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Does disrupting the system of patronage affect growth?

Updated January 21, 2019

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Prime Minister Khan needs to instil confidence in the business community but not through ad hoc, knee-jerk patronage initiatives,” says EFP president. ─ File photo
Prime Minister Khan needs to instil confidence in the business community but not through ad hoc, knee-jerk patronage initiatives,” says EFP president. ─ File photo

BUSINESS leaders in Pakistan privately acknowledge that a regime change shakes the framework of patronage on which our system operates, and possibly adds to the economic adjustment cost. The impact, however, is relatively marginal in their opinion.

There may be exceptions, but historically the GDP growth rate seems to moderate after every regime change in Pakistan.

According to the Pakistan Bureau of Statistics, in FY71 there was a steep fall in GDP to around 1pc from 10pc in FY70, from 6.6pc in FY96 to 1.7pc in FY97 and to 0.4pc in FY09 from 5pc in FY08, indicating that the economy does take a greater beating after turbulence.

But even the relatively smooth power transfer entails some economic cost. Besides other factors, analysts attribute this to disruption and uncertainty in the transitional phase.

It is interesting to observe the same cycle repeat itself in 2018 despite a peaceful transfer of power after elections.

Soon after the PTI-government assumed power in the middle of last year, the growth expectation for the ongoing fiscal year was revised down significantly. From over 6pc, the GDP growth projection was scaled down to 4pc or less.

A mounting fiscal deficit and growing external sector vulnerabilities have been identified as the key triggers that have stalled the growth momentum. The indecisiveness of the incoming economic team has also been blamed to have dealt a blow to business confidence leading to shrinkage.

But, has the regime change also disrupted a hidden system of perks and privileges to deter growth?

‘Most sectors depend on crutches instead of standing on their feet and advancing their operations by facing competition’

“The nexus of patronage, cronyism and corruption in the country is too obvious to dismiss. Each political party has its own set of favourites in the private sector. These elements are shunted out of Islamabad’s elite circles as soon as their patrons are de-seated. It is no accident that trade bodies tend to elect people perceived to be close to the party in power,” a businessman commented requesting anonymity.

“The liberal use of SROs by the subsequent rulers to the benefit of their cronies is an open secret. Perhaps a dissection of records of bank credit write-offs, major public contract grants, permission for LNG stations, sugar mills, power plants etc can shed some light on how this system works. There is still enough circumstantial evidence to confirm the existence of collusion to undermine competition and the rule of law in the country,” he added.

Most leaders reached for comment avoided a direct answer. Irfan Wahab Khan, CEO of Telenor Pakistan and president of Overseas Investors Chamber of Commerce and Industry (OICCI), was travelling.

He still promptly mailed the following response: “Everyone knows that Pakistan is currently facing certain economic challenges. However, in our opinion they cannot be unilaterally attributed to the change of guard. The slowdown is a result of a number of factors that have built-up over time including low foreign reserves, trade and current account deficit and external debt, etc.

“Of course, any regime change puts the new leadership under the microscope. People rightly have a lot of expectations. OICCI maintains periodic interaction with the relevant stakeholders in the government. The primary focus of these interactions is to discuss some of these challenges as well as exchange ideas about how the government and private sector can collaborate to improve the economy.

“We are optimistic when it comes to mid- and long-term economic outlook of the country. And we are hopeful that the government will continue to work with OICCI in a joint effort to put Pakistan on the road of economic growth and prosperity.”

Muhammad Ali Tabba, CEO Lucky Cement and chairman Pakistan Business Council (PBC) defended the current economic team. He told Dawn over phone that rent-seekers do strive to capitalise on personal relationships but their influence is receding gradually.

“Conditions forced the government to adopt stabilisation policies. The focus on export promotion is appropriate but for sustainable growth, and in anticipation of a growth spurt, the government must focus simultaneously on measures such as sufficient energy supply at affordable rates and appropriate logistic facilities,” he said.

“With a huge population bulge the country can endure the stress of a slowdown for a year or so at most. It is absolutely necessary to put in place policies to engineer an economic rebound before the situation gets out of hand,” he warned.

Ehsan Malik, CEO of PBC was also cautiously optimistic. He said cronyism is a problem but there are other bigger problems that need urgent attention. “We believe that the country will be better served if a predictable and transparent framework for the conduct of public and private business is in place, independent of politics.” He appreciated the growing public demand for and emphasis on the rule of law.

He emphasised the need for competitive markets for a strong feedback mechanism to ensure better appropriation of resources. Market competition, in his opinion, limits the ability of power yielders to create too many rents. He thought that while currently the arbitrary abuse of power may exist, and could be exerting pressure, its impact is limited.

Majyd Aziz, president Employers Federation of Pakistan forwarded a detailed mail in response to the query: “Many policies of the past governments are responsible for stalling the transformational process.

“In Pakistan the business environment is rooted in a system of privileges. The economic underperformance propel crisis and the country ends up seeking help from the International Monetary Fund, World Bank or friendly countries.

“Most sectors depend on crutches instead of standing on their feet and advancing their operations by facing competition, increasing productivity and marketing aggressively. The PTI-government has still not been able to change the mindset that longs for government largesse.

“The various measures taken to broad-base the formal economy have not been successful because of indecisiveness and non-implementation of announced policies.

“The hyper activity of agencies such as the Federal Bureau of Revenue, Federal Investigation Agency, etc. has disrupted and discouraged not only the formal sector but also those in the informal sector who wish to enter the formal economy. Prime Minister Khan needs to instil confidence in the business community but not through ad hoc, knee-jerk patronage initiatives,” Mr Aziz advised.

Published in Dawn, The Business and Finance Weekly, January 21st, 2019