The culture of pessimism: Why businessmen lie to make things sound worse

KARACHI:

The least reliable source of information about the state of the Pakistani economy are its businessmen, for one very simple reason: barring a very small sample, the overwhelming majority of them will lie to make things sound far worse than they really are.

It would be ludicrous to argue that business in Pakistan is booming or that it is easy to do business in the country. But if you were to rely entirely on the opinions of business leaders you meet (assuming you are not a businessperson yourself), you would think that the country’s economy will come crashing down before 5 pm this afternoon.

It is the suggestion of this scribe that, although doing business in Pakistan poses far more challenges than running a commercial enterprise in a developed economy, the returns tend to more than make up for it. And if you seek evidence of this assertion, try getting hold of people’s financial statements (the real ones, not the fake stuff they give to banks and tax authorities).

The numbers will bear out a simple truth: business in Pakistan goes through the same kind of mundane boom-and-bust cycles it does anywhere else. The only difference is that our booms tend to be bigger and our busts tend to be deeper. So while more volatile, Pakistani business is not inherently less profitable. If anything, the return rates here seem to be higher.

Numbers do not lie

Entrepreneurs in Pakistan love to kvetch about how the country’s economy is going down the drain. Barring a few exception, many of them especially love making it sound like they would leave the country the minute they got the opportunity to.

Take, for example, a former client of mine in the retail food business. I was at a board meeting of this gentleman’s company where the conversation, as is normal in these occasions, turned to political and economic developments in the city and the country. There was the usual blather about how nothing works and the country will probably break up within the next decade.

They waxed eloquent about how doing business in Pakistan is utterly impossible and that they only do it because they have no choice. The problems they highlighted were very real – the chronic power crisis, the problem with security, the burdensome regulations, corrupt government officials, etc.

But then began a presentation on the company’s financial statements, and an analysis of how their new line of retail stores was doing. The return on investment on that chain was upwards of 72 per cent. The company’s overall revenues and profitability had been doubling for the last two years.

This, by the way, is despite being in a line of business that is vulnerable to all of the factors they highlighted as making life difficult for Pakistani entrepreneurs.

Or take another example, of an asset management company based out of Karachi. The chief executive officer of this company, who has worked in the United States for a few years, has an extraordinarily pessimistic outlook on the national economy. Conversations with him about Pakistan tend to get depressing very quickly.

But his company’s profits have been increasing at 56 per cent per year for the last five years. Put another way, the company’s profits grew nine times in five years. Not only has the firm been doing well in the past, it seems to be anticipating a good future as well. It has been adding new lines of business, hiring new employees and generally acting as one would expect a fast growing company to act anywhere in the world.

These companies are not alone in doing well, although they are probably doing better than most. The banking sector, for example, has grown by over 16 per cent per year since 2002, yet bankers are some of the most pessimistic people in the country. Profitability in nearly all sectors of the economy has risen by double digits over the last decade (more research on that in future articles).

Yet there is a wide gap between the rhetoric of the managers and owners of companies and the reality that their financial statements portray. Why?

Deception and fear

Part of the reason is fear. There is a perception, one that is entirely reasonable and based on experience, that well-off people in Pakistan are targets of kidnapping for ransom. So it is understandable that many people have developed a habit of saying things are bad, just to throw others off the scent of their money.

Another is simply fear of competition. Two of my friends recently tried to enter the rice export business and were discouraged by nearly every single rice exporter they met. They were told the market was terrible and this is a bad time to enter (even though global commodity prices, including rice, are skyrocketing). They were told about defaults from buyers, which is a real threat.

But what was omitted by these captains of industry was that they themselves were doing extraordinarily well for themselves. How do I know this? Because one of them came to the firm I work for and asked for business plans to spend his surplus cash on.

Reality is more complex

None of the above is meant to discount any of the challenges that business face in Pakistan. They are very real, though it is sometimes too easy to forget that they are worth overcoming. Contrary to what businessmen may tell you, they have a choice about living in Pakistan and most of them choose to stay.

Yes, their day is frustrating and the challenges they face are mind-numbing in both number and intensity. But the payoff they get makes it all worthwhile. So the next time they start telling you how bad it is, nod along and then try to get a peak at their financial statements. The challenges they describe are real, but their assertion that they are a reason to be pessimistic is not.

At best, they are presenting you with a half truth. Look at the numbers to get the real picture.

Published in The Express Tribune, March 21^st, 2011.