STIMULATING PRIVATE SECTOR INVESTMENT
It must brace itself to meet the challenges of an increasingly competitive global environment
By SHABBIR H. KAZMI
Sep 01 - 07, 2003
The most important issue confronting Pakistan's economy is slow growth in private sector investment. Despite the significant improvement in economic indicators and increased economic activities in the country, private sector investment has not increased correspondingly. Many experts express their concerns but often have not been able to suggest remedial measures. Lately an effort has been made by Marshuk Ali Shah, Country Director, Asian Development Bank (ADB) Pakistan Resident Mission. He was the keynote speaker at an event organized by 21st Century Business Club, headed by Syed S. Haider. Shah made an elaborate presentation before an august gathering of entrepreneurs, professional managers, bankers and equities brokers. Though, one may not agree with the observations made and the strategy suggested by Shah, these certainly demand the attention of every Pakistani.
The focal point of Shah was that private sector has to play the lead role and the government should create conducive environment for investment. Globally, the concept of "state should manage the business" has been transformed into "state should facilitate business" and Pakistan is no exception. The process of liberalization, deregulation and privatization has been going on in the country for nearly one and a half decades. While some of the critics say that the new strategy has helped the government in encouraging private sector to play a more active role, the others do not subscribe to this.
Like many Pakistani analysts, Shah also subscribed to the observation that with the improved corporate governance, greater accountability and rather transparent policies the investment is being made by serious businessmen. Whereas in the past bulk of the investment was made by the public sector or by "rent seekers". The investment made was either due to SROs offering numerous incentives or concessional financing provided by the state owned financial institutions. However, with the shift in paradigm, both the GoP and private sector, should look at the strengths and weaknesses and redefine the strategies.
According to Shah, the slow growth of private sector investment is a major challenge facing Pakistan's economy. The reasons for low growth in investment can be attributed to factor relating to macroeconomic environment and inhibitions and challenges faced by the private sector. The macro environment related issues are: - 1) institutional weaknesses, 2) legal and regulatory constraints, 3) poor infrastructure, 4) lack of long-term finance, 5) smuggling and rent seeking, 6) law and order situation and 7) prevailing low level of skills.
After living under protected environment for decades the local private sector was never exposed to global competition. This brought some weaknesses that include: - 1) lack of entrepreneurial skill and professional management 2) closely held businesses, 3) absence of corporate profile and 4) herd mentality. To face the challenge of globalization and free-market a complete change in the mind set of local investors has to be brought in.
It is heartening to note that the GoP with the support of multilateral institutions is working on creating an enabling environment for private sector growth. The GoP is following an ambitious agenda of reforms in the financial sector, capital markets, trade and commerce, SME sector, judicial reforms, taxation good governance and many other areas. The reforms have certainly made the impact in increasing economic activity. However, a lot more has to be done.
While the GoP needs to create the enabling environment, the private sector should also prepare to face the challenge by becoming more pro-active. It must have the right sectoral focus and at the same time bring in innovation in business operations. There is a need to target exports and penetrate new export markets. To achieve this private sector should identify areas of comparative advantage and explore possibility of increasing exports in non-traditional areas. Also, market should be explored for increasing export of services and not just tradable commodities.
The private sector needs to self-reform itself through improving business management to compete globally, the gradual removal of trade barriers has led to greater competition. The new strategy should include, 1) building economic size plants capable of competing globally, 2) taking advantage of indigenous materials, 3) using long-term financial plans, 4) following good corporate governance, 5) using efficient technologies and 5) inducting professional management. Human resource management is one of the most important aspects the private sector should look at for sustained growth and higher degree of competitiveness.
It is important to note that most of the multilateral lending institutions have announced and following clear cut policies. It is heartening that the redefined strategy of the GoP is based on the broadly specified policies. It is imperative that private sector should act swiftly to further improve its efficiency, effectiveness, and innovativeness to take advantage of the new opportunities.