The Youth Loan Scheme: what is at stake?

Young people do not merely need capital, but also knowledge of how to turn raw ideas into sound, profitable businesses

The Prime Minister’s Youth Business Loan scheme is the first major initiative of the current government targeting the country’s chronic youth unemployment problem. Initial media reports suggest that around 6.5 million people have downloaded the loan application forms and more than 50,000 applications have been made. This is a clear sign of how eager Pakistan’s youth are to seize every opportunity that will allow them to fully exploit their individual potential and join an elite class of people that, through their entrepreneurial acumen, are contributing enormously to wealth creation and economic growth.

Official circles are optimistic that they can successfully channel the youth’s entrepreneurial energies into productive ventures, whereas critics of the loan programme have pointed to a number of potential flaws, including the inability of a large number of applicants to find a suitable guarantor. As the proof of the pudding is in the eating, we will have to wait and see the full impact of such an ambitious employment generation programme until some future date. However, it is also worth remembering that many other countries have been experimenting with similar ideas for a long time. It is, therefore, important to understand what others have achieved and whether we can learn something from their experiences.

What is at stake is not the millions that have been earmarked for the loan scheme: governments generally have an unenviable record of wasting huge sums of public money on fanciful economic growth projects. It is the creation of an entrepreneurial culture that will underpin an innovation-based economy needed for tackling the youth unemployment problem on a sustainable basis. A clear example of such an opportunity-based economy is Silicon Valley, where a large number of start-ups are initiated on a continual basis, creating technology related jobs for a large number of people, as well as bringing productivity improvements in other parts of the economy. Similar hubs have now emerged in cities such as New York and London, complementing their already well-established financial and legal sectors.

The Silicon Valley example is relevant to Pakistan for two reasons: there is a viable information and technology sector in Pakistan that can prove to be a powerful economic engine similar to that in India; and there is relatively little fixed cost involved in setting up technology ventures.

How can a government encourage the creation of such clusters of innovation and technological development? Unfortunately, the answer is not as straightforward as one would like to hear. This is because a country’s education system must be able to produce graduates who are technically literate. This requires long-term planning and resource commitments; however, governments can still do a lot in the short-term. They can help create a strong venture capital and private equity sector. Commercial banks can process funding applications prudently for businesses in traditional brick and mortar sectors, as we see them do in the current loan scheme, but they are hopeless in enabling business potential in more creative and knowledge-based areas. This requires a specific type of knowledge and a willingness to take risks. Private equity and venture capital firms can perform such a role. More importantly, they can provide direct support to budding entrepreneurs through transferring technical and business expertise.

This is not the only way to create a vibrant enterprise economy. Pakistan has already established an extensive network of higher education institutions. Enterprise zones can be set up alongside university campuses where youngsters can test their ideas and turn them into workable business plans, which could later be funded by a scheme like the one currently in place. Such linkages can also be beneficial for the universities as well. They could generate impetus for them to develop their own strong research bases, further augmenting their role in science and technological developments.

Similarly, coordination could be improved between different policy and business organisations, including technological and scientific establishments. By strengthening links between business, employer and research organisations, a networked type economy can be developed that relies on the genius of people. This is not simply about benefiting from outsourcing trends in the Western world, but how digital technology-based ventures can penetrate into our traditional agriculture sector and increase the effectiveness of more advanced power and energy-related enterprises. As a result, there can be massive productivity gains in both traditional and modern economies, pushing the frontiers of innovation and development.

A fundamental factor that would ensure success in establishing this knowledge-based economy is the access of individuals to information technology, although other factors are also important. For example, new start-ups will need capital at different stages of their development and there will be a need for intermediary organisations that will help broker their innovations and market products in both national and international markets.

One can only hope that when the officials running the Prime Minister’s Youth Business Loan scheme finally have the chance to review their programme’s achievements, they also consider the fact that young people do not merely need capital, but also the knowledge of how they can turn their raw ideas into sound and profitable businesses. They will need to be given a helping hand in establishing a basic enterprise infrastructure, as well as in marketing and sales. That means creating institutions that overcome many market-related inefficiencies. Governments can play a pivotal role in creating such support mechanisms, which are so vital in ensuring a thriving enterprise culture. However, this requires implementing a multi-pronged approach to tackling the challenge of unemployment: providing loans to individuals is only one component of this growth framework.

Creating an enabling infrastructure that improves the network and business capabilities of each aspiring youth is as important as providing money that can be used to buy office furniture, computers or machine tools as part of setting up a business venture.

Published in The Express Tribune, January 25^th,  2014.

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