Growth driven by pri­vate sec­tor

The Pak Banker - - Front Page -

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 short­term 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 in­ter­preta- tions of laws and rules or refuse to ac­cept rul­ings of su­pe­rior courts on the sub­ject — with­out much fear of be­ing held ac­count­able — at the be­hest 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 dis­in­cen­tivise 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

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