The move towards consumer-led economic growth is now being followed up by proposed regulatory initiatives to check speculative and unfair trade practices. The anti-trust and anti-monopoly law is being updated.
Under consideration is an idea to set up a "corporate ombudsman" to protect interests of small share-holders. And the State Bank is stressing the need for setting up consumer interest groups.
The prices of a wide range of goods including food, industrial raw materials, durables and building materials have shot up to push the official rate of inflation to 5.3 per cent last month.
Food prices are perceived to be moving much faster than those recorded officially. The soaring share market prices are raising fears of a bubble, though the KSE officials rule out any major volatility.
How the interests of consumers can be protected depends on the corporate culture; the policy mandate, integrity and the efficiency of the regulatory authorities and the organized resistance of the consumers themselves.
Corporate fiascoes and failures of regulatory authorities in the United States and Europe have given birth to "shareholders activism" that has managed the exit of some errant top corporate executives. Company "owners/sponsors" in the West retain 10-15 of the shares and the rest is offered for public subscription. This makes "shareholders activism" more practical and feasible.
The NIT chairman, Tariq Iqbal Khan, defines the capital market as, "a set of institutions and individuals which put the savings of an economy into productive channels." Speaking on some related core issues. he said, the growth of the capital market must keep pace with the growth in other sectors of the economy as it contributes directly by mobilizing savings and allocating investment resources. Another crucial aspect is the professional and ethical practices and the adequate knowledge for all those involved in the market.
In Pakistan, the majority of shares are controlled by the sponsors and good scrips are tightly held. The low volumes of free float of shares in the market provides easy opportunity to a few to manipulate prices through speculative trading. There is very little room for share-holders' activism.
The local corporate culture is still dominated by the outdated mind-set rather than the modern corporate bosses with a progressive outlook. There is very little of share-holders' democracy.
The sharing of profits, fairly and equitably, with the other stakeholders whether it be lenders, tax-collectors, minority share-holders or consumers, leaves much to be desired. That there has been some improvement in areas other than speculative trading in goods, services and shares, cannot be denied.
Somehow, the strategy for consumer-led growth coincides with social exclusion (as the economic stream churns out poverty) and the fast disintegrating welfare state.
The problem has been further compounded by the conflict between the market and representative democracy. Policy makers look at electoral mandate with contempt as "populist" as opposed to the old dictum that the voice of the people is the voice of God. All voices are neither heard nor taken into account. Institutions are not answerable to individuals.
The less said about the regulatory authorities the better. All the banking reforms for the past seven years or so have been designed to minimize, if possible, eliminate risks to finance capital, rather than pressing credit in the service of diversified industrialization. The State Bank is less of a regulator and more a representative of the financial market.
The banks make abnormally high profits and the depositors get negative returns on their profit and loss accounts. In second quarter ending December FY04 commercial banks made an after-tax profit of Rs28.6 billion as against Rs2.4 billion for calender year 2002.
Bankers say that the return on profit and loss accounts are determined by supply and demand and not by the inflation rate. The State Bank does not intervene. Banks penalize account holders if cash balances slip below the prescribed limits and fee-based incomes are rising disproportionate to the quality and cost of service being rendered. For such regulators, to quote an eminent economist and scholar Joseph Stiglitz, 'free market is a matter of faith rather than a question of economics/science.'
In the second quarter of FY 04, the total non-interest incomes of all banks went up to Rs48.4 billion from Rs32.4 billion in the comparable period of last year. Comparable net interest incomes rose to Rs72.5 billion from Rs69.3 billion. Returns on profit and loss deposits have ranged between 1.5-1.75 per cent for banks with large network of branches. The main beneficiaries of the low interest rates have been big companies and the government.
Now, new opportunities are being opened up for auto leasing (pushing up prices and premium on cars) and house financing (inflating costs of building materials.)
For small investors, the shares of state enterprizes are also being offered. Then the mutual fund sector which is the midst of a major boom, is expected to expand fast. From next fiscal year, the mutual funds may be allowed to launch private pension funds in which the individuals and not the company would be made responsible for pension payments. Real estate mortgage funds may also be floated.
The deepening of the financial market would be achieved through individuals /retailers/consumers by offering them a wide range of saving products. This would provide individuals an opportunity to play a significant role with risks and rewards that would be exclusively their own.
In an emerging market like Pakistan, individuals have so far limited choices, they lack the required knowledge and skills to invest and to act prudently. They have to be educated and made aware of the risks. Individual decisions will have also to be made in a limited but widening range of investment options, within the policy framework and rules set by the government and the companies. The individual investors are not consulted.
Compared to other stakeholders, individual consumers/middle class investor have no lobby. The consumers/share holder activism is the best course and needs to be encouraged by the government. All business institutions should be answerable and accountable to individual stake-holders.
Consumer financing and home remittances have helped revive domestic market demand and industrial production and combined with low interest rates have sharply inflated corporate profits. Companies have improved their balance-sheet and some of capital accumulation has gone into modernization in various industries. But economic growth is a jobless one.
What is needed is an investment-led diversified economic development. Profits need to be ploughed in creating new industrial and productive capacities. If this does not happen immediately and on a big scale, the consumers' disposable incomes, already eroded, would shrink further, making consumer financing unfeasible.
Companies can do away with jobs and employees but they cannot afford to loose customers, a prosperous middle class. In fiscal 2003, private consumption accounted for 75.2 per cent and the government consumption 11.2 per cent of the gross domestic product (GDP). The share of fixed investment was 12.9 per cent. Exports of goods and services contributed 18.1 per cent.
Imports of goods and services claimed a negative 18.9 per cent of the GDP. In the background of these statistics, a consumer-focused growth strategy may not look out of place but a sustainable growth can only be achieved by protecting the legitimate interests of the consumers and a prosperous middle class. That requires consumers and share-holders activism in self-interest.
