KARACHI, Jan 28: It is now widely recognized that the new generation of entrepreneurs, whose business practices are being shaped by the emerging market, is elbowing out crony capitalists, nurtured by patronages in an over-regulated economy.

And the process has been hastened by massive failures of over-capitalized companies unable to face the challenges of globalization, demise of DFI concept and weak public sector banks which lend at high rates of interest and make investment prohibitive.

Despite the leverage that debt provides, many entrepreneurs find it more profitable to put their own money in their investments. Equity capital and corporate bonds have started moving towards the driving seat.

The nationalized commercial banks (NCBs), which dominate the market, have yet to achieve the level of efficiency that would reduce their intermediation cost and make lending rates globally, or even regionally competitive.

Besides, the banks are shy to take risks of long-term lending and tend to stick to the well established clients.

Yet, the banks and the financial institutions are the first to be professionalized. In this sector, the family management has become a thing of the past, says a young chartered accountant.

The textile industry has emerged as the largest industrial sector, both because of the domestic advantage as well as patronages. It is now making equity investments to improve quality and add value to its products and depends less on borrowing. The new generation, educated abroad, is more professionally-oriented than their elders. It is also true for such industries like cement and leather. Professional managers are also family members.

Through its own earnings, the textile sector is consolidating. It is reckoned that about 8-10 large groups are emerging. As scales require downstream investments, they may seek joint ventures with foreigners. The last Pakistani delegation, which visited the US, sought joint ventures with the US textile business to relocate their manufacturing in this country. That is the way that each country’s or each region’s requirements would have to be tackled to attract foreign investment, says an analyst.

He further adds: “If you want access to the US market, you would have to provide them access to your market for US textiles. You can provide it through import of products from there or give a percentage of ownership in your industry. That is the kind of thinking that has to be developed to attract foreign investment.”

On the basis of their financial performance, more and more companies now raise money from the capital market through corporate bonds with indicated returns. These include multinationals. The corporate image counts in a market where banks and financial institutions take the major share of TFCs through private placements and companies investment their pension funds and a minor share is offered for public subscription. The stock exchanges have yet to win the confidence of the small investors, though the dividend payout of listed companies has improved.

Addressing a seminar jointly sponsored by Pakistan Economic Forum and PRMG on Monday, the Federal Minister for Privatization Mr Altaf M. Saleem said “it was the common man for whom the subsidies on wheat and oil, etc. were intended but the benefits were hijacked by the rentier class. The subsidy has been radically reduced and is being phased out, he added.

The companies are being trimmed to face local and foreign competition. The pre-mature arrival of globalization has made firms sick and made industrial growth stagnant. It has strengthened the corporate culture. The focus is shifting now from how to benefit from patronages to how to manage a fast changing world by reducing costs and make products more competitive.

No doubt, there are some cases of bailout by the present government, which have raised eyebrows in the corporate world. That includes an investment bank.

Foreign investors, nervous about security concerns, have invested through joint ventures where they don’t exercise control but need a sustained cash flow. The Atlas Group have six joint ventures with Japanese multinationals. Mitsubishi has 7-8 joint ventures with local groups.

Some foreign IT technology companies are, however, trying to seek special concessions on the ground that they are bringing in high-tech and large investment. These companies want project-related incentives apart from the concessions offered to the industry as a whole.

Yet a major problem facing the corporate sector as well as the country is that of social exclusion that is raising the level of unemployment and poverty. The incomes of consumers who provide market for business, is shrinking.

The success of the free-market depends how fast capital can be globalized within the national economy and not how fast the economy can be integrated into the global market. In fact, regional trade is moving faster than global trade.

As Latin American economist Hernando De Soto says assets governed by informal social contract and informal law should be brought into the formal law (based on property rights that bring social recognition of a claim’s legitimacy) so that the asset can be turned (or used) for realization of the economic potentials. It should be ensured that “dead capital turns into live capital. The asset is put into productive use.”

Hernando De Soto also shows the way as to how to go about. He says: “The only organized way to integrate these social contracts into a property system is by building a legal and political structure, a bridge, if you will, so well anchored in peoples’ own extra-legal arrangements that they will gladly walk across it to enter this new, all encompassing formal social contract. But this must be a bridge so solid that it does not crack and send everyone stampeding back into the extra-legal arrangements.”

Extra-legal sectors account for 50-70 per cent of all working people and are responsible for 20-60 per cent economic output of the third world countries. In Pakistan, the informal sector is estimated at 60 per cent of the GDP. The cost of observing extra-legal system , based on social recognition of a claim’s legitimacy, is much cheaper than the following the formal law, e.g. in securing the title to one’s property .

The noted economist calls for an end to “the apartheid of formal law” by quoting an old German saying, “The law must come from the mouth of the people”.