Rent seeking in Pakistan has its roots to pre-partition. In 1930s when congress decided to undertake land reforms in India, feudal of Punjab and Sindh joined Muslim League which was originally formed by East Bengal Muslims, to counter the oppression of West Bengal Hindus. These Punjabi feudal had become big by Brits in 19th and 20th centuries as latter awarded them with big landholdings upon their service to accept Great Britain as the master.
Rest is history; but the deep routed rent seeking behavior explains the suboptimal economic and social growth of the country in the past seventy years. Politicians, businesses, establishment, NGOs and the list goes on; every institution, at one point or another, indulged in rent seeking.
Since 1990s, politics has become a money game as hefty sum is spent on winning elections in each constituency; and seemingly elected representatives seek economic benefits in return. Sugar industry is virtually run by politicians, and there are barriers to entry in it. It's the only effective license raj business in Pakistan today.
To support big land lords, government introduced wheat support price in 2008; while only 26 percent of wheat producers are net sellers. Thus, the support price supposedly for food security is only benefiting big landholders while making food dearer for the poor - food prices increase by 125 percent since 2008.
Offshoots of military have become giant business entities in Pakistan. They are in fertilizer business for decades and the industry ran on government subsidies and today three companies operating in the sector have EBITDA margins north of 30 percent which is much higher than global average. Similarly, in logistics, NLC and FWO prospered by having a heavy subsidy on diesel; and that came with a cost of demise of railway freight business. In real estate, DHA is the king. And the list goes on.
The oligopolistic structure is prevalent in many industries in Pakistan. Cement is one of the most competitive industry in the country that can generate export surplus; but in fact enjoys 20 percent import duty. This makes domestic cement prices dearer to international prices. The EBITDA margins of 16 companies (out of 20 odd companies) averaged at 36 percent, while cement makers in China hardly make any profits
Three Japanese players in automobile sector kept on living on protection till 2016 which was supposed to terminate in 1995. It was first extended to 2005 and whenever a new policy was in offing; they lobbied against it. They are not happy on incentives offered exclusively for new entrants in 2016 policy; but three new players have committed investment in the country lately; see what wonders competition can bring.
Cellular operators who are operating in the country for a decade or so are complaining on high indirect taxes as they claim that they have collected billions of dollars in indirect taxes. But that is what consumers pay. How much is the direct contribution? How many companies are showing profits?
Textile is said to be the backbone of country's manufacturing and exports. The industry is always talking about the support from government in one form or the other. Downstream and upstream industry fights to get protection and whoever has strong lobbying wins. The PSF manufacturers are killing the small petrochemical industry as they look for cheap imports. Multinational pharma companies are known for transfer pricing. And the list goes on.
Whenever there is talk about improving business environment or ease of doing business; companies complaint of excessive taxation and harassment by taxation authorities. Yes, the has its issues. But, it is businesses that hire tax consultants to avoid and, at times, to evade tax.
It is businesses or high net worth individuals who are big on philanthropy, but run two accounting books, nurturing the culture of charity at the cost of taxation. How can an individual decide to tax himself by paying charity of choice by not paying requisite state taxes? The trust deficit between state and tax payers is breaking the social fabric of the country.
And higher taxation or cumbersome compliance requirements do not explain low investment in Pakistan. Its economics - textile tycoons are not expanding in exports but are looking inward to cater the domestic demand by coming up with fashion brands. There is no or little tax on exports, while any business for domestic market is taxed at 25-30 percent. Cement players are simply not focusing on exports as retention price for domestic market is 20 percent higher than that of exports.
The export market is competitive and there are no rents for domestic players. While import protection and the oligopolies in the industries explain industries' preference of domestic markets. And after living on the clutches of rent for decades, innovation becomes scarce and businesses cripple.
Rent seeking exists because it is possible. The system harnesses it. It's unrealistic to expect voluntary compliance in the real world. Businesses exist to maximize profits. Those who recognize that there is benefit in clean business, become formal and grow. And seeking protection, tax breaks, subsidies is a global phenomenon. Ideally, it's the responsibility of the government to regulate that. Does it mean that we shouldn't have all these big federal government bodies swallowing funds when they cannot do their job? No, we cannot live without an effective state.
It is near impossible to decide from where to pick the thread to unwind. The utmost need is to change the mindset at top of every institution be it legislators, establishment, judiciary, media, civil society and business community. The need is to show love to the country; and change always comes from the top!
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