but no more about them than about the earth.” The task is notone of substituting a single set of categories with another set but



to be able to create and move among various sets of categories,and even to cross between them. A political thought of differencerecognizes that whatever categories we use, there is always moreto experience. We need to be getting ready to switch perspectivesin order to experience more.

Deleuze and Guatarri’s machinic political approach permitsus to open that question from different angles, to see differentconnections being made at different levels and layers. Rather thantaking it for granted that there are particular individuals withparticular needs or lacks that the engagement in politics seeks tofulfill needs or interests, political living might consist in the creationof connections within various actualized levels of difference:individuals, the earth. They do not seek to give all encompassinganswer that one should live in such and such a fixed way. “Thereis no general prescription. We have done with all globalizingconcepts” (Deleuze & Parnet1987, p141). It is not a question ofhow we should live but it is a question of how we might live whichis possible in multiple connections.

Machinic thinking is rhizomtic. It provides opportunitiesfor multiple connections from a variety of perspectives that arenot grounded in a single concept or macro concepts. Rhizomesoperate differently. Todd May elaborates rhizomes as “Kudzu is arhizome. It can shoot out roots from any point, leaves and stemsfrom any point. It has no beginning: no roots. It has no middle: notrunk. And it has no end: no leaves. It is always in the middle,always in process. There is no particular shape it has to take andno particular territory to which it is bound. It can connect from anypart of itself to a tree, to the ground, to a fence, to other plants, toitself” (May 2005, p134 ). Deleuze and Guatarri write “The tree isfiliation, but the rhizome is alliance, uniquely alliance. The treeimposes the verb “to be,” but the fabric of the rhizome is theconjunction, “and . . . and . . . and . . .” This conjunction carriesenough force to shake and uproot the verb “to be.” Where areyou going? Where are you coming from? What are you headingfor? These are totally useless questions. . . . Between things doesnot designate a localizable relation going from one thing to theother and back again, but a perpendicular direction, a transversal

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movement that sweeps one and the other way, a streamwithout beginning or end” (Deleuze & Guatarri 1987,p25).

Traditional political thought, according to Deleuze,is arboreal which is structured like a tree. First there is theindividual, then the state, then the laws that answer back tothe interests of the individual. A tree has particular rootsgrounded in the soil at a particular place and gives rise tobranches and then leaves in a specific way. Arboreal is asystem of derivation: first the roots, then the trunk, then theleaves. The roots are rooted here and not elsewhere. Thebranches are indispensible to the trunk, the leaves to thebranches. There is transcendence in this structure which isreplaced it with immanent model of rhizome.

c. Immanence and Capitalism

Deleuze and Guatarri after making machinicorientation talk of macro or grand scheme of things likeindividuals and of the state and of capitalism but. Theycontend that we are composed of lines. “Whether we areindividuals or groups, we are made up of lines and theselines are very varied in nature. The first kind of line whichforms us is segmentary – or rigid segmentarity . . .family-profession; job-holiday; family – and then school – andthen the army – and then the factory – and then retirement.”(Deleuze & Parnet 1987,p124). They are composed of thecategories we recognize. Traditional political theory operateswith segmentarity lines. Deleuze denies the exclusive rightof segmentary lines to determine our political thought. Hecontends that they are rigid. These lines are made of linesof flight. The nature of lines of flight is to overflow. Whatmakes these lines frozen and rigid is not what they containbut what people think they contain. Lines of rigidsegmentarity appear as rigid. Segmantery lines are morethan what they may seem. The difficulty is to grasp this“more” feature of these lines.



Deleuze names lines of rigid segmentarity molar. Otherlines, he calls, molecular: “we have lines of segmentarity whichare much more supple, as it were molecular. . . . rather than molarlines with segments, they are molecular fluxes with thresholds orquanta. A threshold is crossed, which does not necessarilycoincide with a segment of more visible lines. Many thingshappen on this second kind of line – becomings, micro-becomings, which don’t even have the same rhythm as our“history.” (Deleuze & Parnet 1987, p124). Molecular lines allowcutting across the divisions of old political structure. “Aprofession is a rigid segment, but also what happens beneath it,the connections, the attractions and repulsions, which do notcoincide with the segments, the forms of madness which aresecret but which nevertheless relate to the public authorities”(Deleuze & Parnet 1987,p125). Under these lines, there is anotherset of lines: lines of flight. Lines of flight, according to ToddMay have two roles to play in Deleuze and Guattari’s thought.They determine both molar lines and other types of molecularlines, and they offer other political adventures – and other politicaldangers (May 2005, p137).

“From the point of view of micropolitics, a society isdefined by its lines of flight, which are molecular.” (Deleuze &Guatarri 1987, p 216) Society is defined by a line of flight “whichis even more strange: as if something carried us away, across oursegments, but also across our thresholds, towards a destinationwhich is unknown, not foreseeable, not pre-existent” (Deleuze& Parnet 1987, p 125).It looks like an escape, a movement awayfrom something. This amounts to be saying that Deleuze’sontology is an ontology of lines of flight. Lines of flight are thepure differences that lie under the constituted identities ofsegmentary lines and the partially constituted identities ofmolecular lines. But they provide the stuff or raw that will beactualized into those identities.

A territorialized line is one that has a specific territoryor a code. It has been imprisoned in a particular identity. Territoryneeds to be identified. Statements need to be made. Identitiesneed to be constituted. People have to live somewhere. It only

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becomes the enemy when we resist deterritorialization.Deterritorialization is the chaos under and within the territories. Itis due to the lines of flight without which there would be neithercode nor change in that code. Lines of flight are the immanentmovement of deterritorialization that at once permits there to be aterritory and destabilizes the territorial character of any territory.“A Marxist can be quickly recognized when he says that a societycontradicts itself, is defined by its contradictions, and in particularby its class contradictions. We would rather say that, in a society,everything flees and that a society is defined by its lines of flightwhich affect masses of all kinds (here again, “mass” is a molecularnotion). A society . . . is defined first by its points ofdeterritorialization, its fluxes of deterritorialization. (Deleuze &Parnet 1987, p 135).

It is not that there are first deterritorialized lines of flightand later settled territories which would subsequently bedeterritorialised. There are always both of them at the same time:“the nomads do not precede the sedentaries; rather, nomadism isa movement, a becoming that affects sedentaries, just assedentarization is a stoppage that settles the nomads.”(Deleuze& Guatarri 1987,p430)

The primacy of lines of flight is nothing but materialwhether territorialised or deterritorialized. It is the primacy of linesof flight that provides the machinic character to Deleuze’s politicalthought. These lines of flight are creative and productive. Linesof flight constitute our living together, a material that forms andreforms itself in our living. Lines of flight along with molecularand segmentary lines are the stuff of our being and the properfocus of political thought. “In any case, the three lines areimmanent, caught up in one another. We have as many tangledlines as a hand. We are complicated in a different way from a



hand. What we call by different names – schizoanalysis, micro-politics,pragmatics, diagrammatism, rhizomatics, cartography – has no otherobject than the study of these lines, in groups or in individuals (Deleuze& Parnet 1987, p 125).

Deleuze does not view the state as a referee or a mediator ofthe interests of individual. The state, according to Deleuze & Guatarri,creates resonances. “The State . . . is a phenomenon of intraconsistency.It makes points resonate together, points that are not necessarilyalready town poles but very diverse points of order, geographic, ethnic,linguistic, moral, economic, technological particularities. (Deleuze andGuattari 1987, p. 433.).To create the resonance is to depend onsomething that precedes one. The state is parasitic and dependablefor its existence. The state is parasitic on lines of flight, molar lines andmolecular lines. It draws from the molar lines its nourishment. Deleuze& Guatarri view a state that resonates molar lines. Since these lineshave identities and orders. Not only that but also there are abstractmachines. Discipline, for instance, is an abstract machine. It bringstogether multiple and multilayered practices under a specific regime ofpower. Discipline overcodes the molar lines of a society. Overcodingis the taking of multiple elements of power to pull them together into aparticular arrangement that is then applied on large segments of society.

The state reinforces overcoding and allows spread it to allnooks and corners of society. If an abstract machine is built from theresonance of a variety of molar lines, the state allows develop andmaintain that abstract machine. “There are no sciences of the Statebut there are abstract machines which have relationships ofinterdependence with the State. That is why, on the line of rigid [thatis, molar] segmentarity, one must distinguish the devices of powerwhich code diverse segments, the abstract machine which overcodesthem and regulates their relationships and the apparatus of the Statewhich realizes this machine ( Deleuze & Parnet 1987, p 130)”. The statedoes not create abstract machines at all but merely realizes them.

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Deleuze and Guattari write “The State is not a pointtaking all the others upon itself, but a resonance chamber forthem all.” (Deleuze and Guattari, 1987, p. 224.) Without the state,according to them, it is hard to imagine how an abstract machinecould get hold of the variety of practices it does and could beinstalled in the midst of the complex relations of identity anddifference that Deleuze and Guattari think are the materialarrangements of any society. The state is a necessary feature ofa society that anticipates to bring order through the impositionof uniformity across its surface. The state, Deleuze and Guattaricontend, is essentially oppressive and a force for conformity.The state has enormous resources available in the service of arealization of the power of abstract machines and their oppressionand conformity. The state maintains discipline. It creates theconditions beneath which abstract machines can reinforce theidentity of molar lines and subject them to the same sorts ofroutines. The state is oppressive, powerful, and parasitic.

The state, according to Deleuze and Guatarri, has astrange relationship to capitalism. Their position is ambivalenton capitalism. They ,on the one hand, credit capitalism forremoving many past oppressions like overthrowing mechanismsof conformity in earlier European history. On the other hand,they hold, capitalism creates its own damages. As Deleuze andGuattari put it, “the old “codes” that have ruled us have beenswept away by capitalism. They have been replaced instead byan “axiomatic.” The difference between an axiomatic and thecodes it has replaced is described by Deleuze and Guattari thisway: the axiomatic deals directly with purely functional elementsand relations whose nature is not specified, and which areimmediately realized in highly varied domains simultaneously;codes, on the other hand, are relative to those domains andexpress specific relations between qualified elements that cannotbe subsumed by a higher formal unity (overcoding) except bytranscendence and in an indirect fashion”(Deleuze & Guattari1987, p 454).

Codes are regulatory concrete principles that regulateparticular people’s relationships with other specific people. An



axiomatic is more abstract that regulates, but not throughspecific rules and not by means of specific relationships.Present day laborers in a capitalist economy are in a verydifferent situation. Laborers can move as they wish providedthey can afford it. This does not mean that they are free andliberated. Capitalism has its own specific ways of regulatingbehavior and interaction. The most prominent among theseways is the dominance of exchange value. Exchange valuefunctions as an axiomatic rather than as a code. It regulatesnot by setting rules between specific people or among people.The axiomatic is a functional regulator of relationships amongmultiple people and things and their relationship.

This is not, in Deleuze and Guattari’s view, an entirelybad thing. Capitalism deterritorializes and decodes, clearingthe ground for new ways of creating lives: “capitalism and itsbreak are defined not solely by decoded flows, but by thegeneralized decoding of flows, the new massivedeterritorialization, the conjunction of deterritorializedflows.”(Deleuze & Guattari 1977,p224). Todd May explicatesthat by “deterritorializing previous territorialities, lines of flightare freed to travel to new territories, intersect with other linesof flight, engage in new experiments (May 2005,p145).According to Deleuze & Guattari Oedipus complex is one wayof stifling flight. Oedipus is an abstract machine that operatesunder capitalism to imprison lines of flight and prevent themcreating new ways of living.

Desire is a line of flight which is capable of creatingnew ways of living. But if its energy is imprisoned by one wayor another, its creativity will be blocked. It will be put in theservice of the dominant order.In this particular case desireserves the axiomatic of capitalism. Oedipus turns desirestowards family. Lines of flight are captured, inhibited fromexploiting the deterritorialization that the emergence ofcapitalism affords. In that way, lines of flight can serve capitalrather than freed to pursue other directions. Capitalismmaintains its hegemony over the unpredictable adventuresthat might follow the deterritorialization it has helped foster.

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A Thousand Plateaus, the second volume of Capitalismand Schizophrenia was published after eight years of Anti-Oedipus : the first volume of Capitalism and Schizophrenia,Oedipus is no longer a figure in their thought whereas the abstractmachine of discipline continues to be recognized as a powerfulmechanism binding lines of flight. Deleuze begins to questionnear the end of his life, whether discipline is still effective as anabstract machine. He appears to be suggesting that we havemoved from a society of discipline to a society of control,characterized not by the confinement and regulation of bodiesbut by “ultra rapid forms of apparently free-floating control thatare taking over from the old disciplines at work within the timescales of closed systems” (Deleuze 1995, p. 178). The capitalistaxiomatic is directly exploitative. It does not require anintermediary. Deleuze and Guattari write “The four principal flowsthat torment the representatives of the world economy, or theaxiomatic, are the flow of matter-energy, the flow of population,the flow of flood, and the urban flow. The situation seemsinextricable because the axiomatic never ceases to create all ofthese problems, while at the same time its axioms, even multiplied,deny it the means of resolving them” (for example, the circulationand distribution that would make it possible to feed the world)(Deleuze and Guattari, 1987, p. 468). All flows are submitted tothe regime of exchange value, capitalism reterritorializes the linesof flight it has liberated from previous codes. An axiomatic bindsall flows and keep them within the orbit of capitalism withoutrequiring an outside force to intervene.

The states, by implication, have more limited role than itit was in earlier regimes.”What characterizes our situation is bothbeyond and on this side of the state.”(Deleuze & Parnet 1987,p146). Perhaps the development of capitalism does not requirethe support of the state to the degree it did in the nineteenthcentury and in mid of the twentieth century. This does not followthat states will wither away. The state does overcode society inthe service of capitalism. The state is not only in the service ofcapitalism; its overcoding touches on aspects of our lives thatare irreducible to economics. And capitalism is not purelyexploitative. The axiomatic that binds us to the market also sets



us free from the oppression of traditional social codes. Theobjective before Deleuze is to mobilize the deterritorializationthat capitalism unleashes in the service of new ways of livingtogether.

d. Schizoids and Freedom

Deleuze has offered us an ontology that manifestsdifference. He has carried that ontology into the realm of politics.In Anti-Oedipus, a distinction is drawn between subject groupsand subjected groups. Both of them involve an investment ofdesire. However they involve very different investments. Eachinvestment is collective; every fantasy is a group fantasy. Thisreflects a position of reality. But the two kinds of investment arefundamentally different, one bears upon the molar structuresthat subordinate the molecules, whereas the other bears uponthe molecular multiplicities that subordinate the structured crowdphenomena. “One is a subjected group investment . . . whichsocially and psychically represses the desire of persons; theother, a subject-group investment in the transverse multiplicitiesthat convey desire as a molecular phenomenon” .(Deleuze andGuattari, 1977, p. 280).

Subjected groups act and think in terms of molar lines.Their world comprises solely of actualities, which has nothingto do with virtualities that might be actualized. This is pureNietzschean reactivity. But what Deleuze held about philosophy.“It is a question of someone – if only one – with the necessarymodesty not managing to know what everybody knows.” Thisis where subject groups begin. With subject groups everyinvestment is collective. We are never alone, whether in ourmolar lines or in our molecular lines. Some among us manage tobe ignorant what the rest of us know. Subject groups are ignorantabout what others know. They do not yet know what their bodiesare capable of. It is unmasking new possibilities, new formationsand creating new connections. “Every struggle is a function ofall these undecidable propositions and constructs revolutionaryconnections in opposition to the conjugations of the axiomatic”(Deleuze and Guattari 1987, p473). Machines, by their very nature,

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connect. They tend to create new connections with othermachines. They seek to actualize new moments of the virtual.

Deleuze draws a contrast between nomads withsedentaries. Deleuze sides with the nomads, with those whoserestlessness sends them on strange adventures. Nomads areignorant. They seek to connect infinitely. They tend to palpatethe virtual in their work in order to unveil what can be connectedto it. Minorities are nomadic adventures. To become minor is toconnect with neglected movements in the social body. Theseconnections may be parental, culinary, scientific, linguistic,vocational, artistic, or literary. To become minor is not to acceptand side with a particular identity. Moreover it has nothing to dowith how many are in the group compared with the number in themajority. Becoming-woman is a becoming minor, irrespective ofthe fact if there are more women than men. To become minor is tocome out of chains of the majority identity in order to palpate newpossibilities, new ways of becoming that are no longer bound tothe dominant molar lines and their abstract machines. It is tounlock the virtual whose vision is quite often obscured by themolar lines of the majority. It is to break with identity, which isalways the identity of the majority, in favor of difference as yet tobe actualized. As Deleuze and Guattari say of Kafka, “A minorliterature doesn’t come from a minor language; it is rather thatwhich a minority constructs within a major language.”(Deleuze &Guatarri 1986, p. 16).May elaborates that “Nomadism andminorities are not the activities solely of particular individualsbanding together. They may be that, but they do not have to be.Nomadism and becoming-minor can happen across groups oreven at a pre-individual level” (May 2005, p151).

Deleuze and Guattari point to the ways of conceivingand acting upon our experience in the following quote. “This ishow it should be done: Lodge yourself on a stratum, experimentwith the opportunities it offers, find an advantageous place on it,find potential movements of deterritorialization, possible lines offlight, experience them, produce flow conjunctions here and there,try out continuums of intensities segment by segment, have asmall plot of new land at all times. . . . Connect, conjugate, continue:



a whole “diagram,” as opposed to still signifying and subjectiveprograms (Deleuze and Guattari, 1987, p. 161). What we arerequired to do now is think and act by means of them.

We do not get any general prescription. There are onlyanalyses and experiments in a world that provides us noguarantees, because world is always other and more than wecan imagine. We roll the dice; we never know for sure what willfall back. “Everything is played in uncertain games. . . . Thequestion of the future of the revolution is a bad questionbecause, in so far as it is asked, there are so many people who donot become revolutionaries, and this is exactly why it is done, toimpede the question of the revolutionary-becoming of people,at every level, in every place “ (Deleuze and Parnet, 1987 p. 147).

This allows Deleuze & Guattari to the kind of personalitytype that has been notoriously resistant FreudianPsychoanalysis-schizophrenic type- in order to show the natureof pre-oedipal, instinctual energies sort of human being. “Whatthe schizophrenic experiences, both as an individual and as amember of human species, is not at all any one aspect of nature,but nature as a process of production” (Deleuze & Guattari 1977,p3). The schizo has his own system of co-ordinates for sustaininghimself at this disposal, because, first of all, he has at his disposalhis very own recoding code, which does not coincide with thesocial code, or coincides with it only in order to parody it. Thecode of delirium or of desire proves to have an extraordinaryfluidity. It might be said that the schizophrenic passes from onecode to the other, that he deliberately scrambles all the codes, byquickly shifting from one to another, according to the questionsasked him, never giving the same explanation from one day tothe next, never invoking the same geneology, never recordingthe same event in the same way (Deleuze & Guattari 1977, p15).

Schizophrenia, according to Deleuze & Guattari, refersto deterritorialized desire which is generated by capitalism andacknowledged by Deleuzean philosophy of difference. “Theysee schizophrenia in this sense not as an illness to be cured butas a value to be nurtured (Gutting 2001, p340). Gutting points

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out that the problem is that capitalism restricts schizophrenicdesire to either its economized or its oedipal form. He furthernotes that those who try to live out non-economised desires inthe public realm are violently repressed and lead the lives ofterror and frustration that define what is generally termed“schizophrenia”. The horror of such lives is real, but it is theproduct of the capitalist system, not an inevitable feature ofdeterritorialized desire. Deleuze & Guattari, according to Gutting,offer a “schizoanalysis” of capitalism designed to expose andhelp eliminate the arbitrariness of its constraints, thereby freeingthe creative power of “schizophrenia” (Gutting 2001, p340).

e. Freedom and Becoming

French thought during the twentieth century has beenconcerned with individual freedom. “Individual freedom as aconcrete, lived reality has maintained the distinctiveness ofFrench philosophy (Gutting 2001, p380). The post-structuralistsrejected the very philosophical tool with which existentialphenomenology had explicated freedom. They questionedexistential phenomenological descriptive and ontologicalmethods. Similarly they challenged their central commitment toindividual freedom. Gutting writes that the “very rejectionexpressed their commitment to individual freedom. The ethicaland political goals of Deleuze flow from pre-philosophicalcommitment to individual freedom” (Gutting 2001, p388). Deleuze’smain objective is to unveil social conditions and attitudes thatresists liberation. He is attempting to combat fascism, as Foucaultwrites “Not only historical fascism but also the fascism in us all,in our heads and in our everyday behavior, the fascism that causesus to love power to desire the very thing that dominates andexploits us” (Deleuze and Guattari 1977, p xiv-xv). Fascism is aforce that terrorizes ,rigidifies, oppresses, robs one of one’spersonal territory, and silences. Deleuze conceives of “theprevailing social system as fascist to the extent that it is repressiveof desire. As things stand, every society is fundamentallyrepressive” (Wicks 2003, p275).



Few post structuralists have been engaged indeveloping a positive philosophical understanding of freedom.They remain satisfied with a naпve, pre-reflective commitmentto the unquestionable status of transgression, novelty, pluralityand difference as absolute ethical ideals. There is no inclinationto raise difficult questions about the roots and limits of humanfreedom. The chief task is to expose and overcome all obstaclesto its unrestricted expansion. So “Deleuze’s ontology endorsesthis view unquestionably without stopping to ask just what itwould consist of and why it is so important” (Gutting 2001,p389).He further elaborates “Post-structuralism is an interlude ratherthan a decisive turning in the history of French philosophy. Ithas been important for its questioning of limits and especiallyfor its rejection of traditional philosophical claims to ultimatetruth. But once its critiques are acknowledged, it is easy to seethat it remains the fundamental twentieth century project ofarticulating the individual as a locus of freedom” (Gutting 2001,p390).

Baudrillard stated in 1996 that: the great philosophicalquestion used to be “why is there something rather thannothing?” Today, according to him, the real question is “why isthere nothing rather than something?”(Baudrillard 1996, p2). Theresurfacing of existential worry shows the limitations of the questfor freedom. A quest that “one could call a “negative” quest tobe “free from” oppressive forces” (Wicks 2003, p297). Wicksnotes that Deleuze wanted freedom from instinctually restrictiveFreudian and Oedipal family constellations, and from too tightlyorganized, fascistically terrorizing social structures. Hence hewas engaged in the negative project of freedom.

All the quests for freedom are aimed to make the worlda better place in which to be with oneself and with others in a selfrespecting way. This displays the biasedness of the inquiry ratherthan neutrality of it. Robert Wicks remarks that this quest is allfundamentally reactive to the given, foreground standing,oppressive situations, despite the contents of some of theirvisionary responses. He writes, “Freedom from” somedominating species of oppression is a weaker kind of freedom

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than the “freedom to” exert one self in a direction that is definedmore autonomously from a position of inner strength and solidself-determination (Wicks 2003, p297). Hence Deleuzean projectof schizophrenic world is negative and weak.

f. Critical Evaluation

Deleuze had fantastic interpretive styles of thought. Hisvision of society was strong and unique. He developed his modelof rhizomatic interaction at length. Wicks argues, however, thatDeleuze may have fallen victim to his own intense vision. “Thereare reasons to believe that society is not uniformly structured likethe rhizome and people are not simply machine like aggregates.There are recognizable dimensions of systematicity, rationalityand organic unity in our daily experience (Wicks 2003,p276).

He is not the only French thinker of twentieth centurysubject to this kind of criticism. Deleuze takes the mechanical,alienated aspect of life to the extreme, and develops upon it arevolution friendly and liberation-aimed position. Wicks holdsthat “What is paradoxical about Deleuze’s antagonism to rigidthought structures, is the way his world of rhizome like structuresis itself offered with a strong dose of dogmatic rigidity in itsdisregard for the systematic and organic aspects of experience”(Wicks 2003, p 277).

The Deleuzean quest for liberation, Wicks raises thequestion, conflicts with his model of society as an assemblage ofdesiring-machines. On Deleuze’s model, he further explicates theproblem, the self is decentered, which is to say that it is difficultto say “who” it is that is the subject of liberation and freedomfrom paranoia, and fascism which is so pointedly sought.Deleuzean ontology disintegrates the subject of experience intoa schizophrenic and depersonalized set of “desiring-machines”.His picture of human being thus tends to render the notion ofpersonal freedom almost absurd. This leads to another problemwhether the quest for freedom and liberation is consistent withthose theories that advance the idea of the decentered self.Deleuze highlights this problem in a clear-cut way, because he is



straight forward about his conception of the human being asaggregate and as an essentially disintegrated and a nonsystematic kind of being. To be sure, one can romantically linkthe schizophrenic tendency toward shifting, movement, creativityand individuality with the idea of jazz improvisation, but thereremains the question whether one can say meaningfully thatanyone in particular is doing the improvising, since the sense ofintegrated personality has been so weakened and almost lost.

Deleuzean analysis and assessment leads us into a triplebind where, if we do not believe self deceptively that we areorganically unified and integrated personalities, we are left togravitate into either paranoid fascism, or schizophrenic insanity.Wicks notes that whatever path we choose within the theoriesinternal options, we end up at a dead end, and thereby in thevery state of mental frustration that has been known to generateschizophrenic states. He concludes “Deleuze’s theory cantherefore be seen as having itself been designed to drive usmad, so that we can experience what he regards as the truth”(Wicks 2003, p278).

References

Baudrillard, Jean, The Perfect Crime, trans. Chris Turner,VersoLondon/New York,1996.Colebrook,clair, Gilles Deleuze, Routledge,2002.Colebrook,clair, Understanding Deleuze, Routledge,2002.Deleuze, Gilles. Bergsonism, tr. Hugh Tomlinson and BarbaraHabberjam. New York: Zone Books, 1988 (first published 1966).———.”La conception de la diff´erence chez Bergson,” Les´etudes bergsoniennes,vol. 4, 1956, p. 88.———.Difference and Repetition, tr. Paul Patton. New York:Columbia University Press, 1994 (first published 1968).———.Empiricism and Subjectivity , tr. ConstantinBoundas.NewYork: Columbia University Press, 1991.———. Expressionism in Philosophy: Spinoza, tr. MartinJoughin. New York: Zone Press, 1990 (first published 1968).———. Foucault, tr. Sean Hand. Minneapolis: University ofMinnesota Press,1988 (first published 1986).

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———. “Immanence: A Life,” in Pure Immanence: Essays on aLife, tr.Anne Boyman. New York: Zone Press, 2001 (essay firstpublished 1995), pp. 25–33.———. Kant’s Critical Philosophy: The Doctrine of theFaculties, tr. Hugh Tomlinson. Minneapolis: University ofMinnesota Press, 1985 (first published 1963).———. The Logic of Sense, tr. Mark Lester and Charles Stivale.New York: Columbia University Press, 1990 (first published 1969).———.Nietzsche and Philosophy, tr. Hugh Tomlinson. New York:Columbia University Press, 1983 (first published 1962).———.”Nomad Thought,” tr. David Allison. From The NewNietzsche: Contemporary Styles of Interpretation. New York:Dell, 1977 (essay first published 1973), pp. 142–9.———. “Postscript on Societies of Control,” in Negotiations1972–1990, tr.Martin Joughin. New York: Columbia UniversityPress, 1995.———.Proust and Signs, tr. Richard Howard. New York: GeorgeBraziller, 1972.Deleuze, Gilles, and Guattari, Felix. Anti-Oedipus:Capitalism and Schizophrenia,tr. Robert Hurley, Mark Seem, andHelen R. Lane. New York: Viking Press, 1977 (first published 1972).———. Kafka: Toward a Minor Literature, tr. Dana Polan.Minneapolis: University of Minnesota Press, 1986 (first published1975).———. A Thousand Plateaus, tr. Brian Massumi. Minneapolis:University of Minnesota Press, 1987 (first published 1980).———. What Is Philosophy? tr. Hugh Tomlinson and GrahamBurchell. New York: Columbia University Press, 1994 (firstpublished 1991). Deleuze, Gilles, and Parnet, Claire. Dialogues, tr.Hugh Tomlinson and Barbara Habberjam. New York: ColumbiaUniversity Press, 1987 (first published 1977).Gutting,Garry, French Philosophy in the twentieth Century,Cambridge University Press, 2001.May, Todd, Gilles Deleuze, Cambridge University Press, 2005.Wicks, Robert, Modern French Philosophy, One worldPublications , Oxford, 2003


Research Identifying Active Factors to Address the Excess Flash Problem

IDENTIFYING ACTIVEFACTORS TO ADDRESS THE

EXCESS FLASH PROBLEM INPLASTIC INJECTIONMOLDING PROCESS

Ejaz AhmedMuhammad Wajahat Ali

College of Computer Science and Information SystemsInstitute of Business Management, Karachi

Abstract

A pivotal paradigm in injection molding is to produce the moldedparts in good quality. Attributes like mechanical characteristics,dimensional conformity, and appearance defines the quality ofmolded parts. The quality is affected by many factors, the mostimportant of which is determination of process parameters forinjection molding. A most typical situation may involve one dozenof process parameters in context of injection molding. All ofthem are potent enough to affect the quality of molded parts.The primary objective of this paper is to implement Design ofExperiment (DoE) in order to envisage causes of defectsassociated with injection molding processes during early phasesof designing. Common quality problems that come from aninjection molding process include but are not limited to void,surface blemish, excessive flash, short shot, sink mark, sprucesticking, bubbles and flow marks. Multiple sources, includingpreprocessing treatment of injection molding process, theselection of injection molding machine, experience of machineoperator and setting of the injection molding process parametersare usually responsible for focusing quality problem. In thisstudy, DoE was used to determine an optimal setting of machineprocess parameters, in a real life situation, to reduce the variationconsequently resulting in a quality product. Taguchi orthogonalarray was used and optimal combination was determined.

Key Words: Factorial Experiments, Fractional Factorials, TaguchiArrays, Orthogonal Arrays, Molded Parts, Plastic Injection.JEL Classification: C61; C91; C93; L21; Q55

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1. Introduction

Design of experiment (DoE) is a well established statisticalfield with solid theoretical backup and multiple practicalapplications. Literature is full of DoE applications in versatile fields(see Box, et. al. 1979, Montgomery, 2007, for example). Moldedparts are a common commodity with very sophisticated andcomplicated structures and recently researchers have discussedproblems faced by manufacturers of molding parts. Statistical toolsespecially DoE has received much attention to address suchproblems. In this article we discuss a similar problem where extraflash in a molded part was identified as a major problem and weused a L16 orthogonal array to determine the optimum factor levelcombination. Factors responsible for extra flash were identifiedafter extensive brainstorming sessions. A properly plannedexperiment was used and the amount of extra flash at each factor-level combination was measured in extra flash was observed withoptimal factor-level combination. In the next sections we willdiscuss some past studies that have addressed similar problems,details of the experimental run, analysis and results are reportedat the end.

2. Molding Part Problems

In this competitive environment companies strive hardto improve continuously their performances with an ultimate goalof a satisfied customer. Proper use of Deming’s Plan-Do-Check-Act, PDCA cycle (see for historical background, Moen andNorman, 2010) can help companies to achieve targetedperformances on a regular basis. DoE is an established branch ofstatistics that can be used effectively to apply PDCA cycle. Linand Chananda (2003) used a designed experiment to identifyfactors creating excessive flash on an injection molding product.They used a 42 factorial experiment and identified three mainfactors and two 2-factor interactions significantly responsible forthe excessive flash on their college mascot. Various authors haveused DoE in different situations and came with fruitful results.Alagomurthi, Palaniradja and Soundrarajan (2006) used a Taguchi



L4 array and traditional 32 designed experiment (12 runs in all)and studied the effect of surface roughness in a grinding process.Gijo and Ravindran (2008) used DoE to identify optimumcombination of water and plasticizer to develop cement with betterworkability and strength. Since Gijo and Ravindran (2008) weremeasuring optimum combination to maximize workability andstrength in addition to ANOVA they used goal programmingtechnique.

A local company manufacturing parts of motorcyclescontacted the authors showing concern on multiple problems theywere facing with the finished product- the headlight of CD 70motorcycle of a specific brand. Prior to the formal study we surveyeddifferent molding manufacturers at two major industrial sites ofKarachi namely, SITE (Sindh Industrial Trading Estate) and KATI(Korangi Association of Trade and Industry). This survey revealedthat an abundance of the managers rely on experience of engineersand machine operators while many of them apply trial and errorprocedures to find optimum setting of parameters. Setting theseparameters is a highly skilled job and is based on the skilledoperator’s knowledge and intuitive sense acquired through longterm experience rather than through a theoretical and analyticalapproach. Our study also emphasizes on the importance ofscientific approaches.

3. Purpose of the Study

Huge research work is available in literature in the domainof parameter setting for injection molding. The major objective ofthis research in injection molding is to produce the molded partscarrying good quality. Quality performances are affected bymultiple factors and determination of process parameters forinjection molding is one of the foremost objectives of our study.For instance, increasing both the holding time and holding pressuremay reduce the sink marks, while decreasing the injection speedmay eliminate the flow marks for the case of plastic polymer.

Commonly process parameters of injection molding aredetermined by experienced molding personnel. Setting these

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parameters is a highly skilled job and is based on the operator’sknowledge and experience rather than the theoretical approach.The corresponding tested molding parameters with intuitiveadjustments and modifications are used at the start for a newmolding application. Unfortunately, the growing demand inindustry for expert molding personnel is increasing and moldingpersonnel need many years to become experts. In a competitiveenvironment the trial and error approach is very expensive andtime taking and can’t be recommended.

Traditional one-factor-at-a-time (OFAT) technique isused where one process parameter is varied at a time until thequality of the molded part is found satisfactory. This methodignores the effect of injections among the combinations ofparameters. In fact, in injection molding process parameters areinteracting with each other. Factorial experiments play a vital roleto obtain the ‘best’ combination (interaction) of parameters ininjection molding process.

Thus the Design of Experiment approach requires expertknowledge of both Statistics and Process Engineering whileplanning, executing or analyzing experiments.

4. Headlight Lens Problem

To discuss the problem in detail, the authors met a teamcomprising of floor shop workers and engineers of the companymultiple times. It was told that excessive flash among void surfaceblemish, short shot, sink mark, bubbles and flow marks for thisparticular product (highlight lens of CD70 motorcycle) was themost acute and frequent problem. Figure 1 shows the productthat we considered for this study. Excessive flash was causingwastages of material, time, delayed supplies, and loss of goodwilland trust. Brainstorming sessions were conducted and it wasagreed that four factors namely, injection pressure, injection speed,melting temperature and back pressure were probably the maincauses of excessive flash. Table 1 displays factors and levelsselected for this study after detailed discussions with the teammembers.



Table 1 Process Parameters (Factors) and their settings (Levels)

Some of the selected parts with excessive flash areshown in Figure 2 for illustration. Removal of flash is a tediousjob and results in wastages of resources, time, material and humanefforts. Figure 3 is an illustration of how traditionally excessiveflash is removed from the plastic molded part.

Figure 1 Reflector CD 70 Headlight Lens- Our selected Product

Process Parameters Low Level (-) High Level (+) Injection Pressure 290 /kg cm 2140 /kg cm Injection Speed 250 /kg cm 260 /kg cm Barrel temperature 0190 C 0220 C Back Pressure 220 /kg cm 250 /kg cm

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Figure 2 Selected Parts with excessive flash

Figure 3 Removal of Excessive Flash



Figure 4 Screw Type Injection Molding Machine JetMaster

5. Experimental Protocol And Data Collection

To accommodate the above mentioned factors (Table1) complete experiment was planned with three replicates.Orthogonal array, as shown in Table 2, of 16-run was used toconduct the proposed experiment. Experiments were run in arandom order to minimize bias. Each experimental run wasreplicated three times. Vernier caliper and centimeter scale wereused to measure excessive flash (in millimeters) around eachheadlight lamp. Molding Machine Jet Master (see Figure 4) wasused to perform experiments as described in Table 2. At the endof each experimental run excessive flash attached with eachmolded part, so produced, was measured and is reported in Table2. To maintain discipline and to minimize bias proper times wereallowed between each run for the machine to settle down.MINITAB®, a powerful statistical software was used foranalyzing the collected data.

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6. Analysis

Analysis of Variance (ANOVA) is an establishedtechnique to answer two major questions in a study, How muchvariation is caused and what are the causes (and respectivecontribution) of variation? This finding (similar to the Pareto 80/20 principle) states that there are a vital few sources and trivialmany and our goal is to identify ‘vital few’ causing major problemsand to remove those to reduce variation significantly.

The fitted model with interactions, given in Table 4,clearly indicates that main effects Injection Speed and BackPressure are highly significant (P value < 0.005) while BarrelTemperature is moderately significant (P value < 0.10) whereasinteraction Injection Speed *Barrel Temperature is significant (Pvalue < 0.05). It has been observed that if barrel temperature isreduced to 1900C from 2200C then process may face a flow markproblem. Normal probability plot as shown in Figure 5 supportsthis conclusion and we observe a significant deviation from lineartrend of the above mentioned two main effects and one two-factor interaction. Residuals behave very well and support theselection of model. We conclude, using the outcome of Figure 6,that residuals are not deviating from the assumption of normality(residuals fall on the linear line of normal probability plot),distributed independently (there is no specific pattern observedin Figure 6) and do not face the heteroscedasticity problem. Themodel is, therefore, satisfying basic assumptions and may berecommended for use.

The main effect plot (Figure 7) shows the insignificanteffect on excess flash by changing the levels of Injection Pressure.Other three main effects Injection Speed, Back Pressure and BarrelTemperature indicate a higher excessive flash on plastic moldedparts when these factors are assigned higher settings (levels).Since our goal is to develop plastic molded parts with minimumflash the recommended settings for the four factors are given inTable 5. These recommendations were communicated to themanufacturing company with a request to produce the next fewlots with these settings. The company informed us about thepositive results they observed. A plastic molded part producedunder the recommended factor level combinations is shown inFigure 8 for illustration.



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Figure 5 Normal Probability Plot of Effects of Model fitted inTable 4

Figure 6 Residual Plots



Figure 7 Main Effect Plot Identifying Optimal Factor Settings

Table 5 Recommended Factor leve combination and averageecess flash noted

Figure 8 Molded part produced under suggestedcombinations- showing no extra flash

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9. Conclusion

Plastic molded parts are quite common and areextensively in use. They are used in various situations such as ,household, laboratories, automobiles, for example. In this articlewe discussed a very acute problem called the ‘excessive flashproblem’. When melted plastic is placed in a predefined structureextreme care is required. Our main focus was to study factorsmost responsible for generating excessive flash on the head lightof a specific brand of motorcycle. L16 orthogonal array was appliedand four factors were selected after extensive brainstormingsessions with technical people. Our analysis identified a vital fewfactors and determined optimal factor level combination. Theoptimal factor-level combination was conveyed to themanufacturer who has communicated a significant reduction inmolded parts with excessive flash.

Acknowledgement

The authors would like to thank an anonymous refereefor valuable comments that improved the presentation of thearticle.

References

Alagumurthi, N., Palaniradja, K . and Soundararajan, V.Optimization of Grinding Process through design of Experiment(DOE) – A comparative study. Materials and ManufacturingProcess, 2006, 19-21.

Azeredo, M.B., Da Silva, S. and Rekab, K. Improve Molded PartQuality. Quality Progress, July 2003, 72-76.

Banda, H. Optimization an injection Molding Process. QualityProgress, ASQ. August, 2007, 30-37.

Ben Cheikh, A. R., Campos A. R. and Cunha, A. M. InjectionMolded Composites of Short Alpha Fibers and BiodegradableBlend. Polymer Composites, 2006, 341-348.



John T., Grinde H., and Rostad, H. The use of a 12-run Plackett-Burman Design in the Injection Molding of a Technical PlasticComponent. Quality and Reliability Engineering International,2006, Vol: 22, 651-657.

Lin, T. and Chananda, B. Quality Improvement of an Injection-Molded Product Using Design of Experiment, A case study.Quality Engineering. 2003-04. Vol, 16, No1, 99-104.

Cha. D.H., Kim, H.J., Lee, J. K., Kim. H. U., Kim, S. S. , and Kim,J. H. A Study Of Mold Grinding and Pressing Condition in theMolding of Aspheric Glass Lenses for Camera Phone Module.Materials and Manufacturing Processes. August, 2008,23:(7),683-689.

Gijo, E.V., Ravindran, G. Quality in the Construction Industry:An application of DOE with Goal Programming. Total QualityManagement and Business Excellence. May 2009, 37-41.

Monk, S.L., Kwong C.K. and Lau, W. S., Review of Research inthe Determination of Process Parameters for Plastic Injectionmolding. Advances in Polymer Technology.1999. Vol. 18 (3), 225-236.

Yang, Y.K., Optimization of Injection-Molding Process of ShortGlass Fiber and Polytetrafluoroethylene ReinforcedPolycarbonate Composites via Design of Experiments Methods:A case study. Materials and manufacturing processes. October2009.Vol:21, 915-921.

Yusoff, S. M., Rohani , J.M., Hamid, W.H. and Ramly, E. Y. APlastic Injection Molding Process Characterization usingExperimental Design Technique, A Case Study. JournalTechnology, December, 2004 Vol:41(A):1-16.

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Excessive Flash around molded part Run order

Injection pressure

Injection Speed

Barrel Temperature

Back Pressure

X1 mm2 X2 mm2 X3 mm2

1 - - - - 1.5 0 1.4 2 - + - - 1.0 1.2 2.0 3 - - + - 0 1.0 1.2 4 + - - - 1.6 1.0 1.0 5 + + - - 1.8 1.2 1.0 6 + - + - 1.6 1.0 0 7 + + + - 1.8 2.0 1.0 8 - + + - 1.0 2.4 2.0 9 - - - + 1.8 1.6 1.2 10 - + - + 1.2 2.4 2.0 11 - - + + 1.8 1.6 1.2 12 + - - + 1.2 1.4 1.2 13 + + - + 2.0 1.2 2.0 14 + - + + 2.0 1.2 1.2 15 + + + + 4.0 3.6 3 16 - + + + 2.4 2.0 1.8

Table 2 L16 Orthogonal Array used for experimentation andrecorded observations

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Table 3 Average excessive flash as observed under each experimental run

Run order

Injection Pressure

Injection Speed

Barrel Temperature

Back Pressure

Average Excessive Flash around molded part mm2

1 - - - - 0.96 2 - + - - 0.80 3 - - + - 0.73 4 + - - - 1.2 5 + + - - 1.33 6 + - + - 0.86 7 + + + - 1.6 8 - + + - 1.8 9 - - - + 1.26 10 - + - + 1.86 11 - - + + 1.53 12 + - - + 1.26 13 + + - + 1.73 14 + - + + 1.46 15 + + + + 3.53 16 - + + + 2.06



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The Islamic Calendar Effect in Karachi Stock Market

562

THE ISLAMIC CALENDAREFFECT ON KARACHI

STOCK MARKET*Khalid Mustafa

Department of EconomicsUniversity of Karachi, Karachi

Abstract

This paper attempts to investigate the effect of Islamic monthson Karachi Stock Market using the daily data for the period ofDecember 1991 to December 2010 with the application of OLStechnique. The conditional and unconditional risk analyses areused to investigate the Islamic calendar effect on the KarachiStock Market. In addition, risk is allowed to vary across themonth of Islamic calendar. Five models are used starting fromsimple model of Islamic calendar effect to conditional risk model.Different models produce different result. A Ramadan effect isfound common in all models. It indicates that there is Ramadaneffect in Karachi Stock market. However, it is also noted thatKarachi stock market is relatively high risky market during themonth of Ramadan.

Key Words: Conditional and Unconditional risk, Islamic Calendar,Ramadan Effect

JEL Classification: C 32, G 12

Research

* This Paper has been presented at the 8th International BusinessResearch Conference, on March 27-28, 2008 Crowne Plaza HotelDubai, UAE.


Research The Islamic Calendar Effect in Karachi Stock Market

1. Introduction:

Calendar anomalies are one of the feature of financialmarket, which is against the efficient market hypothesis. Manyresearchers investigate the calendar anomalies, which are basedon Gregorian calendar. However, different countries and societiesalso follow their own calendar, which are based on religion inaddition to Gregorian calendar. For example, Jewish society followHebrew calendar, which is strictly based on luni-solar, the Christensociety follows Gregorian calendar, which based on solar, Hinduand Chinese follow their own calendar. Muslim society followsthe Islamic calendar, which is based on a lunar calendar, referredas Hijri calendar1.

In these religious calendars, there are religious days andmonths, which these societies celebrate and observe e.g. Christensociety, celebrated Christmas days, Deepavali by Hindu society,and Vesk day by Buddhist. Like these religious days Muslimsociety also observe and celebrate the religious months likeRamadan and Ashura and days like Eid-ul-Fitr and Eid-ul-Azha.

Ramadan is considered as the Holy month in which mostof the time is spent on Salt-ul-Nafil, Recitation of Quran, andparticipation in social services. Moreover, in the last decade ofRamadan people sit in AAITAKAF, to search LAILA-TUL-QADAR.All days and nights are spent with religious activity as a proof oftheir affiliation to Allah i.e. fear of Allah. Some people also visit SaudiArabia to perform UMMARAH. Maximum efforts are undertaken toavoid sin and wrongdoing such as speculation and illegal practice.To honour people’s devotion to Allah, Muslim State gives relaxationin working hours.

Muslim society celebrates Eid-ul-Fitr after the end ofRamadan. People purchase new clothes, and decorate their houses.It is observed that food prices, prices of the cloths and prices ofothercommodities are increased during this month. The behavior1 This calendar contains twelve months that start with the appearanceof new moon. The average days in a lunar month contain only 29.53days that is why Islamic year is approximately eleven days shorter thanthe Gregorian year.

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of the people during this month ultimately has impact on thefinancial market trading activity. It decreases the volatility of stockmarket in volume and stock returns in Pakistan (Husain, 1998).This phenomenon is not observed in Pakistan’s financial marketonly it is also observed in Saudi Arabia stock market, Seyyed,Abraham and AlHajji(2005).

After celebration of Eid-ul-Fitar, the prices come down tonormal. In the month of Zil-Hajj (Dhil-Hijja), people slaughter cattlelike cow, camels’ and goat etc, to follow the Sunnat-e-Ibrahim.Some people go to Saudi Arabia to perform Hajj. It increases theconsumption of people, which reduces the purchasing powerhence saving depleted. Ashura come after Eid-ul-Azha, which isobserved as a mourning month. It implies that the expenditures ofPakistanis society are very high from Sha’ban to Muharram.

Due to such a peculiar change in these months ascompared to other months, it is interesting to examine the behaviorof trading activity under these situations. The purpose of thisstudy is to investigate the impact of Islamic month on stock returnswith and without risk factor. The rest of the paper is organized assuch that the second section describes the review of literature,econometric methodology and related issues are described insection three. The empirical findings and interpretation arepresented in section four. Section five contains the concludingremarks

2. Review of literature:

Though a lot of attention has been already given oncalendar anomalies but a little attention is given on the religiouscalendar effect on stock markets. For example, religious holidayseffect on S&P500 index and NYSE trading volumes Frieder andSubrahmanyam (2004). These holidays focused on the JewishHigh Holy Days of Rosh Hashanah and Yom Kippur and theChristian holy day of St. Patrick’s. They showed that returns arenegative after Yom Kippur (Solemn) however, positive after RoshHashanah (Joyful) and St. Patrick’s. They also reported that volumedeclined on Rosh Hashanah and Yom Kippur.



There has been given little attention to the Islamiccalendar effect. However, some studies are available on the impactof Ramadan on stock returns. Alper and Aruoba (2001) analyzevarious macroeconomic variables in Turkey, and show that theusual seasonal adjustment procedures based on fixed holidaysoften fail to remove all seasonality when the series are subject tomoving holidays like Ramadan. However, they do not find anysignificant Ramadan effect in Istanbul stock market. Moreover,Husain (1998) analyzed the Ramadan effect in Pakistani stockmarket and demonstrated that volatility is significantly lowerduring the weeks of Ramadan. He does not find any significantchanges in average returns during Ramadan. However, he doesnot compare the mean average return before and after Ramadan.Seyyed, Abraham, and Al-Hajji (2005) investigated the Ramadaneffect in Saudi Arabian stock market. They analyzed several sectorindices in the market and showed that volatility and trading activitydisappeared significantly during Ramadan. Their findings areidentical to Husain’s (1998) findings i.e. no significant change isfound in average returns during Ramadan did not look at thestock returns before and after Ramadan.

3. Econometric Methodology and Data

The methodology of Ariel (1987), Lakonishok and Smidt(1988), Jaffe and Westerfield (1989) are used to investigate theIslamic calendar effects. However, some amendment has beenproposed in this methodology. In this model the excess stock

returns tR are regressed on Muharram, Sha’ban, Ramadan,Shawwal, Dhil-Q’ada, Dhil-Hijja.

(1) 1665544332211 iiiiiiii DDDDDDR

Where D1i to D6i represent the dummy variables for Islamicmonth i.e. Muharram, Sha’ban Ramadan, Shawwal, Dhil-Q’ada,Dhil-Hijja2. The error term is assumed to be independent andidentically distributed with a zero mean and constant variance.

2 Other Islamic months are ignored due to less importance from tradingpoint of view.

(1)

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Equation (1) is the simplest test for Islamic calendar effects onstock market. Statistically insignificant estimated coefficients inequation (1) provide no evidence of Islamic month effects. Thereis no risk factor in this model. If risk factors3 are incorporated inthis model, daily returns could be higher or lower before andafter selected Islamic month because risk is higher or lower.Equation (2) explains turn of the Islamic month dummy variablesand a market risk factor (RF), calculated by the excess returns onall share price index basis.

(2) 2665544332211 iiiiiiiiii RFDDDDDDR

The risk factor is constant across the Islamic months inequation (2). This may be improved upon by adding slopeinteraction dummy variables that allow risk to vary across theselected Islamic months. After incorporating dummy variable inrisk factor the equation (2) become.

Equations (1) to (3) are unconditional risk models wheremarket risk is assumed to have a symmetric impact on emergingstock market returns. Another approach to examine for turn of theIslamic month effects is to use a conditional risk factor in equation(3). There may be an asymmetric relationship between stock returnsand market risk where positive market returns have a different impacton stock returns than do negative market returns (Fletcher (2000),Pettengill, Sundaram and Mathur (1995). Equation (4) shows theconditional risk factor that relates to stock returns to market risk.

(4) 4665544332211 iiiniipiiiiiii RFRFDDDDDDR

where ip is a positive risk factor and in is negative risk factor..

To incorporate the variability in return, the risk factor is incorporated.The reason is that the rate is high or low on different days which increaseor decrease risk. The increasing or decreasing the return show the higheror lower risk which is termed as conditional risk

(2)

(3) 3

6

1665544332211 iiii

iiiiiiii RFDDDDDDDR

(3)

(4)



where Dpi is a dummy variable takes on a value of 1 for positiverisk factor and 0 otherwise and Dni is a dummy variable takes on avalue of 1 for negative risk factor and 0 otherwise. Equation (5) isa conditional model relating excess stock returns to market returnsthat also includes slope interaction terms before and after selectedIslamic month’s variables. This model allows conditional risk tovary across the Islamic months.

The data used in this study is daily covered fromDecember 1991 December 2010. The data for stock prices aretaken from several issues of Daily Business Recorder. The returnis calculated by the difference of two successive log stock prices.Ordinary least square technique is used for estimation purpose.

4. Empirical Findings

The result of simple Islamic calendar effects is exhibitedin table 1. The result indicates that the average return in themonth of Ramadan is smaller and significant, which indicates thatthere is Ramadan effect in Karachi stock market. However, thepositive and insignificant average return is found in all selectedIslamic months. It implies that there is no after Ramadan effect inKarachi stock market. The reason is that during Eid theconsumption of people increases and they pay less attention toinvestment in stock market. After Ramadan and Eid, peopleconcentrate to investment in stock market, as a result tradingactivity increases in the month of Shawwal, Dhil-Q’ada in Karachistock market. Moreover, higher kurtosis and higher positiveskewness are found in the month of Shawwal. That indicates thatinvestors prefer to invest in this month.

(5) 5

6

1

6

1665544332211 i

inin

iipiipiiiiiti RFDnRFDDDDDDDR

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568

Table 1Islamic Calendar Effect

Table shows the result of regressions of Islamic calendars onstock returns with multiplicative dummies for each month withoutrisk factor

iiiiiiit DDDDDDR 1665544332211

Where tR is the return and D1 to D6 are dummy variables from

Sha’ban, Ramadan, Shawwal, Dhil-Q’ada, Dhil-Hijja, Muharram.

a Significant at 1%b Significant at 5%c Significant at 10 %

With risk factor the coefficients of the average meanreturn in the month of Ramadan is significant and increases.Table 2 shows the same. Some additional Islamic effects are pickedup i.e. the month of Dhil-Q’ada. Moreover, the coefficient of riskfactor is negative, significant and more than unity; it indicatesthat Karachi stock market is relatively high risky market duringselected Islamic month. However the average mean return in themonth of Ramadan, and Dhil-Q’ada is also positive and significant

Days Coefficient Standard Error

t-value p-value Skewness Kurtosis

Sha'ban -0.0003 0.0008 -0.3689 -0.3689 -1.181 53.8412 Ramadan 0.0028 0.0009 3.3847 3.3847 0.897 48.1211 Shawwal 0.0007 0.0009 0.3653 0.3653 4.6859 273.7111 Dhil-Q'ada 0.0011 0.0008 1.2744 1.2744 1.1109 73.744 Dhil-Hijja 0.0005 0.0009 0.4069 0.4069 -1.3683 65.8244 Muharram -0.0003 0.0008 -0.1332 -0.1332 -2.502 59.1797 F-values= 2.0837(p=0. 0.0644) R2 = 0.0023



TABLE 2Islamic Calendar Effect and Market Risk Factor

Table shows the result of regressions of Islamic calendars onstock returns with multiplicative dummies for each month withrisk factor

Where tR is the return, D1 to D6 are dummy variables from Sha’ban,

Ramadan, Shawwal, Dhil-Q’ada, Dhil-Hijja, Muharram and iiFRis the risk factor.

F-values=3.1612 (p=0.0042) R2 =0.0041


After adding dummy variable in risk factor with Islamicmonths only Ramadan and Muharram effect are found. Table 3shows the same. With and without risk factors the significantexcess return is found in the month of Ramadan and Muharramonly. Equations (4) and (5) are conditional risk factor models thatpoint out the asymmetric market effects. Equation (4) is theextension of equation (3) in which positive and negative returnsare added. The estimated result is given in table 4 which indicatesthe Ramadan and Muharram effect are present in Karachi stockmarket. However, the positive stock returns are statisticallysignificant.

Days Coefficient Standard Error t-value p-value Sha'ban 0.0002 0.0008 0.2895 0.7722 Ramadan 0.0034 0.0009 3.8762 0.0001 Shawwal 0.0009 0.0009 0.9654 0.3344 Dhil-Q'ada 0.0016 0.0009 1.8362 0.0664 Dhil-Hijja 0.0009 0.0009 0.943 0.3457 Muharram 0.0004 0.0009 0.4571 0.6476 Risk Factor -3.2672 1.1186 -2.9209 0.0035

2665544332211 iiiiiiiiii RFDDDDDDR

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570

Table 3Islamic Calendar Effect and Market Risk Factor with

Calendar Dummies

Table shows the result of regressions of Islamic calendars onstock returns with dummies for each month with risk factor Where

tR is the return, D1 to D6 are dummy variables from Sha’ban,

Ramadan, Shawwal, Dhil-Q’ada, Dhil-Hijja, Muharram and iiFRis the risk factor.

Days Coefficient Standard Error t-value p-value Sha'ban -0.01 0.0058 -1.7176 0.0859 Ramadan 0.02 0.0069 2.8999 0.0038 Shawwal 0.0007 0.0059 0.114 0.9093 Dhil-Q'ada 0.0046 0.0061 0.7514 0.4525 Dhil-Hijja -0.0078 0.0071 -1.1048 0.2693 Muharram -0.0128 0.0068 -1.886 0.0594

Market Risk Factor with Month Sha'ban -0.001 0.0006 -1.6823 0.0926 Ramadan 0.0018 0.0007 2.4909 0.0128 Shawwal 0 0.0006 0.0588 0.9531 Dhil-Q'ada 0.0004 0.0006 0.5794 0.5623 Dhil-Hijja -0.0009 0.0008 -1.1683 0.2427 Muharram -0.0014 0.0007 -1.8845 0.0596

3

5

1665544332211 i

iiiiiiiiiti RFDDDDDDDR

F-values=2.2484 (p=0.010) R2 =0.0539 a Significant at 1% b Significant at 5% c Significant at 10 %



The estimated results from equation (5) depicted in table5 which shows that some of the Islamic month have effects inKarachi stock market. Comparing across Tables 1 to 5, Ramadaneffect is found prominent in Karachi stock market, which indicatesthat there is Ramadan effect in Karachi stock market.

Table 4

Islamic Calendar Effect and Conditional Market Risk Factor

Table shows the result of regressions of Islamic calendars onstock returns with dummies for each month with risk fac

4665544332211 iniiipiiiiiti RFRFDDDDDDR

where tR is the return, D1 to D12 are dummy variables from Sha’ban,

Ramadan, Shawwal, Dhil-Q’ada, Dhil-Hijja, Muharram and FiR p

and FiRn is the positive and negative risk factor

Days Coefficient Standard Error t-value p-value Sha'ban -0.0001 0.0009 -0.1333 0.8939 Ramadan 0.0018 0.0010 1.7880 0.0740 Shawwal 0.0031 0.0010 1.0508 0.1023 Dhil-Q'ada 0.0031 0.0010 1.2067 0.1114 Dhil-Hijja 0.0001 0.0009 0.0539 0.9570 Muharram -0.0002 0.0009 -1.8211 0.0832 Risk Factor (+) -0.8043 0.0189 -42.3754 0.0000 Risk Factor (-) -0.0001 0.0009 -0.1333 0.8939 F-values=76.45 (p=0.00) R2 =0.717


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572

Islamic calendar Effect and Conditional Market Risk Factorwith Calendar Dummies

Table 5Table shows of regressions of Islamic calendars on stock returnswith dummies for each month with risk factor

where tR is the return, D1 to D12 are dummy variables fromSha’ban, Ramadan, Shawwal, Dhil-Q’ada, Dhil-Hijja, Muharram

and FiR p and FiRn is the positive and negative risk factor..

Days Coefficient Standard Error t-value p-value Sha'ban 0.0023 0.0022 1.0281 0.3040 Ramadan 0.0018 0.0023 0.7604 0.4471 Shawwal 0.0001 0.0019 0.0242 0.9807 Dhil-Q'ada 0.0026 0.0021 1.2295 0.2191 Dhil-Hijja 0.0006 0.0023 0.2548 0.7989 Muharram -0.0001 0.0021 -0.0533 0.9575

Positive Risk Factor with Islamic Month Sha'ban 0.7974a 0.1484 5.3734 0.000 Ramadan 1.0354a 0.2041 5.0722 0.000 Shawwal 0.3065a 0.1056 2.9024 0.003 Dhil-Q'ada 1.0999a 0.1472 7.4687 0.000 Dhil-Hijja 1.0084a 0.1878 5.3680 0.000 Muharram 1.0941a 0.2077 5.2656 0.000

Negative Risk Factor with Islamic Month Sha'ban -1.0432a 0.1387 -7.5207 0.0000 Ramadan -0.9614a 0.1997 -4.8130 0.0000 Shawwal 0.1235 0.0872 1.4163 0.1569 Dhil-Q'ada -0.9203a 0.1214 -7.5805 0.0000 Dhil-Hijja -0.9876a 0.1939 -5.0933 0.0000 Muharram -0.9542a 0.1274 -7.4891 0.0000 F-values=37.013 (p=0.00) R2 =0.285


5

6

1

6

1665544332211 i

ini

iiipiiiiitt RFRFDDDDDDR



5 Conclusion

Using daily data of KSE-100 index from December 1991to December 2010 this study investigates the Islamic Calendareffects on Karachi Stock Market. Both conditional andunconditional risk models are used to investigate the Islamiccalendar effect in Karachi stock market. Moreover, risk is allowedto vary across the months of Islamic calendar. Five models areused starting from simple model of Islamic calendar effect toconditional risk model. Different models produce different results.Ramadan effects are found common in all models where asMuharram effect is found in all models except one. It shows thatthere is Ramadan effect in Karachi Stock market. However, it isnoted that Karachi stock market is relatively a high risky marketduring the month of Ramadan which is against the findings ofRamadan. Seyyed, Abraham, and Al-Hajji (2005) and Husain(1998).

References:

Alper, C. and Aruoba, S.B. (2001), “DeseasonalizedMacroeconomic data: a caveat to applied researchers inTurkey”, Istanbul Stock Exchange Review 5(1), 33-52.

Ariel, R. A. (1987), “A Monthly Effect in Stock Returns”, Journalof Financial Economics 18, 161-174.

Basher, S.A. and Sadorsky, P. (2006), “Day of the Week Effectsin Emerging Stock Markets”, Applied Economics Letters 13(10)621-628

Fletcher, J. (2000), “On Conditional Relationship between betaand Return in International Stock Returns”, InternationalReview of Financial Analysis 9, 235-245.

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Frieder, L. and Subrahmanyam, A. (2004), “NonsecularRegularities in Returns and Volume” Financial AnalystsJournal 60(4) 29-34

Husain, F. (1998), “A Seasonality in the Pakistani EquityMarket: The Ramdhan Effect”. Pakistan Development Review37(1) 77-81.Jaffe, J. and Westerfield, R. (1989), “Is there a Monthly Effectin Stock Market Returns? Evidence from Foreign Countries”A Note: Journal of Banking and Finance, 13 237-244.

Lakonishok, J. and Smidt, S. (1988), “Are Seasonal AnomaliesReal? A Ninety-Year Perspective”, Review of Financial Studies1 403-425.

Pettengill, G. Sundaram, S. and Mathur, I. (1995), “TheConditional Relation between Beta and Returns”, Journal ofFinancial and Quantitative Analysis, 30, 101-116.

Seyyed, F. J. Abraham, A. Al-Hajji, M. (2005), “Seasonality inStock Returns and Volatility: the Ramadan Effect”, Researchin International Business and Finance, 19(3), 374-383.


Case Study Stock Valuation: Hub Power Company

STOCK VALUATION:HUB POWER COMPANY*

Shazia Farooq, Dileep Kumar MaheshwariRabbiya Ghulam Mohammad, Rafia Abdul Sattar,

Sateesh BalaniDepartment of Accounting and Finance


Case Study

Highlights

Attractive Return: We initiate coverage with a BUY ratingon HUBCO on our DDM-based target price of PKR 47.13. Thestock is currently trading at a P/E of 9.06x, offering a return of41% on the price of PKR 36.72 as of 26 November 2010.

Best Bet among IPPs: Unlike new IPPs, HUBCO has a U-Shaped tariff structure and its Project Company Equity (PCE) isindexed to both PKR devaluation and US CPI (while other IPPsonly have exchange rate protected PCE). Furthermore, theGovernment of Pakistan backing for fuel supply to the companyis expected to extenuate the shock of circular debt.

Resolution of Circular Debt to Boost Investor Buoyancy:Complete withdrawal of the power subsidy through gradualincrease in power tariff by 2.2% per month during the periodNovember 2010 to June 2011, would ease HUBCO’s counterpartyrisk. The move would brace expected dividend yield and payout,thereby, uplifting investor confidence in the stock’s returns.

Expansion to Augment Dividends: The company has enteredinto a growth phase with the Narowal expansion,, increasing itscapacity by 20% resulting in an IRR of 15%.

*Report presented at CFA Institute Global Investment ResearchChallenge, Karachi in November 2010


Stock Valuation: Hub Power Company

576

Case Study

Table 1: M a rket Profile

52 Week Price Ran ge P KR 2 8.6 - P KR 37 .01

Average D aily Volume 1.812 mn

B eta 0.703 D ivid end Yield (Estim ated ) 13%

Shares Ou ts tand in g 1,157 mn

M arket Cap it aliz atio n P KR 42,490 mn

B oo k Valu e P er Share P KR 24 .13

D ebt t o To tal Cap it al 3.48x

R eturn o n Equity 16%

Source: Karachi Stock Exchange



Table 2: Valuation Summary fdgfgds 2009 2010 2011E 2012E 2013E 2014E Turnover (PKR mn) 82,784 99,694 101,369 123,568 126,826 129,573Net Profit (PKR mn) 3,645 5,557 4,692 6,281 7,010 7,182EPS (PKR) 3.15 4.8 4.05 5.43 6.06 6.21DPS (PKR) 2.35 4.49 4.62 5.97 6.47 6.46BVS (PKR) 24.05 23.98 24.13 23.69 23.56 23.79ROE 12% 19% 16% 22% 25% 26%PER (x) 11.66 7.65 9.06 6.77 6.06 5.92ROA 4% 5% 4% 5% 5% 6%Source: Blaze Research

Business Description

The Hub Power Company, the first private sectorinfrastructure project and the second largest Independent PowerProducer in Pakistan, commenced operations in 1991 as a publiclimited company. The sponsors include UK based InternationalPower, Xenel of Saudi Arabia, IHI of Japan and K&M of USA.The company is listed on Karachi, Lahore and Islamabad stockexchange. Its global depository receipts are traded on Luxemburgstock exchange.

17%

12%

9%

14%

35%

13%

Figure 2: Shareholding Structure of HUBCO

National power Xenel Fauji Fondation

Individuals FI Others

Source: Company Data



578

Case Study

The company is mainly engaged in developing andoperating power stations. It sells power to Water and PowerDevelopment Authority (WAPDA), its only customer, under aguaranteed minimum off-take contract. The company operateson the basis of four main agreements including Power PurchaseAgreement (PPA) with WAPDA, Fuel Supply Agreement (FSA)with PSO, Operating and Maintenance Agreement (O&MA) withInternational Power and Implementation Agreement (IA) withthe Government of Pakistan (GoP).

The company originated with a thermal power plant,based on residual fuel oil (RFO).

With a gross generation capacity of 1292 MW, the plantis located near Hub in the province of Baluchistan. Subsequently,it expanded power generation capacity by installing a 213 MWRFO power station at Narowal in the province of Punjab whichis expected to come online by the third quarter of this fiscal year.In 2008, the company also established Laraib Energy Limited toconstruct an 84MW hydro power project near the New BongEscape in Azad Jammu and Kashmir. HUBCO has a 75.5%controlling interest in Laraib which is the first private sectorhydro project in Pakistan. The project is expected to come onlinein FY20.

Plant Name Installed Capacity (in MW)

Type of Plant

Hub 1200 Thermal

Narrowal *214 Thermal

Laraib Energy *84 Hydel

Total 1498


*Narrowal COD expected in Apri l 2010

*Laraib COD expected in June 2013

Table 3. Capacity Mix of HUBCO



05000

1000015000200002500030000350004000045000

Figure 3: Supply and Demand of Electricity in Pakistan (MW)

Expected Available Generation

Demand (Summer Peak)

Source: PPIB

Industry AnalysisFactors Fueling Growth

Demand to Outpace Supply

The power situation in Pakistan has been critical overthe past few years and is expected to aggravate in the future.Demand has grown at a CAGR of 5.2% during the past ten yearswhereas the supply increased by 2.2%. This gap can mainly beattributed to deficit capacity building.

Currently the electricity production per capita ofPakistan is 512 kWh which is very low when compared to theother countries in the region including Malaysia, Iran and Turkey,having a production per capita in excess of 2500 kWh. Althoughthe government has made strenuous efforts in resolving theexisting issues, the measures were adhoc and largely short-term. A long-term well thought out strategy is desperately neededfor an efficient resolution of the energy crisis in the country.



580

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Heavy Reliance on Thermal Power

Total nominal power generation capacity of Pakistanas on 30 June 2010 was 21,593 MW of which 14,576 MW (68%)was thermal, 6,555 MW (30%) was hydroelectric and 462 MW(2%) was nuclear. With a heavy reliance on expensive thermalcapacity, Pakistan has been unable to improve its energy mixover the years. Frequent water losses due to limited storagecapacity and depletion of gas reserves have compelled thecountry to resort to thermal based power generation. AlthoughPakistan has sufficient potential for alternate sources of energylike coal, wind and solar, no proper measures have yet beentaken to initiate such projects.

52%

9%

9%

9%

21%

Figure 5: Electricity Generation by Company 2008-2009

WAPDA KESC HUBCOKAPCO Other IPPs

Source: Pakistan Energy Yearbook 2009

68%

30%

2%

Figure 4: Nominal Power Generation Capacity (MW)

Thermal Hydro Nuclear

Source: SOI Report 2010



Stakeholders

Electricity production in Pakistan is mainly contributedby Water and Power Development Authority (WAPDA), KarachiElectricity Supply Company (KESC) and Pakistan Atomic EnergyCommission (PAEC). The development of IPPs since 1994 hassignificantly contributed to power production capacity. WAPDAand KESC are integrated public sector utilities which areresponsible for the supply of electricity to the country through220 kV double circuit transmission lines.

National Electric Power Regulatory Authority (NEPRA)is the power sector regulator managing the issuance of licensesfor generation, transmission and distribution of electric powerand determining of the tariff rates. PEPCO was the public sectordistributor which, after 18 years of operation, was dissolved bythe government in October 2010 on account of huge losses andmanagement inefficiencies. Post closure of PEPCO, its ninedistribution companies were made independent.

Independent Power Producers

Most of the IPPs are thermal based since set up costsof such plants are lower compared to hydel power units. Currently19 IPPs with an installed capacity of 6,600 MW are operating inPakistan, providing more than one third of total energygeneration.

Corporate Structure

IPPs are established through public-private ownershipfor generating electricity and supplying to the sole buyer i.e.WAPDA. IPPs are operating under various project agreementswith the government in addition to the power policies of 1994and 2002.

Capital Structure

The minimum equity required for financing IPP inPakistan is 20% of project capital cost with at least 51% equity



582

Case Study

held by founder shareholders for up to 6 years from commercialoperation date. The government has also allowed 100% foreignshareholding.

Tariff Structure

The tariff structure of IPPs has two componentsnamely; Energy Purchase Price (EPP) and Capacity PurchasePrice (CPP). Both these components are measured in per kWh.The EPP deals with actual power generation and comprises offuel and variable operating and maintenance (O&M) costs thatare indexed to inflation and exchange rate variation. The CPPcomponent is independent of the power generated and is basedon base capacity utilization. It is subdivided into escalable andnon-escalable charges where the former includes return onequity, fixed O&M and insurance costs (all indexed of inflationand exchange rate movements) and the latter accounts for debtservicing charges including both principal and interestpayments.

Lucrative Return Structure

IPPs have a very well defined return structure shieldedfrom rising energy prices, interest and operation costs backedby international and sovereign guarantees for fuel and energy& capacity (E&C)) payments. The returns of IPPs aredenominated in US dollars based on a negotiated ROE with thegovernment and assured cash flows over the project life.

Government Support to Stimulate Foreign Investment

The private sector has always received tremendoussupport from government in the form of various incentives forthe development of power. This is one major reason whyPakistan’s power sector has always been eyed by foreigninvestors. Investors are guaranteed lucrative returns throughthe power policy, hedged against inflation and exchange ratemovements, in addition to the government backing on tradedebts.



Revenue

•EPP: Fuel Cost +Variable CostCPP: Fixed Cost + Project Company Equity(PCE) + Principle Repayments + Interest Expense(IE)

Operating Costs

•Fuel Cost + Variable Cost + Fixed Cost

Operating Profit

•PCE + Principle Repayment + IE

Other Income

•Interest Income(I)

EBITDA

•PCE + Principle Repayments + I +IE

Non cash charges

•Depreciation + Amortization(A)

EBIT

•PCE +Principe Repayment - A + I + IE

Financial Charges

•IE

PAT

•PCE + Principle Repayment - A+ I

Source: Blaze Research

Figure 6: Tariff Structure

Figure 6: Tariff Structure



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Case Study

Favorable Agreements and Tariff

Power Purchase Agreement (PPA)

PPA represents a contract between the IPPs andWAPDA whereby both the parties agree upon conditions relatedto plant operation and tariff charges. So far there have been twodifferent PPAs signed in Pakistan with various IPPs under powerpolicies of 1994 and 2002 respectively

Implementation Agreement (IA)

The IPPs sign IA with the government which guaranteesthe performance of WAPDA in terms of the conditions stipulatedin the PPA.

Fuel Supply Agreement (FSA)

This agreement is signed between the IPPs and fuelcontractors to ensure that fuel requirements of the IPPs will bemet. Unlike the first generation PPA, the second generation PPAdoes not provide the guarantee of the government for fuel contractobligations. However, this does not affect the financial health ofthe IPPs as the risk is entirely passed on to the fuel supplier.

Operation and Maintenance Agreement (O&MA)

The O&M Agreement between the IPPs and theirrespective contractors ensures that the latter efficiently adhereto the operations and performance standards of the IPPs plants.

Industry Threats

Energy Price Hike

Pakistan’s energy bill has surged due to escalatinginternational oil prices coupled with rupee devaluation. Over thelast five years, furnace oil prices rose by a CAGR of 29% fromPKR 24,263/ton in 2006 to PKR 47,500/ton triggering an increase



PEPCO Receivable 181 PEPCO Payable 211

Private 93 IPPs 111

KESC 38 Oi l Companies (PSO+APL) 27

Sindh Government 20 Wapda Hydel 45

Fed Government Tube wel l 5 Renta l Projects 9

Others 26 Gas Companies 20

Source: SOI 2010

(bn PKR)(bn PKR)

Table 4: Trade Debt Position of PEPCO

in electricity prices. Against this backdrop, the rising inclinationof private sector towards the RFO based plants is not suitable forPakistan’s economy in the long run. The cost of thermal energyhas risen sharply due to which subsidy is provided by thegovernment. The major threat facing the industry is the IMF’sconditionality stipulating subsidy withdrawal.

0

10,000

20,000

30,000

40,000

50,000

60,000

Source: PSO, Blaze Research

Figure 7: Furnace Oil Prices

Furnace Oil Prices(PKR/Ton)



586

Case Study

Circular Debt

Pakistan faces severe internal liquidity crisis especiallyin the energy sector with almost every other company indebtedto the government or consumer/supplier. Theft of electricity inthe country is major cause of circular debt with likes of KESChaving 57% collection ratio.

Out of the 9 electric distribution companies in thecountry, 5 have high transmission and distribution losses.Transmission losses result in load shedding leading to lowrevenues for these companies which aggravates the issue ofcircular debt. One of the main causes for the inefficiency is thedeteriorating distribution system which results in overload andtripping of main power grids.

Net circular debt position has decreased by 16.9% inJune 2010 from PKR 216bn in the corresponding period last year.This was mainly possible through issuance of TFCs worth PKR80bn and PKR 82bn in March and September 2010 respectively.However, this proved to be a short term measure as the levelrose to PKR 235bn in October 2010.

Power Price Hike to Reduce Circular Debt

Recently, the government has announced a gradualphase out of subsides through power price hike of 17.6% duringNovember 2010-June 2011 to reduce the disparity betweenaverage cost of power generation and power tariff. We believethat this step will considerably alleviate the circular debt levelsof IPPs.

Healthy Payout despite Circular Debt

Circular debt significantly raised receivable and payablelevels of IPPs. Nonetheless, companies particularly HUBCO andKAPCO seem to be indifferent, maintaining healthy payout ratioin excess of 95%.



RISKS RISK MITIGANTS

Change In IPP's taxation policy Change in Taxation policy secured under the implementation Agreement

Delay in COD of Narowal causing payment of liquidation damages to WAPDA

These charges to be passed to EPC contractor,MAN diesel

Table 5: Risk Profile

Delayed payment by WAPDA causing financial constraints

Company continues with running finance facility to meet working capital requirement

Minimal exposure to credit risk GOP guarantee for recovery of

company's trade debts and other receivables

Management inefficiency to affect cash flows

Competent management with a proven track record

Poor performance of plant resulting in payment of penalties to WAPDA

O&M agreement with International Power Plc

Volatility in exchange rates hinder ability to meet off-shore lender debt obligations

PPA provides tariff indexation for currency depreciation on foreign debt

Volatility in interest rates to result in higher debt servicing charges and reduced net cash flow

Overcome with fixed lending rates and hedging arrangements

Delay in supply of fuel by PSO leading to penalty charges to WAPDA

Liquidation damages paid to WAPDA can later be flipped by liquidation damages paid by PSO




588

Case Study

Risks

Possible Difficulty in Meeting Obligations Related To FinancialLiabilities

The CPP and EPP charges of the company are passed onto WAPDA. Therefore, any delay by WAPDA in this regard affectscompany’s payment obligations, mainly fuel and debt servicingcharges. The company manages its liquidity risk through runningfinance facilities which cover short term funding needs triggered bydelayed payments from WAPDA. Payments to PSO are also delayedin case WAPDA does not pay on time.

Possible HUBCO Default on Numerous Obligations

The guarantee of GoP on the performance of WAPDAensures the recovery of trade debts and other receivables whichminimizes the company’s credit risk to a great extent.

Exchange Rate Risk on FX Loans

Volatility in exchanges rates and unavailability of foreignexchange hamper the company’s ability to cope with its debtobligations particularly towards off-shore lenders. The PPA providesthe company with the advantage of tariff indexation for any currencydepreciation on the foreign debt element (along with other factors),thereby, mitigating the exchange rate risk. The government providesguarantee for the accessibility and the hedging of total foreigncurrency liability.

Interest Rate Risk

Fluctuations in market interest rates may require thecompany to pay higher debt servicing charges, thus reducing itsnet cash flow. This risk is mostly dealt with given the fixed lendingrates on company’s debt or alternatively through hedgingarrangement at the preference of the lenders.




Poor Performance of Plant

Revenues are highly dependent on plant performancewhich is determined by various factors including heat rates,plant availability, dependable capacity and emissions. Adeficiency in any of these factors may lead to payment ofpenalties to WAPDA or PSO. The risk of loss in revenues owingto poor plant performance is, however, low as the company’sO&M contractor, International Power, is a well-reputedequipment supplier which is also a shareholder in the project.International Power is accountable as per O&M Agreement forpenalties in case of non-performance and bonuses for efficiency.

Delays in Fuel Supply

HUBCO’s fuel input remains contingent to timelydelivery of supplies by PSO. Hence, any potential supply delaysor bottlenecks will assume the added risk of paying penaltycharges to WAPDA as per PPA. These penalty charges canlater be recovered through payment of liquidated damages fromPSO.

Inadequate Management Control by the Company

Any inefficiency on the part of company’s managementcan lead to improper monitoring of the operator’s performance,affecting operating cash flows. This risk is mainly addressedby the current management structure consisting of highly skilledand experienced staff. Moreover, guarantees and liquidateddamages can be called from O&M contractors on account oftheir poor performance.

Political Risk

Tax Rate Changes

The company is exempt from all taxes and duties. Anychange in this policy in future may reduce profitability. Thiscontingency is also taken into account in the ImplementationAgreaement.



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Penalty on Delay in Narowal

The company is liable for the payment of liquated damagesto WAPDA on a daily basis by delaying the commercial operationdate for Narowal project beyond September 2010. The risk is offsetby passing these charges to the EPC contractor, MAN diesel.

Risk to the valuation

EPC contractor MAN diesel Germany was unable to meet thecontractual COD of Narowal and it was delayed twice initially.According to company sources, the project is now expected tocome online in April 2011. HUBCO is bound to pay the penalty ofdelay to the WAPDA under the PPA, although it is almost offsetby the liquidity claims made to the MAN diesel. Our calculationsestimate that a further delay of three months in COD would reducetarget price by PKR1.08/share.

0

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Figure 10: Debt Mix

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Financial Analysis

Buoyant Revenues

With increased operational efficiency, HUBCO has becomesuccessful in reaching a revenue level of PKR 99bn (EPS: PKR 3.15)for FY10 in comparison to a turnover of PKR 82bn for FY09, a YOYincrease of 20%. We expect the revenue to maintain an increasingtrend through FY15, despite a conservative assumption for loadfactor of 75% for the existing plant. Expected growth in revenue isprimarily attributed to Narowal project and indexation against rupeedepreciation as well as inflation. Generation bonus that companyreceives due to operational efficiency and load factor improvementwill also contribute to revenue. We have not incorporated this sourceof revenue in our projections due to a conservative approach.

Strong Earnings Stream

HUBCO reported a net profit of PKR 5.5bn for FY10, anincrease of 52.5% over the preceding year. ROE has shownsignificant growth over the past 3 years, hovering in the range of9%-19%. We expect a slight slump in the earnings for FY11 mainlydue to increased finance cost on amplified short term borrowings.Going forward, earnings are projected to increase at a CAGR of16% during FY12-15. A u-shaped PCE structure will contribute toearnings growth in future.

Capacity Building to Enhance Balance Sheet Size

HUBCO has so far incurred a capital expenditure of PKR21bn in setting up Narowal plant and an additional PKR 2.7bn willbe invested in this project during FY11. Furthermore, the companyhas invested PKR 2.6bn in Laraib Energy which will require anotherUS$23.7mn in the next 2 years. We expect asset utilization to maintainan encouraging trend, increasing from 0.81x in FY10 to 1.04x inFY15.



Liquidity

The company has managed to maintain a satisfactorycurrent ratio since the delay in accounts receivable due to circulardebt has been offset to a large extent by increasing days payable.We expect similar trends to continue through FY15.

Leverage

Total debt to assets ratio of the company is expected toremain in the range of 78-80% during FY11-15. Short term liabilitieswill comprise 8 to 10% of total debt resulting from sharp increase inaccrued accounts payable triggered by circular debt issues. Weexpect the issue to be resolved post FY15 based on a conservativeapproach. The company is compensated for any mark-up on accruedpayables by WAPDA, hence nullifying the effect of such liabilitieson interest cost. Furthermore, the debt position reflects the fact thatdespite aggressive expansion the company has managed to restrainthe share of long term debt in total debt.

Investment Summary

We recommend a BUY on HUBCO based on strong revenuegrowth, healthy payout and attractive dividend yield. A U-shapedPCE and protection against US CPI inflation in addition to PKRdevaluation will feature as key investment considerations. Ongoingcapacity expansions will add further value to the stock.

-5%0%5%10%15%20%25%30%35%40%45%

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Project Company Equity (in millions) growth rate




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Inflation and Devaluation Cover: An Added Advantage

HUBCO’s tariff profile insulates its earnings againstinflation and exchange rate devaluation. We have assumed anannual PKR//$ devaluation of 2.8% and US CPI at 2.4% asforecasted in the Labor Bureau of Statistics for FY11-20.

Change in US CPI inflation and PKR devaluation willhave a significant impact on our fair valuation for HUBCO’s stock.A change of 50 basis points in our assumption of PKR devaluationand US CPI inflation will result in an approximately 2% and 1.5%change in the fair value respectively.

PCE in Growing Phase

Besides a hedge against inflation and exchange rates,earnings of shareholders are also supported by the in-built growthin PCE. The U-shaped PCE is currently in a growth phase and thisupward trend will continue to support HUBCO’s earnings overthe entire life of the project. PCE will grow in real terms at a CAGRof 2.2% during FY11-FY15.

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Figure 12: ROE and Payout

ROE Payout Ratio




Robust Payout

The company has maintained strong payout ratio inexcess of 70% over the past, (in some years in excess of 100%).According to our estimates, the company will maintain an averagepayout ratio in excess of 100% through FY15.

Expansion Endeavors to Fuel Growth

The company has entered a growth phase with theNarowal project, increasing its capacity by 20%. Acquisition of75% stake in Laraib Energy will add value to the company,although we have not incorporated it in our calculations.

Surety of Payments from WAPDA

HUBCO’s cash flow streams are deteriorating due todelay in payments by WAPDA, which is a key consideration forinvestors eyeing for a dividend yielding stock. Payments fromWAPDA are guaranteed by Government of Pakistan, thus easingthe company’s cash flow position and ensuring futureconsistency of dividend yields.

Generation Bonus

The PPA rewards the company with a generation bonuson a higher load factor (in excess of 60% base utilization).However, we have not incorporated the values of generationbonus in our earnings expectations. Given the growing trend ofthe load factor over the recent year, returns from productionbonus are inevitable.

Valuation

We have valued HUBCO by using Dividend DiscountModel on account of high payout ratio of IPPs. We discountedall the dividends of the company throughout the life of theproject. The cost of equity is assumed at 17%, by taking 5-yearPIB return of 13.75% as risk-free rate, a market risk premium of5% and a beta of 0.703. Based on this discount rate, we havevalued HUBCO at a fair price of PKR 44 per share showing anupside potential of 23% on the share price of PKR36.72 as of 24November 2010.



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Laraib will further add value to the price as Hydel project is providingan IRR of 17%. However, we have not incorporated this revenue in ourvaluation.

Valuation of HUBCO is sensitive to discount rate, with every changein 50 basis point change in discount rate there is an approximately 3%change in the target price.



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APPENDIX



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Particulars Jun‐11 Jun‐12 Jun‐13 Jun‐14 Jun‐15 Jun‐16 ….. Terminal ValuePeriod(n) ‐ 1 2 3 4 5Dividend Paid (PKR mn) 5,349.13 6,905.63 7,485.43 7,475.10 8,409.39 9,552.23 …..

4.62 5.97 6.47 6.46 7.27 8.25 ….. 0

DDM Value (PKR) 44.13 Upside Potential 23%

Risk free rate 14%Market risk premium 5%Beta 0.703Cost of Equity 17%

Table 5: Valuation Summary

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A. Balance She et (PKR mn) 2 009 201 0 2011E 20 12E 2013 E 2014EASSET SN ON‐CURREN T ASSETSPrope rty plant and e quipm e nt 37,8 95.72 49,614 .60 5 0,663.45 48,4 43.89 46,213 .50 43,871.24 Intangible s 2.25 8 .37 5.00 5.00 5 .00 5.00 S tore s and s pare s 637.02 637 .02 637.02 6 37.02 637 .02 637.02 Inves tm e nt in subs idia ry 656.46 2,610 .12 3,617.25 4,6 24.50 4,624 .50 4,624.50 O the r as se ts ( Long te rm D epos its and Pre pa ym ents) 4.28 4 .13 60.00 60.00 60 .00 60.00

39,1 95.73 52,874 .24 5 4,982.72 53,7 70.41 51,540 .02 49,197.77 CU RRE NT A SSETSInventory of Fue l oil 2,5 40.89 1,559 .88 1,553.53 1,6 52.63 1,682 .61 1,731.04 T rade de bts 46,6 29.46 66,712 .46 7 2,207.77 79,5 57.38 81,654 .87 76,323.98 A dvances , Prepa ym ents and othe r rece ivable s 785.81 739 .63 1,189.76 1,1 89.76 1,189 .76 1,189.76 Cas h and bank Bala nce s 1,0 33.79 809 .31 927.60 1,1 01.47 1,129 .12 1,157.48

50,9 89.94 69,821 .28 7 5,878.66 83,5 01.25 85,656 .36 80,402.26 T OTA L ASSET S 90,1 85.67 122,695 .51 13 0,861.38 137,2 71.66 137,196 .38 1 29,600.02

E QUITY AND LIABILITIESS HARE CAPIT AL AN D RESERV ES

A uthorise d 12,0 00.00 12,000 .00 1 2,000.00 12,0 00.00 12,000 .00 12,000.00 Is sue d subs cribe d and paid ‐up 11,5 71.54 11,571 .54 1 1,571.54 11,5 71.54 11,571 .54 11,571.54 Unappropriate d prof it 17,9 60.81 18,309 .73 1 7,652.12 17,0 27.42 16,551 .86 16,259.00

29,5 32.35 29,881 .28 2 9,223.66 28,5 98.96 28,123 .41 27,830.54

N ON‐CURREN T LIABILITIE SLong Te rm Loans 11,3 40.91 23,444 .52 2 7,591.98 26,3 59.64 25,538 .63 20,877.39 CU RRE NT L IABILITIESS hort term borrow ings 3,5 82.25 6,743 .60 5,779.85 7,0 06.58 8,586 .09 9,859.43 T rade a nd othe r payables 43,9 70.16 59,595 .33 6 5,711.80 69,7 45.69 71,361 .79 67,228.51 Inte re s t/ m ark‐up a ccrued 765.94 1,317 .96 1,331.14 1,3 44.45 1,357 .90 1,371.48 Current m aturity of long te rm loans 979.06 1,655 .93 1,222.95 4,2 16.34 2,228 .57 2,432.68

60,6 53.32 92,814 .24 10 1,637.72 108,6 72.70 109,072 .97 1 01,769.48 T OTA L EQ UITY AND L IABIL IT IES 90,1 85.67 122,695 .51 13 0,861.38 137,2 71.66 137,196 .38 1 29,600.02

APPEN

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B. Income Statement (PKR mn) 2009 2010 2011E 2012E 2013E 2014EREVENUES 82,783.92 99,694.26 101,368.60 123,567.85 126,825.65 129,573.26

OPERATING COSTSFuel Cost 71,894.69 86,246.92 84,389.50 86,330.46 88,402.39 90,524.04 Oper. & Maint. 2,360.43 2,707.22 2,340.15 2,434.81 2,535.71 2,641.21 Insurance 409.80 542.27 549.03 555.88 562.81 569.83 Misc. 330.27 812.36 548.93 565.03 580.20 592.29 Narowal Operting Cost ‐ ‐ 4,932.09 20,260.99 20,830.75 21,420.62

74,995.18 90,308.78 92,759.71 110,147.18 112,911.85 115,748.00 7,788.74 9,385.49 8,608.89 13,420.67 13,913.79 13,825.27

Admin and selling Expenses 342.94 367.73 383.38 426.57 476.90 535.73 EBITDA 7,445.80 9,071.02 8,225.51 12,994.11 13,436.89 13,289.54

Depreciation Charge 1,706.72 1,720.18 1,880.57 2,678.04 2,704.12 2,725.54 EBIT 5,739.08 7,350.85 6,344.94 10,316.06 10,732.77 10,563.99

Finance cost 2,094.50 1,793.59 1,653.43 4,035.13 3,722.89 3,381.76

PROFIT FOR THE YEAR 3,644.58 5,557.25 4,691.51 6,280.93 7,009.88 7,182.23

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C. Cash flow Statement (PKR mn) 2009 2010 2011E 2012E 2013E 2014E

CASHFLOWS FROM OPERATING ACTIVITIES 15,113.85 3,912.89 6,880.89 13,822.43 12,751.18 16,223.13

CASHFLOWS FROM INVESTING ACTIVITIES (6,330.65) (14,885.41) (2,558.62) 1,212.31 2,230.39 2,342.25

CASHFLOWS FROM FINANCING ACTIVITIES (964.99) 6,437.80 (7,444.18) (12,349.79) (12,929.59) (12,919.26)

BEGINNING CASH BALANCE (9,217.77) (1,399.56) (5,934.29) (9,056.19) (6,371.25) (4,319.28)

ENDING CASH BALANCE (1,399.56) (5,934.29) (9,056.19) (6,371.25) (4,319.28) 1,326.85

Book Review


Taha Turabi (ed 2009) Turabiyat

601

TAHA TURABI (ED. 2009)TURABIYAT ALLAMA

RASHEED TURABIMEMORIAL TRUST KARACHI

Javed A.AnsariCollege of Business Managment, Karachi

Allama Nasirudin Raza Husain Rasheed Turabi (1908-1973) was the greatest Pakistan rhetorician and orator of thetwentieth century. He was a disciple of another great oratorNawab Bahadur Yar Jung who dominated Muslim League politicsfor several decades. Another great Indian orator of the periodNetaji Subhas Chander Bose often acknowledged NawabBahadur Yar Jung’s preeminence in this field.

But Allama Turabi was much more than an orator. Hewas a scholar of fiqh, tafseer and above all kalam. He was astudent of Aqai Burejardi, Ayatullah Hakeem Tabatabai, AyutullahKhoi and Ayatullah Shariat madar and obtained ijaza from theseluminaries to serve as an authentic interpreter of the Islamicintellectual tradition.

The discipline of kalam has remained comparativelyneglected in the Indian tradition of Islamic learning. Thus thetexts of Imam Ghazali, Imam Muhammad (of the Sahibain), ImamIbn-i-Tayymiyah and Imam Ibn Khuldun are not included in theDars-i-Nizami. It is due to this neglect of kalam by our traditionalulema that when a revival of kalam was attempted by Shibili andIqbal kalam was submerged in an alien intellectual tradition(phenomenology in the case of Shibli and empiricism in the caseof Iqbal). Islamic discourse, as developed by Shibli and Iqbaljustified rupture with Islamic history and a reinterpretation ofIslamic thought within the context of Enlightenmentepistemological discourses. In Iran Ali Shariati (and to a lesserextent Jalal Al-e-Ahmad) followed a similar trail.

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The distinguishing character of Allama Turabi’s kalamis its immersion in Islamic history Turabi is well aware of modernistdiscourse (he obtained an M.A in Philosophy from Allhabad in(year) but he is neither a Modernist nor a Post Modernist. Heasserts the relevance of Islamic history as the sole authenticsource for legitimating current Islamic theory and practice. In thatspecific sense he is a co-worker of the great twentieth centuryrevivalists and traditionalists – Syed Qutb, Baba Samarqandi,Abbasi Madani, Hasan Nasrullah, Ayubullah Montazari, MaulanaMaududi and Imam Khomeni (may Allah exalt their status inParadise). Allama Turabi is a mujahid battling for Islamic supremacyin all walks of life.

Unfortunately this book contains one piece of AllamaTurabi’s writing (spread over only three of its 144 pages). In thispiece Allama Turabi argues for the universality of Islam and definesijtihad not as an attempt to accommodate Islamic practice within.Modernism but as “ an attempt to derive universal principles ofconceptualization and practice on the basis of the sole criteria ofIslamic texts and their historical interpretation, nass” (P.16). Heasserts that the interpretations of the nass present in the orthodoxschools of fiqh are authentic and non subjective. Turabi’sconception of rationality (al-Aql) reflects Imam Ghazali’sunderstanding of the scope and limitations of man’s rationalityTurabu writes “(Reason) is an instrument for seeking Allah’sacceptance and (in that sense) reason and the sharia do not conflictand the commands (ahkam) of the shariah explicate the maxims ofreason and (seek) the well being (falah) of mankind although therational faculty lacks the capability to comprehend thiscorrespondence”.1 (p.17). The derivation of practical maxims inall ages thus depends exclusively on articulating the discoursesof the classical Islamic knowledges – tafseer taweel-i-hadith, fiqh,rijal etc. In Imam Turabi’s view ijtihad must be taqleedi – onceagain our Imam is following the definition of ijtihad developed byMaulana Imdad-Allah Muhajir Makki.2 It must be based on usultafseer, usul al din and fiqh as articulated in the classic Islamictradition. Ijtihad cannot be undertaken on the basis ofEnlightenment epistemology. It cannot be undertaken on the basisof the principles underlying the physical sciences, economics,

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political science, psychology or jurisprudence etc. Imam Tutabiremains totally uncompromising on this issue in all his writings.

Our imam wrote twelve books. Five of them – Kanz-i-Mahkfi, Muqaddas Qanun, Takweem, Dastur and A Great HistoricDocument explicate the implications of the practice of taqleedi,nussusi ijtihad with regard to contemporary issues. AllamaTuabi’s style is obscure, laden with Arabic and Farsi tarakeeband relatively unknown intellectual and social references.3 Thismakes these works inaccessible to the those Muslim intellectualswho have no grounding in Islamic epistemology. One gets theimpression that Turabi is in his writings addressing only a selectgroup of ulema and not the lay Muslim intellectual.

In his speeches on the other Imam Turabi isaddressing the masses. His chosen technique here is use thekey reference of Iman Husain (radi Allah tala anha) to assert theuniversality of Islamic principles. Imam Husain (radi Allah talaanha)’s struggle is indeed a key reference and as several imams– Imam Muhammad (of the Sahibain) Imam Abul Yala, ImamMawardi and Maulana Abdul Huq Muhaddis Dehlavi for example– have argued the continuing struggle for the establishment ofIslamic government (khilfat–i-rashida) derives its ultimatelegitimacy from Imam Husain’s (rade Allah tala unha) epicstruggle. Revolt against un Islamic rule is always legitimate andcontemporary Islamic revivalist movements are Husaini in thatfundamental sense.

Imam Turabi was a soldier of Husain (radi Allah-o-talla-anha)’s army because he believed in the universality of Islamand in the validity of its claim for universal hegemony. Despitehis roots in Shia traditions and learning he was never the partisanof a sect. He unfurled Husain’s (radi Allah ho tala anha) bannerand called all Muslims to rally around. It Imam Turabi was anambassador of Shia-Sunni unity and several articles in this booktestify to this non sectarian character of our Imam’s message.Rasheed Turabi was a true followers of those who gave him ijaza– Ayat ullah Borojardi, Ayatullah Tabatabai, Ayatullah Hakim,Imam Shariat Madar – none of whom was a sectarian and all of

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whom stood unflinchingly for Shia-Sunni unity and for Islam’suniversal dominance. The Shia segment of the contemporaryIslamic revolutionary movement has developed this line of thoughtand gone from strength to strength – specially in Iran, Labnanand Iraq4 – in the twentieth century.

I have said little about this book because it contains solittle of Imam Turabi’s own words. Imam Turabi does not needany one’s praise – he has returned to his Lord who has inshaAllah showered him with the blessings Imam Turabi deserves. Itis the Islamic revolutionary workers who need to benefit fromTurabi’s precious heritage.

I have two specific requests to make to the governors ofthe Allama Rasheed Turabi Memorial Trust.

Prepare an anthology on “Islamic and the Challenges of theModern World” based on the material in Kanz Mahkfti, MuqdusQanun, Takween, Dastoor and A Great Historic Document. Thisanthology should be an easily accessible rewrite of passages inthese books using a contemporary diction and style in (say) tenchapters. The book may be published in both Urdu and English.It should be a collaborative effort between an Alim and a layIslamic intellectual.

Publish a book “Arguments for Shia-Sunni Unity” on thebasis of material selected from the recordings of Allama Turabi’sspeeches. Here rewriting will probably be minimal but carefulselection, collation, thematisation and editing will be required.This book should be prepared first and published in Urdu only.

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Notes

1. This is a complex passage and its comprehensionrequires a clear differentiation between the Ghazalianand the Kantian conceptions of rationality. In Ihya-al-Ulum-ul- Deen Imam Ghazali sees rationally as aninstrument for obeying God as He says He should beobeyed. In the Critique of Pare Reason Kant seesrationality as an instrument for deriving universalisablemaxims which enable an autonomous will to obey itsown self. Imam Turabi (R.A) is arguing that we shouldunderstand rationality as a faculty for obeyingAllah (not our own desires) and the well being of manis the obtaining of Allah’s approval. The nass tells ushow to obtain Allah’s approval. Thus there can be nocontradictions between the maxims generated throughwhat Imam Turabi calls “a search for nussus” and themaxims of reason as understood by Imam Ghazali andImam Turabi and not as understood by Kant andHabermass

2. In Mulfuzat (ed. Maulana Abul Hassan Qasadi; Dar-ul-Ma’arif Hyderbad (n.d).

3. This is true of almost all major twentieth centurytraditionalists with the notable exception of MaulanaMaudude.

4. But not in Pakistan where the Shia presence in theIslamic revolutionary struggle is minimal andAllama Ibn-i-Hassan Jarchavi’s works have beensadly neglected


Conference ReportSeminar on MBA in Educational Management Programme

606

STRONG LEADERSHIPSTRONG INSTITUTIONS: IT’S

A MATTER OF CHANGEREPORT ON SEMINAR HELD

ON FEBRUARY 26, 2011Nasreen Hussain

Department of Educational ManagementCollege of Business Management, Karachi

Introduction

A seminar was organized by the Education Departmenton ‘Strong Leadership Strong Institutions: It’s a Matter ofChange’. It was attended by over 40 participants that includedrenowned educationists, IoBM faculty, prospective participantsand presently enrolled students. The four main speakers were:

1. Prof Zakia Sarwar2. Abbas Husain3. Ms Qamar Safdar4. Mr Aziz Kabani

Prof Zakia Sarwar discussed the importance ofContinuing Professional Development (CPD). She contendedthat CPD was the conscious updating of professional knowledgeand the improvement of professional competence throughout aperson’s working life. It was a commitment to being professionalby keeping up to date and continuously seeking to improve. Shefurther stressed that a manager could become a leader if s/heacquired the 3Gs: i) Grow yourself, ii) Groom others, and iii) Go.She then motivated the audience by sharing personal learningexperience.

Conference Report

Conference Report Seminar on Pakistan: Challenges and Aspirations


Ms Qamar Safdar presented a paper on ‘Leadership andSystems’. She reiterated that change cannot be implemented bychanging part of a system. Unless all people think and worktogether no one can come to a correct solution. She further clarifiedthe notion by giving examples and sharing her experiences. Themain point stressed was that finding causes of academic andprofessional problems was more important than solving them at asuperficial level. In conclusion, she shared the importance of selfquestioning and ended her presentation by sharing the acclaimedseven habits of highly effective people and five disciplines of alearning organization.

Mr. Abbas Hussain in his presentation said that theeducation system of Pakistan faced a shortage of intellectualleaders and the time was ripe for the teachers, educationists andthe government to develop and nurture leaders for the bettermentof learning organizations and society at large. He argued thatindividual thinking is meaningless and unjustified; Pakistanneeded think tanks who could think unitedly or in clusters foreffective implementation and long lasting change.

A very different perspective was presented by Mr. AzizKabani. He explained that the world had become a global villageand it was impossible to survive within the assigned boundaries.It was imperative for teachers to interact with others in order tofind their position in the global village. It was time for them toevaluate their position in the world and then to work for achievingtheir identity. Mr Kabani concluded by stressing that changeshould be brought about by nurturing motivated and dedicatedleaders in the area of education.

Dr Nasreen Hussain, Head, Department of Educationdiscussed the scarcity of educationists in Pakistan and dug deepinto the social, economic and environmental factors responsiblefor creating such a deplorable situation. She also briefed the


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participants of the scope of educationists and the positive rolethey could play to upgrade the mental faculty of the future leadersof the country. Dr Hussain was of the opinion that effective andstrong leaders have a vision, develop and support teachers, andstrengthen institution milieu. They also share and distributeleadership roles among teachers and other staff, particularly to reenforce and enhance instructional leadership capacity. Sheproposed that leadership undoubtedly is a catalyst to teachinginstitutions’ improvement; therefore, the environment of thelearners, teachers and leaders should be one in which the onlyconstant element will be change. Dr Hussain then introduced theMBA in Educational Management programme formally and sharedthe aims, objectives, salient features and the course structure.

The Dean, Dr Javed Ansari supported the programmeand reiterated the importance of developing educational managersto run the institutions effectively. He also stressed the point thatsuch forums should be called on frequent basis to share differentperspectives and promote quality education in the country.

Mr. Abbas Hussain in his presentation said that theeducation system of Pakistan faced a shortage of intellectualleaders and this was the time for us to find the treatment ofintellectual leaders. That is a lack of capacity to think which couldbe rectified by thinking together. He emphasized that all educatorsshould unite and work to bring the required change.

A very different perspective presented by Mr. AzizKabani. He explained that the world had become a global villageand it was impossible to survive within our boundaries. Teachershave to interact with others to find their position in the globalvillage. It was time to evaluate our position in the world and thento work for achieving our identity.

Conference Report Seminar on Pakistan: Challenges and Aspirations


Dr Nasreen Hussain shared a presentation to introducethe MBA in Education Management programme offered byInstitute of Business Management (IoBM).

She discussed the scope for educationists in the futureand the scarcity of them in Pakistan and all over the world. Thenshe introduced the programme formally. The programme consistsof 24 courses for a two- year programme and 36 courses for threeyears programme which includes three electives. Moreover, eachstudent needs to submit a research thesis which will beequivalent to 4 courses. Then she discussed the aims, salientfeatures, and structure of the programme.

Contribution by the Dean

The Dean of Iobm supported the programme andreiterated the importance of developing education managers torun educational institutions effectively. He also stressed the pointthat such forums should be called on frequent basis for sharingdifferent perspectives on education. Furhermore, the Deanstressed that group should meet often to work together for thebetterment of promoting quality education.

Conclusion

In the end, the seminar was wrapped up by stressingthat change should be brought about by nurturing motivatedand dedicated leaders in the area of education.


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OVERSEAS CHAMBERS OFCOMMERCE AND INDUSTRY

SEMINAR ON PAKISTAN:CHALLENGES AND ASPIRATIONS

APRIL 2011

Syed Maqbool-ur-RehmanDepartment of Accounting and Finance


The objective of the Seminar was to take stock andprepare policy recommendations. This seminar was divided intothree segments: Segment 1 covered the external environmenthighlighting the relationship of Pakistan with its immediateneighbours, United States and NATO. Former AmbassadorsMr. Jamsheed Marker and Najamuddin Shaikh spoke at lengthabout Pakistan’s fragile and strained relationship with the U.Sand its repercussions on other relationships. Dr Akmal Hussain,quantified the financial impact on Pakistan’s economy in theevent Pakistan fails to comply with America’s demands withregard to its war on terror.

The second segment aimed to solicit focused views onissues such as health, education and energy. Prominent speakersDr. Shams Kassim Lakha, Mrs. Nasreen Mehmood Kasuri, Mr.Hussain Dawood, Mr. Farooq Rahmatullah and Mr. Aziz Bilgramimade presentations on the above subjects. Mr. Hussain Dawoodspoke on CNG/LNG supply, demand and the pricing structure.He recommended that CNG prices should be brought in line withpetrol prices which would not only correct the market imbalancesbut also pave way for the import of LNG at market prices. Mr.Farooq Rahmatullah and Mr. Aziz Bilgrami made a jointpresentation covering the oil and gas sector. They showed thecurrent energy mix and the forecasted rise in the cost of oil importsin 2025 at $200/barrel to be a whopping $125 billion from thecurrent level of $9 billion. They proposed a drastic change in theenergy mix by including other sources such as coal/wind and

Conference Report

Conference Report


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altering the ratios of the existing sources of energy. The proposedchanges as claimed will reduce the import bill and produce afavourable impact on the economy. Speakers also said that theup gradation of the existing plants will add about 25,000 megawatts to the energy starved nation.

The third segment was on the economy of Pakistan. DrIshrat Hussain, said that the present revenue stands at Rs. 1500billion with a gap of about Rs. 700 billion. He suggested someshort term measures to improve upon the economy. Dr. AkmalHussain proposed major structural changes in order to correctthe imbalances and direction of the Pakistan economy. His firstsuggestion was to utilize the 2.5 million hectre cultivable landwith the government presently unutilized by distributing it in 5acre plots on ownership basis among those farmers who do nothave any land of their own. He also suggested the formation ofan agricultural corporation to provide one window operation tothe farmers. Secondly, he wanted that SMEs be linked to bigcorporations by a government corporation created for this purposeso the output of SMEs can be used as input by the bigcorporations. He wanted the poor and the middle class to beincluded in the rebuilding process and gave example of AmulIndia, the largest dairy farm products firm in the world owned by700,000 peasants and managed by professionals and Grameentelecom, a service provider owned by women stockholders andmanaged by professionals. Mr. Yusuf Abdullah, Ex- ChairmanFBR, apprised the audience that in the year 2000, major projectsto improve FBR operations were initiated. Notable among thosewere electronic e filing, concept of data warehouse etc. Mr ShabbarZaidi presented a workable plan to collect the shortfall in revenueof Rs.700 billion. He proposed to bring into the network untaxedsegments; aarhtees (brokers) in mandis, doctors etc. He wascritical of academia for the lack of research by provoking questionssuch as what do we know about Jodia Bazaar? How do theywork? He emphasized the need to have carefully researched factsabout the segment before FBR consider bringing it to the tax net.He also talked about revaluation of properties and asserted thatall of us are involved in converting our well earned money intoblack by under invoicing the sale /purchase proceeds. He claimedto have given the proposal of advanced wealth tax. In short, all


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the proposals were practical but required political will forimplementation.

Mr Paul Ross, Resident Representative of IMFexplained the working of IMF to the audience. He did notcomment on Pakistan’s relationship with IMF (which was hissupposed topic). According to him, IMF performed three typesof basic functions; Global surveillance, Regional surveillanceand Institution building. Mr. Gareth Aicken spoke on issues inbilateral aid. He was section head for Pakistan in DFID — a UKgovernment agency.

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