Our Beacon Forum

Devaluing the Rupee
By:Muhammad Rafi
Date: Monday, 1 March 2010, 6:07 pm

February 22, 2010

By:
Humayun Gauhar

I was appalled to read in The Nation today that in an interview to a private TV channel Finance Minister Shaukat Tarin “…hints at rupee devaluation.” TV interviewers know even less about running a national economy than commercial bankers do.

You only have to look at the track records of the plethora of bankers and geniuses from financial houses that ran the US Federal Reserve and the Treasury into the ground to believe what I am saying. Even chartered accountants would do better. Because bankers and financial gurus are still at the helm at the FED and the Treasury is exactly why the fundamental structural flaws in the US financial system and the economy are not being addressed and they only keep throwing worse money after bad, desperately trying to keep an edifice standing with spit and paste knowing (or perhaps not) that sooner rather than later it is going to collapse through a process called liquefaction, when the ground underneath a building becomes soft and collapses into itself like a star that becomes a black hole, taking everything on it into oblivion.

A country considers devaluation when its balance of payments go awry i.e. its imports exceed exports and its trade balance goes into deficit. If they have no surplus they usually bridge the gap through short-term borrowing at relatively high interest rates, usually from the IMF, or when desperation sets in, from commercial banks at usurious interest rates. (When Shahid Javed Burki took charge of finance in the government of the late caretaker Prime Minister Meraj Khalid, he inherited desperation. So he was forced to borrow from commercial banks at rates between 5 and 7 percent. It nearly killed us). But such borrowing is done only when governments are convinced that the deficit is only a temporary glitch and will go into surplus soon and they will be able to return the money in the short term. They don’t let it become a disastrous long-term loan.

The other option is to devalue. But this is a double-edged sword, not understood by those who are victims of the tyranny of theory’s word in impressively bound textbooks. In real life, 2 plus 2 is equal to many things apart from four, for real mathematics is not zero based – zero was brilliantly invented for ease of calculation – but infinity based and in infinity there can be any number of outcomes. It is like raising interest rates to control inflation: it won’t work if a country’s inflation is driven not by consumption but by a factor outside its control, like world petroleum prices, as ours is. Then high interest rates only contribute to discouraging investment and raising prices further as the cost of money goes up.

So too with devaluation: it works only if a country’s imports and exports are both price inelastic. If they are not, as ours are not, it will only make matters worse, for the trade gap will go up as the quantum of exports stay about the same while the money earned from them actually reduces while the import quantum also remains the about same but the rupee bill for it shoots up by more than the factor of devaluation. Thus the balance of payments gap gets bigger.

Our main exports are cotton and rice, both primary raw materials with a given global demand every year, and that too against acute competition, not only in prices but also in quality. Which means that lowering their prices in dollar terms won’t necessarily increase their demand by an amount in money terms that justifies devaluation.

Similarly, our main imports are petroleum, tea and edible oil. Again, no matter how expensive they get, the demand for them is not going to decrease appreciably, not even in the very short term. After all, the army isn’t going to stop its tanks, the air force its planes and the navy its ships. Ministers won’t start traveling in donkey carts, though by rights they deserve to (they can keep their flags). Public transport can’t stop and neither can private. Worst of all, a huge amount of our electricity is generated by furnace oil guzzling power plants. All that will happen is that the prices of petrol and diesel will go up at the pump as will the price of kerosene and the price of electricity will go up too. This will fuel already out of control inflation further. People are finding it difficult to survive given the current prices. Suicides are being committed, minor children are being sold and young girls from decent families are being forced into prostitution out of desperation. Then what?

Then what? As a revolutionary who rejects this obscene system totally, this is great, if you see the big picture. At least this decrepit edifice we have built on a constitution whose legitimacy is questionable and which is a document dedicated to protecting the iniquitous anti-people status quo will be burnt to a cinder and hopefully, just hopefully, another edifice will arise in its place. It can’t be worse, not for the vast-hungry multitudes, the wretched of the earth.

Chaos, already upon us, will soon turn to anarchy. There will be blood on the streets. The tinderbox is ready, dry and full. All it needs is a spark. The spark could come from anywhere, any incident. Then sit back and watch the gory spectacle. Remember the French Revolution? Actually, it was anarchy. Remember there was somebody called Robespierre? I suggest if you had read about it in a comic or even in a history book years ago, go back and revisit it. If you cannot stand boring academic writing, read A Tale of Two Cities by Charles Dickens again. I’m sure you’ve heard of that one even if most of our rulers, especially our parliamentarians, have not. But such people won’t even know who Dulla Bhatti was. The novel will help create some of the atmosphere of France in 1789, the bloodletting, the guillotining, the rapine and massacres, the burning and looting. They had it coming. They got it.

Anarchy is a necessary precursor to revolution, though there is no guarantee that anarchy always leads to revolution. It can just become permanent anarchy or lead to direct military colonization if the State remains in tact. Or the State can fragment to become several, more viable states. Though anarchy is a necessary pre-condition to revolution, an organized force that can attract the people is a necessary pre-condition for converting anarchy to revolution. In Iran there was anarchy for a time as the communists and west-oriented liberals fought to wrest power from the Shah as well as to knock the other out. Neither the communists nor the liberals were successful for they were ideologically weak, fuzzy and unclear, steeped in western ideologies as they were. So they couldn’t fire the imagination of the people. The Ayatollahs were ideologically crystal clear, their ideology wasn’t imported but cast in Iran itself and it was one the people could readily relate to. They were organized, not least through their network of mosques and madrassahs. Politics abhors a vacuum and the mentally clear and well organized Ayatollahs simply walked into the vacuum – or got sucked into it.

Well, I have news for you well-heeled western oriented ladies and gentlemen. The only relatively organized force we have that can use violence (though certainly not as well organized as the Shia clerics of Iran) are the Pakistani Taliban. The three main religious parties, especially the Jamaat-e-Islami, are also organized, but since they entered western electoral politics they too got mired in the politics of status quo perpetuation and lost their revolutionary ability. Islamic politics is the politics of revolution.

Will the WOGs let this happen? Just watch them welcoming the army again. But as we have seen, the army has no solution to any of our problems. All it can do is create a feel good atmosphere, but temporarily. That might give us time to organize a modern revolutionary organization though, geared to taking advantage of anarchy and converting it into revolution.

Of course this is a tall order. But winning independence and creating a new country was much taller, and we did it. Sure we can do it again, and don’t lament the absence of a Jinnah to lead us. There is a Jinnah present in each one of us. It is for us to make him emerge.