''Short-termism'' not terrorism is the biggest dampener of long-term investor confidence in Pakistan; whimsical changes in the often irrational policies keep the economy from gaining dividends of its promising demographics.
The adhocism and the objective to gain immediate political mileage behind policy formation has long been reflected in poor fiscal management that has been shaking the very pillars of Pakistan''s macroeconomics and keeping private investors at a distance.
For instance, several studies show that Pakistan''s pharma industry has immense potential. However, consistent bad policy of keeping the price of pharma products at decade-old levels is hindering this business from doing justice to its potential.
Meanwhile, the rent-seeking culture, often on the part of industrialists, has been inviting government intervention beyond the sphere of policy making. This has been distorting the market mechanism since decades, and killing the incentives and opportunities for the private sector to capture its fair share.
Along with these chronic issues, power shortages and an overall bad management of the energy sector, amid poor law and order situation in the last couple of years, are only worsening the investment climate.
And the economic indicators substantiate the narration: the fixed-investment-to-GDP ratio in Pakistan averaged 16.6 percent between 1971-2009 - a time when it averaged 23.9 percent and 32.2 percent for neighbouring India and China, respectively.
For the manufacturing sector - the engine for long-term growth - lack of policy focus and infrastructure impediments have led to major damages in the last decade. The share of the manufacturing sector in fixed investments declined from 23 to 16.7 percent during the decade ending 2010. Although its share in the GDP improved by 4 percentage points during this period, declining fixed investments is certainly worrisome for future.
In such a business environment, corruption bred well; under-invoicing of imports, rampant misuse of the Afghan transit trade scheme, and other abuses of law gradually became common and still are. That, coupled with an overvalued currency as a policy design, especially during 2004-07, made imports relatively cheaper than domestic products. Hence, the domestic manufacturing sector lost its viability and competitiveness.
To add to the woes, at the policy level, the taxation system weakens the incentives for achieving scale and the formalisation of business. The effective corporate tax is 47.8 percent versus 34.3 and 20 percent for small companies and individuals, respectively.
The irony is that the exorbitant tax rates have clearly failed to avert a low tax-to-GDP ratio, which has been fuelling inflation, threatening external imbalances and curtailing future growth; Not to forget, the high corporate tax rates are also eroding manufacturing sector profits.
It''s a vicious cycle. Disincentivising corporate sector growth subdues growth in taxes, and worsens the trade balance. This adds to fiscal stress, the financing of which keeps on fuelling inflation and threatens external balance. Therefore, an out-of-the-box solution with serious realignment of policies and implementation reforms is required to pull out of the abyss.
Infrastructure impediments, mainly energy problems, are hindering the expansion of big corporates. Most of the big business families, especially in textiles, interviewed by BR Research explicitly said that half of their expansion resources have been consumed in maintaining un-interrupted power supply.
Moreover, citing power generation as a lucrative opportunity, big names have expanded in this area. While it seems rather harmless at the surface, it does dry up resources for achieving export competitiveness and improving other aspects of industrial goods and services areas.
India''s energy shortages are no less than those faced by Pakistan, but India consistently prefers to ensure power supply to the industrial sector in order to support expansion. In Pakistan, however, the case is different. Despite gas shortages, the previous government allowed the CNG culture to boom, a policy flaw left uncorrected by the current regime.
The use of CNG is clearly not pro-poor and instead caters to the middle and upper-middle class, while the lower-middle and lower classes pay full taxes on petroleum products used in motorcycles and tractors. The case against CNG usage in vehicles is also strengthened by the fact that it is also inefficient. "A car runs at 30 percent of its efficiency on CNG, while a gas turbine runs at 60 percent," Pakistan''s businessman Mian Mansha told BR Research.
Such misalignments have other repercussions as well; for instance, the promised gas supply to Engro''s new fertiliser plant - an investment worth over a billion dollars - is in doldrums. Such precedents dampen the confidence of big investors towards choosing Pakistan over other countries and provide reasons to local players to seek level-playing grounds in foreign countries.
Apart from these obstacles, bureaucratic hurdles, asymmetric information and inconsistent policies in the absence of venture capitalism hinder the formation of a vibrant entrepreneurship culture.
NEO GROWTH MODEL Enhancement in the productivity of the labour force -- which is estimated to grow at 3.6 percent in the long-term - and innovative thinking of the young rising population are key ingredients to be on a fast-growth track. "Any growth less than 8 percent with employment elasticity of 0.45 will increase unemployment," said the Planning Commission''s New Growth Framework.
In the last couple of years, mounting private sector toxic assets, amid rising government financing needs, have channeled more credit to the public sector. In other words, the crowding out of private investment is routing savings to less-productive purposes, as government spending is predominantly used for meeting day-to-day requirements.
Whatever little is spent on the Public Sector Development Programme is mainly confined to brick-and-mortar with less focus on education, technology and innovation. This project-based thinking in the public sector has to be changed, the Commission rightly argues.
This mindset is not letting private investment develop on the back of public spending. Then, of course, after the regime changes, projects are reprioritised in line with the regime''s political motives. An independent Planning Commission, isolated from politicians, for streamlining projects, therefore, is imperative for sustainable growth.
Alongside this, land and zoning laws should be made less rigid and more open to changes in the economic and social landscape of urban centres. Pakistan is a consumption-based economy, and there is a need to capitalise it.
The private sector should be facilitated to cater to the rising housing needs, shopping malls, office buildings and hotels and restaurants. Property rights are required to be well-defined in urban and semi urban areas to encourage local people to invest.
Land titles in rural areas are required to be transparent so that they are tradable with banks, which can facilitate growers against leased land. This will help in gaining efficiencies in agriculture and allied industries by transferring land from lazy land owners to enterprising rural youth.
A workable banking model can facilitate corporatisation and documentation in the segment. The financial and judicial laws and infrastructure will bring awareness, and pave way for education in the rural and semi-urban segment, and help in changing the feudal culture over a period of time. This will also facilitate market development in these areas that can potentially apply brakes to the accelerating rural-urban migration.
The rural sector has lately been growing faster than the urban sector on the back of the commodity price boom, which means that there is immense potential for consumer industries to penetrate in that market. "Pakistan is a virgin territory in tapping the consumer durable market," Chairman of a leading FMCG business told BR Research.
Pakistan''s GDP per capita is hovering around the $1000 mark for the past two years, and there is empirical evidence that inflexion in demand exceeds beyond this level, as it grows exponentially in many areas. Housing needs for the rising middle class and bulging youth is paving way for growth in construction and allied industries.
Therefore, the export-oriented industries must be strengthened. With a decline in textile production in the West, there is a trend of shifting factories to the East and international trade in textiles is likely to increase to $800 billion from the current estimated value of $350 billion, according to Shaukat Elahi of Nagina Textile.
With a strong textiles industry base, it would not be a daunting task for Pakistan to double its textile exports in five years or so, albeit subject to consolidation at the top, as is advocated by leading textile players. However, this consolidation should not undermine the need to focus on SMEs and specialisation within the textile chain.
There is also a need to incentives and formalise the country''s engineering sector in the Punjab belt with special focus on the engineering sector, which is the largest contributor to global trade. Compared to the share of textiles in global trade, which is about 4 percent, the share of the engineering sector in global trade is about 25 percent. Therefore, keeping this in perspective, Pakistan''s engineering industry needs an overhaul on an immediate basis.
Meanwhile, the judiciary should take necessary actions to accelerate the cases of sick units to enable profitable businessmen to buy those units. There is also a need for change in mindset in the North to consider businesses on rational economic bases and not on personal egos to embrace the sick units.
Consistency of rational, long-term policies, better enforcement, and modern day changes of business and property laws are imperative to attract long-term foreign investment, which has been on a sharp decline lately.
The growth shall be market-led and not government-led, as envisaged in the Planning Commission''s medium-term growth framework. The private sector should be the driver of growth with the market paving way for innovation, entrepreneurship and transformation of cities with the aim of enhancing productivity and providing employment to the rising youth.
The revival of businesses is the revival of the country. Failing to put Pakistan on a growth trajectory by fostering businesses and markets, developing the human capital, and ensuring smooth governance and protection of property can have horrible consequences in the long-term.
The writer is the Head of Research at Business Recorder. He can be reached at ali.khizar@br-mail.com