Pakistan-Style Free Market Capitalism

You thought we had it bad here in the U.S. with the decline in our stock market? Take a look at Pakistan. First of all, yes. Pakistan does have a stock market. How else would you expect all of the sand, camel, Kalashnikov, and plutonium merchants to raise capital? And where else would you expect Al-Qaeda to launder their money?

Relax. I'm just kidding. It actually inspires hope that a coup-ridden developing country with little in the way of stability, democracy, or natural resources even has a stock market. This is, however, a very small stock exchange. We have about 100 companies listed in the U.S. that are bigger than the entire stock exchange of Pakistan.

Regardless, it exists, and it had been doing extremely well in recent years. Per the Karachi Stock Exchange's website:

Karachi Stock Exchange is the biggest and most liquid exchange and has been declared as the “Best Performing Stock Market of the World for the year 2002”. As on July 31, 2008, 653 companies were listed with the market capitalization of Rs. 3,301.908 billion (US $ 46.258 billion) having listed capital of Rs. 713.077 billion (US $ 9.990 billion). The KSE 100 Index closed at 10583.58 on July 31, 2008.

KSE has been well into the 4th year of being one of the Best Performing Markets of the world as declared by the international magazine “Business Week”. Similarly the US newspaper, USA Today, termed Karachi Stock Exchange as one of the best performing bourses in the world.

Unfortunately for Pakistan, the stock market peaked back in April and has since fallen 41%. Now that's a bear market. The decline seems to have irritated local investors who had become accustomed to only rising prices. As reported by the TimesOnline on July 17th:

Pakistani investors and traders ransacked stock exchanges in Karachi, Lahore and Islamabad today, reacting furiously to a share-price rout that has decimated the life savings of many.

Police and paramilitary officers were drafted in to protect the Karachi Stock Exchange after a thousand-strong mob stoned the building, smashed windows and chanted anti-government slogans. In the eastern city of Lahore, investors burnt tyres and blockaded the local bourse.

Fortunately for the new breed of Pakistani capitalists, the powers-that-be have now come to the rescue. Securities will now be allowed to trade within a range of 5%. BUT they won't be allowed to trade below a floor price -- which just happens to be the previous day's closing price. Therefore, prices aren't allowed to fall! Why didn't we think of this!? It's so simple. Just don't allow prices to fall.

Sure, we could get mired down with silly little facts, like the fact that this type of price fixing has never worked before and is doomed to failure. Or the fact that actual price discovery will be impossible. Or the fact that trading volume is sure to dry up. Or the fact that firms won't be able to raise capital in such an environment.

The important thing is that this floor will probably result in a 0% return on the Karachi 100 Index so long as it's in place. A 0% return just might be enough to enable Pakistan to regain the title of "Best Performing Stock Market of the World."