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Time to rebalance the economy

June 25, 2018


THE registration of new companies with the Securities and Exchange Commission of Pakistan (SECP) last month demonstrates that the private sector is stepping into businesses required to fill the gaps created by a web of sectoral imbalances.

The marked bias for the trading and services’ sector is now being tempered by approaching a balanced ratio of registered industrial firms.

While the trading sector took the lead with 178 firms, followed by services (153) and construction (132), the new companies in different sub-segments of industries together totalled 154.

In the practice of economic growth, balances turn into imbalances and assume the proportion of a crisis if not addressed promptly as an ongoing process in the pursuit of sustainable development

The breakup was as follows: engineering- 32 firms; chemicals, fuel and energy-12 each; textile and pharmaceuticals-19 each; communication and power- 11 each; and corporate agricultural farming-26 firms.

Another positive development is that there is a rapid induction of high-technology companies. The number of information technology firms is shooting up at a rapid pace, indicating a likely pickup in digitalisation of the economy.

That will lead to the creative destruction of old technologies, elimination of outdated ways of doing business, and improvements in industrial efficiency, productivity and competitiveness. As many as 135 IT companies were registered in a single month.

However, the actual pace and the volume of industrial investment is not enough to remove inter-sectoral imbalances any time soon. Currently the services sector has a skewed share of 56 per cent of the GDP and the rest is made up by the underperforming commodity sectors.

The surging imports contribute negatively to the GDP. Investment/economic growth is being driven primarily by domestic demand.

Most big business groups are prospering, but the incorporation trend indicates that big firms seem to be getting out of fashion. No less than 98pc of the registered firms are either private limited companies (76pc) or single member companies (22pc).

This trend has become more pronounced after the banking sector reforms and the rising costs in terms of time and money of regulatory compliance by public listed companies. Big groups have few listed companies and many small self-financed private companies.

The SECP is hesitant about giving the exact number of public companies and clubs them with non-profitable and foreign firms. Together they constitute a mere 2pc of the total registered firms.

The registration trend also shows that business confidence has not been impaired by political uncertainty and balance-of-payments strains. The number of registered firms in May rose by 17pc to 1,094 compared to a year ago.

But the optimistic outlook presented by the incorporation of the new firms needs a reality check. How many of these companies have gone into operation is not known. The SECP does not provide periodical consolidated figures of operative companies while giving data about new incorporations.

Even some existing companies go dormant unable to face business risks. Most of the business risks reside in the multiple unaddressed imbalances, a few of which such as the fiscal deficit and current account gap seem to be on the verge of a crisis.

There is a critical mismatch between national savings and investment as well as accumulation and dispersal of capital. The risk perception holds back surplus cash from flowing into productive outlets and channels it into speculative trading in currency, stocks and real estate, etc.

Money is also stored in dollars/euros as a hedge against the depreciating rupee. Some of it flows out of the national frontiers in search of greener pastures. And the hard currency stashed aboard or at home is used to finance imports, education of children abroad, etc.

However, a part of the earnings from speculative activity ultimately finds productive outlets as indicated by investments of some leading stockbrokers who have diversified their businesses to manufacturing, banking, and real estate activity.

This brings us to a relevant discourse in developed economies about multiple facets or types of capitalism, with specifics differing from country to country and varying impacts on economic growth.

Deviating from Margaret Thatcher’s praise of capitalism and demonising the state, Bagehot of The Economist in “Good capitalism vs Bad Capitalism” pointed out that the Conservative Party leadership in the United Kingdom is now making a sharp distinction between good and bad capitalism.

The party’s influential members are suggesting an active role for the state in promoting the first and tackling the second. The party wants to curb the excesses of capitalism. Academics laud entrepreneurial capitalism for its positive, robust contribution to economic growth.

They criticise “a well connected oligarchy” for sucking up a disproportionate proceeds of growth. In state-directed capitalism, they argue, the leaders of many governments and the elites that backed them do not seem to care as much about growth as they do about keeping the spoils of the economy.

Such economies are best characterised as “oligarchic”. Pakistan’s economic growth is inhabited by numerous factors. Oligopolies dominate some of the segments of the domestic markets discouraging new entrants for building up of a competitive, inclusive economy.

Despite some efforts to reduce subsidies and tax exemptions, rent- seeking has not been fully curbed. Businesses are hamstrung by the numerous unaddressed imbalances in the economy.

Published in Dawn, The Business and Finance Weekly, June 25th, 2018