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The many pitfalls of economic democracy

Pakistan’s economic systems are in a mess and the reason is not far to see. The instability and the uncertainty in the economic system is such that the players do not know how to play the game where profits may sink to such an extent that the players may face bankruptcy and eventual poverty. Not that the political government is not playing its part but the public’s perceptions are such that whatever it may do the action or the end result is viewed with suspicion. It is the perception that maters. The youth investment scheme is one such area where the persons are worried about the way things will go if the investment does not deliver. There is no way that the political system will be able to determine whether those involved will deliver and whether they are capable of marketing what they hope to deliver. The principle is that of micro finance without the inputs of microfinance. One of the basic inputs is that the peer group will ensure that the investment will come through and that the loan will be repaid. If that loan is 18% then the profitability of the product for the market should have a profit that covers the cost of the product and that ensures that the effort is self-sustaining. The job creation in such a venture is less than self-employment. It is only with time that the real effort and over a period of time that the growth of that industry can yield results.

When the People’s Party nationalised the large industry in 1973 the unintended consequences were a surge in small industry. There were some positive points in the economy in the small industrial sector. There were no energy shortages and the number of electrical connections could be had in a day. Since those heady days try and show me how many years it will take for an energy connection. The infrastructure was available and the small industrial estates were waiting to be colonised by the small manufacturing sector. The results indicated for the Gujrat and Gujranwala industrial estates an increase in light engineering industry of 187% and in the case of light textile industry an increase of 127% on a per annum basis. There was surge in new industries.

It was free market at its best and although at that time neo-classical economics was not in vogue this represented the best of that policy. Human behaviour issues were not visible and the ordinary person was quite capable of taking the industrial and market risks and uncertainties. The current polices suffers from some issues which are not of their making but of the legacies that Pakistan has for some unforeseen reason accumulated. The form is complicated by the fact that the giver of loans is petrified as to what will happen if the loan is not returned. Will he be culpable? Will he be punished for an act caused by others. So the collateral has been made more stringent. What may have been more sensible was to create a venture capital amount to be given entirely on the basis of selections by the bank managers. The political aspects would have been reduced to the minimum. The gain would certainly have been that of the political party and once there was gain in confidence then the loans could have been given to more investor entrepreneurs.

As things stand now there has been violent unfair criticism of the political system. My cook wanted a loan and I asked him what will he do with this amount of money and how will he return. What he will have to return and when I told him the interest he was aghast. He never thought that it will have to be returned. Why he asked me were there double standards between the rich and the poor. What could I say?

Will this sensible policy be practically impossible to be implemented? Why does this have to do with the political thinking of the political system? Political pundits think these kinds of policies impossible to be implemented. Do sound proposals stay on ground and are a failure? Who can say but the historical record of unintended consequences seems to suggest that the policies that seem too good surely have a downturn. The PM seems to be a believer in the free market system and that may well augur well for the country. Adam Smith’s hidden hand in the market may well be benign for some but could be lethal for those that do not perform. Is unfettered pursuit of self-interest the best way forward for our new entrepreneurs? On the one hand there is the question of taxing all those that make financial gains and on the other the regressive tax policy will suffer from human greed from the petty bureaucrats in the FBR. What if the investor, after borrowing, is unable to meet the various costs and the market does not play properly for the new entrepreneurs? The Small and Medium Enterprise Development Authority (SMEDA) was all agog with all the feasibilities that would guide these entrepreneurs. What if the feasibilities were not of the highest order and failed in certain critical aggregations? Who will be held accountable?

If this operation of cultivating new youth entrants is successful and efficient then the economic pie will be enlarged but if that is not the case then inefficiency will reduce that impact drastically. This suggests a two-pronged strategy to increase the income of the poor and not to hold prices down. The balance and equilibrium between incomes and prices has to be achieved. Bettering incomes is a function of the market system. We know that as result of the middle men the improvement in the marketing system especially for agricultural products will never improve unless those with unfettered powers are somehow brought to book. Today I listed a number of mafia operating in agriculture and all those mafia reduce incomes of the farmers (70%) in the market place. Can their power be reduced? Yes but then the party system should know how to handle the fallout. Designing and implementing sensible policies within Pakistan is not an easy task. I have not listed the impact of external countries on the economy of Pakistan or for that matter the impact of IMF and the WB. That for later.

Dr Zafar Altaf, "The many pitfalls of economic democracy," Business recorder. 2013-12-21.
Keywords: Economics , Economic issues , Economic policy , Economic system , Economic growth , Industries , Trade-Pakistan , Poverty , Pakistan