Managing Government Business Relations In Pakistan

Published Date: 02 Nov 2017

In almost all nation-states of the world, private businesses have to co-exist with governments. On one extreme is a state where either direct ownership of most prolific resources lies with the government and only small businesses operate in the private sector. At the other polar extreme is a market driven by laissez faire with the government playing a nominal role as private businesses dominate the show. The U.S. – the bastion of private market economy – was hurt severely by the most recent financial crisis as the regulatory and oversight role played by the government was minimal. In between these two extremes there is a whole mix of models that range from the Nordic, European Social Market, Chinese State Capitalism, East Asian, Indian mixed economy to Chavez Socialism that divide the economic space in a wide variety of ways between the private sector and the government.

Market, if it operates competitively is good at allocating resources and producing efficient outcomes. But it also creates inequalities among households, individuals, regions, gender, urban-rural divide. Government, if it is benign and uncorrupt, can minimize these inequalities through Tax, Transfer, Subsidy schemes, and other policies, investment and regulations. The U.S. has 12 percent people living below the poverty line and 9.6 percent unemployment rate. Unemployment had declined, poverty had fallen but I think inequality had worsened. Since 2007, the middle class in Pakistan is hurting under the burden of high inflation, low purchasing power and diminished employment opportunities.

What should therefore be the appropriate relationship between Government and Private businesses in Pakistan?

Government as an Enabler and Regulator

The politicians and bureaucrats in Pakistan are neither equipped nor have the appetite for risk taking in running businesses. The poor record of nationalized companies since 1973 corroborates this assertion. Suffice to say that the production, distribution, marketing, trading of goals and services should be carried out by the private sector. What the Government can do is to ensure a level playing field for all market participants. If the market structure is monopoly, oligopoly , cartel or in other way imperfect, the welfare of the public who buy these goods and services will be hurt. The Government through Competition Commission, regulation, legislation and oversight has to protect the consumers from the abuse of market power. A private monopoly, in my view, is worse than a public monopoly and should be shunned.

Protector of Life and Property

The second important function of the government is well known – national defense, internal security and protection of life and property of citizens. The threat to security had accentuated after September 2001 but an expanding market and a higher growth provided handsome returns in pre 2008 period thus offsetting some of the security concerns.

Enforcer of Rule of Law and Contracts

Private markets cannot function if property rights are not cosseted, contracts are not honored and disputes are not settled through an open system of the courts of law. If land disputes loiter on for over decades in the courts, how can you expect businesses to enter into long term investments? Pakistan’s percentile rank in the World Bank’s rule of Law Indicator has deteriorated from 65 to 81 and among the 20 most populous countries Pakistan ranks 19th followed by Nigeria.

Provider of Infrastructure

The fourth area of government duty is the proviso of physical infrastructure – roads, bridges, highways, ports, terminals, pipelines, railways, power, gas, dams, irrigation water, etc. These are basically public goods whose benefits cannot be appropriated exclusively by any one group of citizens. In Pakistan, the opposite has taken place. Other countries have successfully experimented with Public-Private Partnership to meet infrastructure deficiencies and although every government in Pakistan has paid lip service to it nothing of significance has been achieved so far. Even the utilization of the existing capacity in the private sector is sub-optimal because of the circular debt problem.

Investing in Human Capital

The fifth area of responsibility for the Government is to invest in human development. Pakistan ranks 101st among 135 countries according to the Human Development Index 2009. Adult literacy is dismally low – 56 percent of the population is illiterate. The private benefits from investment in human development leak out because of what the economists called ‘externalities’. For this reason, public sector finances education and health. Deplorably Government’s allocation in Pakistan for Education and Health is only 2 percent of GDP while the task of educating 50 percent of the population below the age of 19 is enormous.

To carry out the above mentioned several roles there are two necessary nuts and bolts that the Government should possess. The bureaucracy administering laws, rules and regulations, protecting life and property or building infrastructure or running schools and health centers should be competent, and free from large scale corruption. Inefficiency and corruption cause heavy harm to the economy and asphyxiate growth of businesses. Pakistan’s rank in Transparency International Perception Survey now falls below Bangladesh – once perceived as the most corrupt country in the world. Sharp twists and turns with each change in the government erode the credibility of the country. With every incoming government reversing the policies, projects and programs of its predecessor, uncertainty about the country’s long term commitment has enhanced.

You may ask me if this is the catalogue of government’s responsibilities what should the private businesses do in return. I would argue that private sector should act as a good corporate citizen, promote good corporate governance, invest in your own future, be prepared to face competition and pursue social mission.

Good Corporate Citizen

First, the private businesses have to diligently and honestly apportion a part of their profits to the Government in form of direct taxes, pay all indirect taxes and duties without concealing misrepresenting, understating, misclassifying under-or over-invoicing. Lower Tax-GDP ratio is a manifestation of the tendency on the part of our businesses to make huge windfall profits at the expense of the government. Pious pontifications on TV shows against corruption are no substitute for the crooked behavior on the part of some of our private businesses. The financial bottom line is not good enough. Both financial and environmental bottom lines are desirable. Corporate Governance

Second, the private businesses do not realize the great opportunity for attracting other people’s money into their businesses. Open, transparent public disclosure of their performance and finances would help bring in other people’s money into their businesses while the ongoing sponsors continue to exercise control over the operations of the businesses. This enhanced credibility and better performance, in turn, will attract financing from wide variety of sources for the firm with a record of good corporate governance. The sooner the Pakistani firms set the right direction the better off this country would be. Competition

Third, Pakistan’s manufacturing industries have yet to realize that they are still operating behind tariff and non-tariff barriers. India lowered its outrageously high tariffs to a level of about 10 percent. East Asian countries and China have average tariff rates of around 5 percent. Cross-country studies suggest that openness of the economy is important for raising growth and attracting technological innovations and spillovers.

Lower trade barriers unleash the competition that forces domestic industries to become more efficient or they would not survive. Selling in domestic market under protectionist barriers is easy and lucrative. Perpetuating the present set of inefficient industries artificially does not augur well for the future of Pakistani economy situated in a fiercely competitive world market.

Research and Development

Fourth, like government the private sector has been equally amiss in promoting Research and Development and investing in high quality manpower. Short term profit considerations have blinded them to the virtue of investment in their long term survival. The future of the companies and Pakistan’s place in the global market is highly dependent upon the quality of human resources, leadership of its Corporates and adapting to the changing dynamics of the global market. Our government has not paid much attention to Human Development but for the private sector filling in the gap is essential for talent management. With 3.5 percent of GDP spent on R&D and 60-70 percent tertiary education enrolment rate Korea is the fastest growing source of Intellectual Property Rights. Private sector firms in Pharmaceuticals, Chemicals, Agro-Food, Electronics, IT ought to step up their R&D activities and all firms should support and set up higher educational institutions in Science Technology and Engineering.

Social Mission

Finally, let me make a distinction between Social Mission of the Corporate and the Corporate Social Responsibility (CSR). Companies, for example drilling or producing oil or gas in the backward areas of Balochistan or exploring and exploiting minerals should help those communities by providing education, health, drinking water, housing, employment opportunities, service contracts, etc. It also makes business sense that latent purchasing power of 60 percent of underserved population at the bottom of the pyramid is offered innovative, low cost products and unconventional, inexpensive marketing channels such as use of the mobile phone. Bottom-of-the pyramid marketing is taking a life of its own in many parts of the world. The challenge for you as corporate leaders become even more formidable if the external environment is hazardous and the government policies and practices are unreliable and erratic.

A cross national study of some 16,000 middle managers of 825 companies in 64 countries, ranging from Albania to Zimbabwe, found for instance, that the most valued attributes of company leadership, regardless of country, are dynamism, decisiveness and honestly; a capacity to motivate and negotiate with others; and a focus on performance. The company managers also universally agreed on several unfavorable traits; autocratic, egocentric and irritable. To sum up, the appropriate model of Government – Business Relations in any country has to emerge from the country’s own historical, cultural, social and economic milieu. If the Government sticks to things which nobody else but the Government itself can only do and the private sector focuses on activities for which only it is equipped and capable then a lot of air can clear up and the country can march forward. In India, in pre 1991 period the Government was the dominant player. Since 1991 the business has overwhelmed the Government. Business leaders in India are leading India on the path of prosperity despite the presence of a bureaucracy that clings to its legacy.