Wed, Jun 06, 2007
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Argentine’s Indigenous Development
Murabahah Goes Mainstream
China-US Standoff

Argentine’s Indigenous Development
Latin America and the Caribbean region is home to nearly 40 million indigenous people, many of whom live in Argentina, a country that is not widely known to have a sizable indigenous population.
“Not many Argentineans are aware of how many indigenous people there are in the country,“ ventured Dorte Verner, Senior Economist in LAC working on an indigenous people project in Argentina. “In practice, they are thought to number anywhere between 600,000 and 2 million,“ she said, the World Bank reported.
Indigenous people in Argentina are beginning to make their presence felt thanks in part to World Bank’s Learning and Innovation Loan program (LIL) that, as its name implies, uses novel methods to promote development initiatives in the communities.
Verner, a veteran of many regions at the Bank and known for her work with the very poorest of them, began working on the indigenous people project in Argentina last year and she becomes positively rhapsodic when describing the changes the project has triggered among the indigenous people living high in the Andes in Salta province in northern Argentina.
“These communities did not have any services to speak of before the Bank intervened. Now they have running water in their homes and they have constructed a health clinic and seriously increased their social capital,“ she said. “The beauty of it is that they run the show themselves--they develop and implement the community projects themselves in addition to managing the funds.“

Remote Communities
Verner described the turnaround and awakening of the communities as nothing short of amazing. “It is not easy to reach the communities up in the Andes in Salta. It takes at least 12 hours walking up to 5,200 meters above sea level to get to them. Despite the inaccessibility and transport hurdles, the communities managed to haul 120 bags of cement for a water project. They had to get all the building material from the capital of the province, have it delivered at the foot of the mountains and organize support from various communities to haul the bags up using donkeys, and then of course build the water system. The conditions are really harsh, I tell you, it gets pretty cold up there.“

Participating in Development
Ability to overcome daunting challenges is just one aspect of transformation that has arrested Verner’s interest. The indigenous people have quickly learned to write proposals and to insist that politicians--who appear to have been taken by surprise by the newly developed shrewdness of this long ignored constituency--listen to them.
“The indigenous people of Salta feel empowered and they are now aware of what public services they are entitled to. They approach provincial public officials armed with specific demands based on what they were promised and refuse to budge until and unless they receive satisfactory answers to questions,“ says Verner, who is clearly on their side.

Faithfulness to Traditions
What further amazes Verner, a macro-economist, is the deftness with which the indigenous people navigate the modern world while retaining fidelity to their traditions and customs.
“Yes, many indigenous peoples are poor materially; some even face food insecurity and malnourishment is a serious problem,“ she observes, “However, working with them has convinced me that poverty cannot be measured purely in terms of income levels, as culture and traditions matters too. The indigenous people are not the poorest of the poor in non-monetary terms.“
Still, Verner does not underplay the litany of problems that the community faces ranging from isolation, illiteracy, unemployment, lack of basic services, to all too frequent discrimination and exploitation.

Empowered Communities
Implementing this first indigenous community project by the World Bank in Argentina has not been easy, as it has involved a new development approach in which the communities are being empowered to make decisions and do the work although traditionally the rural poor and indigenous people have been marginalized and had quite limited access to public goods.
Verner ascribed much of the success of the project to the dedicated team of local level facilitators who work directly with the communities to build capacity and the increasing openness by the state to consider new ways of approaching the needs of indigenous communities. The project will officially close in December this year benefiting 53 communities in six provinces in Argentina. “Of course, this is just the beginning. Much more needs to be done,“ says Verner.

Murabahah Goes Mainstream
Islamic banking has changed from a curiosity to a widely accepted form of economic behavior with the potential to become an alternative global financial system.
A modern form of Islamic trade financing has taken root and is flourishing in the Middle East.
According to, with its ancient caravan trails winding through the desert sands of Arabia, the Middle East is a fabled trade entrepot between Europe and Asia. Now, as a modern form of Islamic trade finance blossoms there, world trade is accelerating in the region in which oil-exporting countries are enjoying strong economic growth and importing more goods and services.
Seeking to boost their trade finance activities in the region, more and more banks, including Western financial institutions, are introducing Islamic finance products for importers and exporters. Meanwhile, the Islamic Development Bank, or IDB, is setting up a $3 billion International Islamic Trade Financing Corporation in Jeddah, Saudi Arabia, to increase intra-Islamic trade, which it has always seen as crucial to development of the Muslim world. The IDB celebrated its 30th anniversary in January with a gala invitation-only dinner at the St. James Palace in London hosted by Prince Charles.
In the more than three decades since Islamic law, or Shariah principles, have been applied to modern-day banking products, Islamic banking has changed from a curiosity to a widely accepted form of economic behavior that some analysts say has the potential to become an alternative global financial system that would not include the threat of debt bubbles. The size of global Shariah-compliant assets has reached about $400 billion, according to Standard & Poor’s Ratings Services, and the potential market is $4 trillion, leaving plenty of room for future growth among the world’s Muslim communities.
The first stand-alone Shariah-compliant bank in the United Kingdom, the Islamic Bank of Britain, was established in August 2004. It is based in Birmingham, which has one of the country’s largest Muslim populations, and now has eight branches, including four in London. The bank offers a wide range of products, including savings accounts, term deposits, personal finance, home mortgages and business banking. Its shareholders comprise leading Islamic banks, including Qatar International Islamic Bank.
The advanced markets of both Europe and the United States offer niche segments in which Islamic finance could profitably gain momentum, according to a report by S&P ratings analysts Anouar Hassoune in London and Emmanuel Volland in Paris. The two historical centers of Islamic banking in the Gulf region and Southeast Asia have just started actively talking to each other, the S&P analysts say. The realization of a common conceptual framework that unites the approaches of Riyadh and Kuala Lumpur could go a long way toward enabling the Islamic banking industry to expand and diversify, they say. Several Islamic banks based in the Gulf have recently set up operations in Malaysia, with an eye to expanding elsewhere in Asia, particularly in China and India.
Islamic finance is a byproduct of the conventional financial system, whereby existing financial products are reconstructed to make them Shariah-compliant, says Khalid Yousaf, director of Islamic finance at IHG Securities, a branch of Dubai-based asset manager International Holdings Group. He previously developed the Islamic finance sector at the Dubai International Financial Center.
Using a form of reverse financial engineering, an existing financial instrument in the conventional system is broken down and rebuilt using equivalent components from the set of Shariah-approved instruments. The major advantage of this approach is the instant recognition and understanding it gets from the practitioners of conventional finance, according to a new book by Zamir Iqbal, principal financial officer in a department of the treasury of the World Bank, and Abbas Mirakhor, executive director for Afghanistan, Algeria, Ghana, Iran, Morocco, Pakistan and Tunisia at the International Monetary Fund.
Their book, An Introduction to Islamic Finance: Theory and Practice, says that most Islamic trade financing is based on murabahah, a cost-plus-profit sales contract, whereby a financier purchases a product or raw material for an entrepreneur who lacks the capital to do so. The banker and the entrepreneur agree on a profit margin, often referred to as a mark-up, which is added to the cost of the product. The goods are purchased by the bank and resold to the borrower.
The payment for the transaction is delayed for a specified period of time. No forbidden interest, or “riba,“ is involved.
More than half of the assets of some Islamic banks are invested in murabahah transactions. A majority of Islamic banks rely heavily on short-term trade financing instruments, according to Iqbal and Mirakhor. A second approach to financial engineering, they say, is to design instruments de novo from an established menu of Islamic instruments. The result would be a new array of instruments, each having a unique risk-return profile, bought and sold in specialized markets compatible with Shariah principles.
“Unless Islamic finance develops its own genuinely Islamic financial instruments, it cannot achieve the dynamism of a system that provides the security, liquidity and diversity needed for a globally accepted financial system, which would be a genuine alternative to the present debt-interest-based international financial system,“ Iqbal and Mirakhor contend. A debt-based system needs an effective lender of last resort, the present international system does not have one, and it is not likely that one will emerge anytime soon, they say.

China-US Standoff
How should we evaluate the second round of the China-US Strategic Economic Dialogue (SED) held in Washington May 22 to 23?
Carlos Gutierrez, US commerce secretary, got it right: The strategic economic dialogue focuses on the overall situation, not on resolving particular issues. Therefore, no short-term results should be expected, China Daily wrote.
The China-US Joint Economic Committee and other joint committees are already in place to handle particular economic matters. The strategic economic dialogue is needed to address the two countries’ long-term economic relationship from a wider perspective. The goal is to develop sustainable mutually beneficial economic ties.
This task goes beyond the functions of limited-focus joint committees. The eagerness for immediate results does not work here. The Washington dialogue strengthened mutual trust through intensive discussion on issues of deep concern to both sides. This is the big yield of the dialogue.
Chinese Vice-Premier Wu Yi, who headed the Chinese delegation, emphasized the intensive discussions on the service industry, energy, the environment, balanced economic growth and innovation. Energy and environmental protection were the most serious issues discussed. Cooperation in these two areas has great prospects and is expected to inject vitality into both economies.
Also, both sides agreed to promote balanced growth of their economies through macroeconomic policies and to encourage innovation through policy exchanges and technological cooperation.
In his opening statement, US Treasury Secretary Henry Paulson said both China and the US face challenges of domestic protectionism and questions about the merits of trade and globalization. He went on to say: “There is a growing skepticism in each country about the other’s intentions. Unfortunately, in America, this is manifesting itself as anti-China sentiment.“
This is worth attention.
After the US mid-term elections last year, protectionist sentiment gained strength in the US Congress, with China as a ready target. According to US statistics, the total volume of US-China trade in 2006 reached $343 billion. The US sustained $232.5 billion in trade deficits with China, almost three times that of its trade deficit with Japan. For the past four years, China has been the biggest source of the US trade deficit.
A host of factors explains the US trade deficits. They include international division of work, Americans’ low savings rate, and restrictions on exporting high-tech products to China. It is not so simple a matter as revaluating the renminbi, despite the beliefs of some US lawmakers.
To make matters worse, ideological factors, which find expression in the theory of a “China threat“, have gotten mixed up with protectionist sentiment.
In 2000, the US-China Economic and Security Review Commission was set up to watch over trade between the two countries, US investment in China, and Chinese investment in the US which could possibly harm US security. Every year, the commission submits a report to Congress, organizes frequent hearings and circulates seemingly plausible but inflammatory opinions. In 2005, when China National Offshore Oil Corp planned to purchase California-based Unocal, the commission played a major part in defeating the acquisition. It stoked the China fears on Capitol Hill, to some extent damaging China-US economic ties.
We should be aware that partisan fights are a daily occurrence in US politics. This is especially true when the White House and Congress are controlled by different parties. With the US presidential election next year, it is possible that the US trade imbalance with China will became a campaign issue.
In fact, bilateral economic relations benefit both economies and peoples. The Chinese and US economies complement each other in terms of structure and level of development.
The US is the biggest economy in the world and China the fastest growing one. Co-development of the two economies is of vital importance to the progress of the entire world economy.
It is natural that some friction arise with bilateral economic interaction. It should be remembered that trade friction between the US and Japan in the 1980s was much more intense than the current China-US friction. The problems can be resolved through negotiations based on equality and by implementing the principle of mutual benefit.
Both sides have numerous options in promoting bilateral economic and trade ties. On the part of the US, easing control on the export of high-tech products to China is a feasible move. Since the publication of the notorious Cox Report in 1999, the US has been restricting high-tech exports to China. This has led to the decline of US market share in China and, in turn, became a major factor contributing to the US trade deficit.
The restrictions have aroused resentment from US businesses which are well aware that China can turn to other countries such as EU members and Japan for high-tech wares. In the end, it is the US that pays for the restrictions.
But the situation is improving. Westinghouse Electric Co is set to introduce third-generation nuclear power technologies in China. This type of cooperation helps reduce the US trade deficit with China.