Enough mudslinging?

Pakistan Tehreek-e-Insaf’s manifesto before the last general elections (2018) committed to usher an era of legislative and structural reforms that would ensure inclusive economic growth and make Pakistan business friendly. Since coming into power, the party has undoubtedly made some efforts to live up to its promise. Yet, when it comes to PTI’s communication strategy on economy, the party suffers from the proverbial Foot in mouth disease. A strong tendency among party leaders to shoot from the hip risks undoing some of the good work undertaken over the last three years. How?

Consider only the incessant roughing up received by various industries over the past three years. What started as an accountability hunt against opposition leaders, first quickly spilled over into an investigation of bureaucracy, eventually also engulfing several private sector businesses. While inquiry commissions set up to investigate profiteering were welcomed initially, it wasn’t long before they adopted a political angle, jeopardizing the integrity of the accountability process.

A quick scan of news reports during its years in power is sufficient to reveal how the party has undermined the seriousness of its own narrative. Over the past three years, various cabinet members and national level party leaders including the PM himself have labelled at least 12 industries as “mafia” and “cartels”. Although the list began with “sugar barons”, it wasn’t long before IPPs, LNG, petrol, wheat, flour, feed, poultry, seed, cement, ghee, vanaspati, pharmaceutical, dairy, and even vegetable/fruits middlemen were added to the list.

This is not to say that local businesses do not engage in abuse of their market position and bargaining power, or that instances of cartelization in various industries are non-existent. However, the reckless abandon with which terms such as mafia, cartels, and barons are thrown around is not without consequences. The narrative public officeholders have built leads to an impression that business malpractice is endemic in Pakistan, and that it is rooted in malafide of unscrupulous market players. This can not only have far-reaching consequences for business confidence and investment climate in the country, but also misses two very crucial aspects.

First, that many instances of exploitation of market position stem from structural weaknesses in regulatory framework. Today, several industries operate under legislative framework that was designed decades ago when market dynamics such as consumer behaviour, degree of foreign trade, and number of players and their level of sophistication was dramatically different. In many such cases, archaic laws have enabled select players to accumulate excessive bargaining power over the years. While no degree of criminal activity by any corporation should ever be condoned, abuse of market position by other players in future can only be avoided if legislation – that no longer reflects current market realities – is reformed. Instead, it appears that the PTI government believes it can discourage malpractice in future by simply charge sheeting ‘guilty’ businesses with criminal action.

This may not only be very hard to prove in a court of law, but it may also fail to deter others from abuse of power, especially if accountability is marred by perception of ‘selective justice’ and political victimization. The accountability drive in sugar industry is only one such example, where two powerful business groups have been co-opted by the party in power and protected from investigation, while others face the grinding axe of justice. Perception matters.

Second, as much as some industries may attract politically-linked families more than others, rarely any sponsor group worth its salt is invested in a single line of business alone. When national leaders paint entire industries with labels such as ‘barons’ and ‘mafia’, they inadvertently ensure that even the scrupulous few get painted by the same brush. Once a business is accused of corporate fraud or criminal activity, it not only has material consequences for the business in question, but also for its all-other commercial interests as well.

Over the past year, several companies have seen their top-rated external auditors dissociate themselves from all group entities, have banks reduce their credit limits, and foreign vendors/suppliers terminate contracts. The case of one (non-politically linked) business group losing acquisition deal of a foreign unit in Australia - in its final stages – speaks volume to the sorry state of affairs. And all of this has happened only during the investigation stage, when no criminal judgement has been pronounced by any court of law so far.

Businesses by their very nature are amoral. Shareholder primacy means that firms exploit every possible legal avenue to maximize profits. Which commercially motivated action may border on illegal is often a matter of interpretation of law: just look at the “contingency” section in financial statements of any corporation to see how frequently businesses run the risk of contravening the law, yet press on nonetheless.

Corporations are not beholden to larger public interest. That responsibility solely lies with the government. Rather than wasting precious manhours making an example out of businesses that – for example, engaged in opportunistic export at the detriment of local consumers – governments can bring in legislation that enable market mechanism to ensure supply-demand mismatches no longer occur, and price stability is achieved without unnecessary intervention.

Yet, three years on, the party in power has little to show for to prove its reform credentials. Price spirals in various industries such as sugar and flour offered perfect opportunities to demonstrate that legislative reform can not only put an end to infrequent shortages/price spirals, but also eliminate prospect of exploitation by unscrupulous players in future.

Instead, a reform-minded party has chosen to go down the path of meting out street justice, punishing business reputations even before the courts could deliberate on the same. Perhaps, populism will deliver next elections. But it most certainly won’t deliver well-functioning markets, nor discourage the next shrewd businessowner from exploiting a future price spiral or shortage. At least not until the regulatory framework is reformed.