Final Project on Business Ethics

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Dedication

We as a group will like to dedicate this report to our parents and teachers. We love and respect all of them.

Great is Allah. It is through His boundless and infinite mercy that we have been able to complete this project report. We invoke peace for Hazrat Muhammad (PBUH) the last Prophet of Allah, who is forever a torch of guidance to humanity as a whole.

We wish to acknowledge our indebtedness to our teacher and guide Pro.r Shehzad Gul for his guidance, encouragement, and criticism. However dispute his instructions, and comments the residual errors due to either omissions is our. Due to his efforts, today we are able to write and present that complicated case.

We also express our profound gratitude to all of our friends who supported us a lot not during this assignment but through out the whole semester.

Finally we wish to record our deepest obligations to our Parents and Families for their prayers and unfailing support.

We will be willing to respond for further questions about the report or add anything in the report if necessary.

COMMODITIES--------------------------------------------------------------------------------------------1

INFLATION AND ENERGY CRISIS -----------------------------------------------------------------2

FOOD PRICES INCREASE AS RAMAZAN BEGINS---------------------------------------------4

DEMAND SIDE FACTORS-------------------------------------------------------------------------------6

SUPPLY SIDE FACTORS --------------------------------------------------------------------------------7

COMMODITIES’ PRICES RISE TO NEW HEIGHTS: CWP----------------------------------8

FOOD PRICE HIKES ROIL PAKISTAN------------------------------------------------------------10

IDENTIFYING CAUSES OF HIGH INFLATION------------------------------------------------12

CONCLUSION---------------------------------------------------------------------------------------------14

A commodity is anything for which there is demand, but which is supplied without qualitative differentiation across a market. In other words, copper is copper. Rice is rice. Stereos, on the other hand, have many levels of quality. And, the better a stereo is, the more it will cost. Whereas, the price of copper is universal, and fluctuates daily based on global supply and demand.

Commodities are agreements to buy and sell virtually anything except, for some reason, onions. The primary commodities that are traded are oil, gold and agricultural products. Since no one really wants to transport all those heavy materials, what is actually traded are commodities futures contracts or options. These are agreements to buy or sell at an agreed upon price on a specific date.

Pakistan is facing a number of constraints in the path of social economic and political development. One of them is the ever-increasing inflationary pressure on the general public. This inflationary pressure created a social instability and misconception among the messes towards the Government. General public considers the government responsible for this inflation. Government gave the blunt gift of inflation, unemployment, terrorism and energy crisis to the public. The government offended the masses. Some economists argue that such type of increase in prices was never seen before the regime of Musharaf.

The prices of essential domestic commodities have touched the psychological boundaries. The fixed income employees and creditors are affected by this inflation.
During five years the prices of red chili increased by 62.7%, flour 66.2% vegetable oil 120% sugar 30.9% rice 69.9% and other essential domestic commodities like vegetables, chicken etc also showed increasing trend of prices. According to official reports the inflation rate is 7.2% and according to non-official reports like UN 8.6% World Bank 8.9% and Asian Development Bank 9.1%.

This inflationary pressure has psychologically affected the employees and employers. Some renounced economists argue that the reason of this increasing inflation rate. According to which inflation rate is measured. Foreign aid was given to Pakistan therefore low standards were made to measure the inflation rate. Although the increasing trend in the prices of fuel and other things in the international market is another factor but the standard year is also a factor Not only these factors caused hyperinflation but also energy crisis played a vital role in this hyper change in the prices of daily use domestic and capital commodities.

There are three main resources used to fulfill the energy requirements Electricity, Fuel and Gas. Despite having the treasure of natural energy resources, Pakistan’s energy production plants are not fulfilling the country’s requirements effectively. The present energy crisis is affecting the economy entirely. Industrial and daily life has paralyzed by this energy crisis. WAPDA is just fulfilling the country’s energy need near to 46% the remaining is fulfilled by the alternative expensive resources. The energy crisis created cost pull inflation in the country, as electricity is the key material for any production plant. There is a general observation of 5-10 hours of load shedding, but some times it hits the level of 18 hours. Even the industrial capital of Pakistan (Karachi) is suffering from the same situation.

Why in the era of energy reservation Pakistan is not utilizing its energy resources? Pakistan is just relaying on the electricity production by Dams. But Pakistan has not enough dams or water to generate electricity. Although WAPADA is enjoying the monopoly but government has to pay 2 rupee/unit as incentive. Our neighboring country India has built a number of Dams to overcome the energy crisis but Pakistan government has paid no heed on this issue. Many projects are delayed due to provincialism the glaring example is of Kala Bagh Dam. The costly machinery amounted US $9 million is now functionless due to (rust) delay in the construction of Kala Bagh Dam, Some scientists predicted that in next 10year world has to face the water shortage also.

If the government fails to construct dams for the generation of electricity due to Provincialism government should have to adopt alternative options to accomplish the energy needs of the country. As Iran has large treasure of natural energy resources like

Natural gas and fuel, despite this Iran is engaged in the attainment of nuclear power generation plant. Pakistan, despite being an atomic power does not think about the nuclear electric generation plant.

Secondly, Pakistan’s western area especially there is enriched by natural coal, which is the fifth largest treasure of the world. Pakistan has signed a contract with China to generate 300 Mega watts by coal deposits in 2003, but due to some reasons it has not been completed till now.

Industrialists due to high prices of electricity use alternative resources (petrol) in electric generators to fulfill their energy needs but, the fuel (petrol) prices in international market cross the psychological limits of US $110/beryl recently. The high prices of fuel and electricity created a long-term cost pull inflation (increase in the prices of raw material of one commodity cause high prices of other commodities).

There are a lot of expectations with the new government as Nawaz Sharif pledged that if he came in rule he will fix the prices of domestic commodities like vegetables oil, floor, sugar and rice for two years. Now the new government should take basic steps to eradicate inflation. I think energy crisis is the real cause of this inflationary pressure. We are hopeful that new government will take some positive steps to fulfill its promises and public expectations.

1- Increase in nominal money supply: Increase in nominal money supply without corresponding increase in output increases the aggregate demand. The higher the money supply the higher will be the inflation.

2- Increase in disposable income: When the disposable income of the people increases, their demand for goods and services also increases.

3- Expansion of Credit: When there's expansion in credit beyond the safe limits, it creates increase in money supply, which causes the increased demand for goods and services in the economy. This phenomenon is also known as 'credit-induced inflation'.

4- Deficit Financing Policy: Deficit financing raises aggregate demand in relation to the aggregate supply. This phenomenon is known as 'deficit financing-induced inflation'.

5- Black money spending: People having black money spend money lavishly, which increases the demand un-necessarily, while supply remains unchanged and prices go up.

6- Repayment of Public Debts: When government repays the internal debts it increases the money supply which pushes the aggregate demand.

7- Expansion of the Private Sector: Private sector comes with huge capitals and creates employment opportunities, resulting in increased income which furthers the increase in demand for goods and services.

8- Increasing Public Expenditures: Non developmental expenditures of government lead to raise aggregate demand which results as increased demand for factors of production and then increased prices.

1- Shortage of factors of production or inputs: Shortage of factors of production, i.e. raw material, labour capital etc causes the reduced production, which causes the increase in prices.

2- Industrial Disputes: When industrial disputes come to happen, i.e. trade unions resort strikes or employers decide lock outs etc the industrial production reduces. And as a short supply of goods in the market the prices go up.

3- Natural Calamities: Natural disasters, invasions, diseases etc effect the agricultural production, and shortage of supply which furthers the rise in prices.

4- Artificial Scarcities: Hoarders, black marketers and speculators etc create artificial shortage to earn more profits by keeping the prices high. (in Pakistan bird flu dilemma and sugar crises are the major examples in this regard)

5- Increase in exports (excess exports): When the country has tends to earn maximum foreign exchange and exports more and more without considering the domestic use of the commodities, it creates a shortage of commodities at home which increases the prices. (With reference to Pakistan, the failure of export bonus scheme during 1950's is the most common example of this type of cause of inflation)

6- Global factors: This factor includes the changing global environment. Most common example is the rise in oil prices. This factor of inflation may vary in nature, i.e. it can be political, strategic, economic or logistic in nature.

7- Neglecting the production of consumer goods: When the production of consumer goods is neglected with reference to the increased production of luxuries, it also creates inflation. For example in Pakistan, in last couple of years our services sector has grown with the highest rate of 8.8% (mainly telecom sector), while basic necessities have been ignored which created increase in the prices of consumer goods.

8- Application of law of diminishing returns: this law applies when the industries use old machines and methods and, which increase in cost by increasing the scale of production. This furthers the increase in prices and hence inflation bursts out.

The commodities’ prices, in stead, have risen to new heights with no platform or mechanism available to the consumers for redress of grievances. The market forces on the other hand had unleashed with full brutality and harshness.

Under the circumstances, the new government which is swearing in shortly has tough challenge in hand to bottle the genie.

With the double-jolt of petrol prices in a fortnight, the prices of vegetable and fruits and other kitchen items showed a sky-rocketing trend in today’s Sunday bazaars of Pakistan.

The vendors were quick to respond to the Saturday’s increase in the prices of the petroleum products and prices of all the vegetables and fruits were ‘adjusted’ accordingly. Ladyfinger was being sold as high as Rs120 per Kg. in Sunday bazaars.

Similar increase was also recorded in the prices of other vegetables including onion, garlic, ginger and tomatoes. Prices of fruits have simply gone beyond the reach of common man. In the first two hours of Sunday bazaars. Apples were sold as high as Rs150 per Kg; thus recording an increase of Rs25 as compared with the prices of last Sunday.

In many cases, vendors were charging higher than the price list and no governmental mechanism present to check this practice.

As the increase in the petroleum prices would be indispensable owing to unprecedented hike in the international market, the new government faces a tough challenge of controlling the prices of essential commodities and providing relief to the consumers.

This may be achieved, among other initiatives, the establishment of all-powerful consumer protection councils.

The Islamabad Consumer Protection Act, which was enacted in 1995, envisages a Consumer Protection Council which has not been established hitherto.

Similarly, it is also mandatory to establish consumer protection councils at district and provincial levels in the Punjab under the Punjab Consumer Protection Act 195.

These councils have so far been established in 11 districts of the Punjab only, whereas the all-important provincial council is still missing.

The importance of these councils lies in the fact that they will not only collect market data to abolish anti-consumer practices, but would also keep the government machinery abreast of the market fluctuations so that steps to arrest the trend can be taken well in time.

CWP has been advocating to the political parties before the February’s general elections to take clear and strong stand on consumer issues.

It has again exerted that time of action has arrived. Consumers in Pakistan should not be left to the brutal whims of the market forces.

The new government should display a strong political will and identify itself with the consumers rather than with profiteers..

FOOD PRICE HIKES ROIL PAKISTAN

Pakistani men and women receive bread donated by anonymous worshipers next to a mosque in Pakistan.

Pop quiz: name the most important issue for voters in the recent Pakistani elections. Was it the increase in terrorist attacks over the past year? President Pervez Musharraf's heavy-handed sacking of the country's top judges? Or the assassination of former Prime Minister Benazir Bhutto?

Actually, it was none of the above. According to former information minister Sheikh Rashid Ahmed, who spoke to the United Nation's news agency IRIN this week, his party, which is aligned with Musharraf, lost the parliamentary poll "because people were angry over the fact atta [flour] was not available, that food prices were high, and due to this they felt insecure." It's a familiar lament in Pakistan these days. "We are worried about terrorism and those other things, but first we are worried about basic needs," says Islamabad nurse Nithat, 24, as she shops in the capital's busy Aab Para market. "People want a person who can fix this problem."

Pakistanis have been grumbling about rising inflation for more than a year now, but in the past few months the sticker shock has grown much worse. Wheat prices have jumped by more than 20% since November, driven up by rising global prices as well as local hoarding ahead of the election and wheat smuggling into neighboring Afghanistan. The price of the gas that many Pakistanis use to cook with has also skyrocketed. January's inflation rate was nearly 12%, the highest in almost three years.

Basic foodstuffs are now so expensive and scarce that people have begun queuing for hours at government stores, where it is cheaper because of subsidies. When those same people lined up to cast their ballot last week, many of them apparently voted against Musharraf's ruling party. "It played a very important role," says Saeed Chaudhry, an economics lecturer at the National University of Modern Languages. "Hungry people are not happy people."

The U.N.'s Food and Agriculture Organization says the world's food stocks are at record lows. And as the food shortage takes a tighter grip, it could start exacting a political toll in more countries than just Pakistan. The threat is particularly sharp in developing countries where food routinely accounts for more than half of household spending, compared to 20% or less in rich countries. As Chaudhry says: Hungry people are not happy people.

In Pakistan, where at least 25% of the country's 169 million people live in poverty, government subsidies have helped keep the prices of some items down. Islamabad spends some $2 billion on fuel subsidies, for instance. Sadly for ordinary Pakistanis and for the incoming government, the country's rapidly worsening fiscal deficit will make it harder to keep underwriting those costs. Continuing the subsidies will only worsen the country's budgetary woes. But if the government passes on the true cost of gas, the resulting increase will fuel inflation even more.

IDENTIFYING EFFECTS OF HIGH INFLATION

Pakistan experienced high economic growth over six per cent during 2004-06. However, prices also started increasing at a rapid pace and the headline inflation remained above eight per cent during the last two years. The average Consumer Price Index (CPI) inflation was 9.3 per cent in 2004-2005 and around eight per cent in 2005-06.

Is there any need to worry about inflation? When is inflation bad for the economy? A reasonable rate of inflation--around 3- 6 per cent-- is often viewed to have positive effects on the national economy as it encourages investment and production and allows growth in wages.

When inflation crosses reasonable limits, it has negative effects. It reduces the value of money, resulting in uncertainty of the value of gains and losses of borrowers, lenders, and buyers and sellers. The increasing uncertainty discourages saving and investment.

Not only can high inflation erode the gains from growth, it also makes the poor worse off and widens the gap between the rich and the poor. If much of the inflation comes from increase in food prices, it hurts poor more since over half of family budget of the low wage earners goes for food. Second, it redistributes income from fixed income earners (for instance pensioners) to owners of assets and earners of large and variable income, such as profits.

In case of Pakistan, annual inflation was above 11 per cent in the 11 of the past 32 years. Not surprisingly, average real per capita income growth was 2.8 per cent in years having less than 11 per cent inflation as compared to the years of high inflation with an average of 1.5 per cent.

For Pakistan economy, inflation can be bad if it crosses the threshold of six per cent, and can be extremely harmful if it crosses the double digit level Several supply and demand factors could be responsible for this surge in inflation. Supply-side shocks can cause large fluctuations in food and oil prices, effects of which on overall inflation, at times,can be so excessive that these cannot be countered through demand management, including monetary policy.

First, increased domestic demand created an output gap, putting upward pressure on prices. Growth in private consumption on the average remained over 10 per cent between FY04 and FY06, depicting signs of demand side pressures on price level.

The relationship between growth and inflation depends on the state of the economy. High growth, without an increase in inflation, is possible if the productive capacity or potential output of the economy is growing enough to keep pace with demand. This is also possible if the actual output is below the potential output and there is sufficient spare capacity available to cope up with the demand pressures.

When the actual output catches up with the potential output, there remains no spare capacity and the economy is working at full employment level, any further gain in growth comes at the cost of rising inflation. If demand continues to grow at this stage, and the productive capacity does not expand, there is a serious threat of rapid inflation in the long run without any additional growth in the output. A prolonged phase of rising inflation in such a case can have severe consequences for the economy.

Second, the growing gap between domestic demand and production was filled by a sharp increase in net imports, which grew by above 40 per cent in FY05 and by 24 per cent in FY06. As compared to imports, exports increased by only around 10 per cent in FY05 and by 13 per cent in FY06. This resulted in a record trade deficit. Rising trade deficit can be a cause of expectations of high inflation in future.

The expectations effect is very important since there is a danger that the current high rate of inflation can get locked into expectations of inflation.

People expect higher salaries to compensate for expected increase in prices, speculation in asset prices increases, credit meant for manufacturing sector diverts to real estate and stock markets, and hoarders, profit and rent seekers become active in expectation of high price in the future. All this can have devastating effect for the prices.

Third, fiscal policy has remained expansionary in the last few years. Expansionary fiscal policy fuels domestic demand and puts pressure on the current account deficit. It widens the investment-saving gap, which has to be financed externally. Financing of fiscal deficit through money creation adds to inflationary pressures. Increased government borrowing from central bank can have serious consequences for general price level.

Fourth, the expansionary monetary policy- high growth in money supply and loose credit policy- was believed to be contributing to high inflation. Although expansion of credit is usual in expanding economies, excessive credit growth can have adverse effects on real variables.

Rising import prices are also considered an important factor for inflation. Exchange rate, if depreciating can also put upward pressure on price level. Increase in prices of goods, such as petrol, raw material etc makes our imports costlier, impacting on cost of production.

The question arises as to what were the factors that stimulated the recent inflation in Pakistan

During the first four years of the new millennium inflation remained under five per cent and then suddenly increased to 9.3 per cent in 2004-05 and settled to eight per cent in 2005-06. The growth in wheat prices and exchange rate was low in some years and high in others. However, it seems that excessive money flows towards public and private sector, along with the import price hike in 2003-04 and 2005-06 and wheat price rise in 2003-04 and 2004-05 created inflationary pressure at an alarming level. Taxes as a percentage of manufacturing sector value-added did not show any rise.

The expansionary monetary policy did contribute in promising GDP growth but it also led to the rise in consumer prices. The phenomenal growth in the flow of to the private sector played a significant role in disturbing the price mechanism. Availability of money at virtually no cost encouraged speculators and hoarders.

Inflation is one of the obstacles on the way of development. In Pakistan, it has squeezed the major part of the population. It needs to be controlled by strategic planning. Domestic production should be encouraged instead of imports; investment should be given preference in consumer goods instead of luxuries, Agriculture sector should be given subsidies, foreign investment should be attracted, and developed countries should be requested for financial and managerial assistance. And lastly a strong monitoring system should be established on different levels in order to have a sound evaluation of the process at every stage.