Growth driven by private sector
By Shahid Kardar | 11/27/2012

The pace of a country`s economic growth depends essentially on private investment. This in turn depends on the political and policy environment and the stock of natural, physical and human resources.

However, this rate is also critically influenced by investor sentiment. Perceptions take time to change as opinions and views shaped over a long period have a deep-seated impact, especially if the scale of the shock and the losses incurred are large.

Unpleasant experiences reduce the time horizon of investment payback and lower the threshold of losses that investors are willing to bear, compared to the limit that they would place in the case of another country similarly placed economically but with a more credible history.

This is reinforced by a government having a short time horizon, as in our case. It is patently ridiculous for the government (which must take the lead in signalling direction) to expect the private sector to take a long-term view while regarding itself entitled to take a short-term view, whatever the reason.

It takes time for the philosophy of a competitive economy based on merit rather than patronage to get entrenched.

Since incentives for strict and fair implementation are weak, officials can openly violate internally issued interpretations of laws and rules or refuse to accept rulings of superior courts on the subject without much fear of being held accountable at thebehest of, or in collusion with, the political and bureaucratic leadership, despite a more assertive judiciary and media.

Persistent issues of law and order, political instability, poor implementation of policies, frequent policy changes (even if prompted by the need to correct a faulty design) and the high cost of doing business (resulting from corruption) contribute to weak investor sentiment in Pakistan.

This sentiment is also affected by an inhospitable regulatory environment, the lack of transparency in decision-making and failure of legal and judicial systems to enforce contracts and resolve disputes in an efficient and timely manner.

The high cost of contract repudiation increases costs for investors in two ways.

First, it increases the risk for larger investments. Secondly, it forces firms to diversify their operations into activities which are not their core competence, thereby lowering the efficiency of investment.

Since it takes years to get disputes resolved through courts, contract violators have much to gain by getting a case stuck in the queue. As a result, business transactions tend to be restricted among parties that have developed a degree of trust in each other`s business ethics.

Development of trust requires long-term stable interactions.If trust cannot be established, contracting remains restrained, the cost of conducting transactions remains high thereby discouraging business development and growth.

While these factors dis incentivise investment, hindering prosperity and growth of the private sector and economy, additionally there`s the general mindset of the bureaucracy.

This views private entrepreneurs as making money by exploiting others and stems partly from the value system and social ethos of not just bureaucrats but also of society, resulting in a distrust of market forces.

The civil bureaucracy believes that the private sector should only be permitted to make `reasonable profits` (whatever the term means) and that the government should check `excessive profiteering` and exploitation of defenceless consumers by the private sector. This belief has become ingrained in the public narrative.

These factors are instrumental in the creation of a low-trust culture and in providing a regulatory role for the government even in areas where it is not required, thereby constraining the development of a robust, dynamic and efficient private sector.

Whereas both politicians and bureaucrats arraign the private sector it is amusing that when it comes to their private lives, they behave differently from what they are proposing or opposing. Not only do they have accounts in private banks, use cellphone services of private providers and watch channels other than PTV, all have invariably chosen private schools for their children.

This private behaviour is rational as they are making choices on the basis of service quality. However, it is this same set of decision-makers and their collaborators who oppose privatisation.

They do so because of the resulting reduced opportunities for `patronage` (an appropriate all-embracing term in our context) or earnings as fees or junket trips as directors of these banks and publicly owned entities.

With such incentive structures the dilemma is how to resist the powerful set of stakeholders in the status quo demanding a large footprint of the government in the economy.

Despite our experience of infinitely better quality services, and at competitive prices, following the privatisation of banks and the entry of private telecom operators resulting from dismantling PTCL`s monopoly, there is continued resistance to deregulation, the only solution left for accelerating growth.

It is simply amazing that in this age of specialisation, instead of deregulating the energy sector, we can continue to even entertain the thought that a bureaucrat who may have read English or psychology and has been secretary social welfare in the morning and secretary health in the afternoon can solve our energy issues by being crowned secretary water and power in the evening.

In other words, under such a dispensation there is no scope for fostering a competitive environment that would unleash the potential of the private sector to serve as the engine of growth, a role that our ossified, corrupted and short of funds state sector is simply incapable of playing.
The writer is former governor of the State Bank of Pakistan.