Innovation and regulation

How can our bright youngsters come up with earth-shattering ideas, businesses when they can’t find affordable offices?

Countries that don’t innovate quickly fall by the wayside in the global success stakes. Pakistan ranks poorly in world innovation rankings, although we do quite well with the limited inputs that we have. While the recipe for innovation is a complex one, government effectiveness and regulatory quality are important ingredients. Our lack of government effectiveness is a well-recognised reality. Even more troubling is the fact that in many cases, our regulatory and policy environment actually impedes rather than promotes innovation. Unless this changes, we will not become an innovation nation.

While innovation is often associated with science and technology, it is at heart nothing more than problem-solving. Innovation is about finding new and better ways to solve existing problems, as well as actively seeking out new problems to solve. Pakistan’s regulatory and policy landscape has too many instances where policy blocks innovation. Regulation allows problems to persist unsolved.

Capital controls are a case in point. Pakistan has not fully liberalised its capital (financial) account. Fair enough. The SBP is arguably Pakistan’s most respected regulator. But existing regulations make it very difficult for Pakistani corporations to acquire scale or capability through acquisition of a foreign corporation or its assets. Companies the world over acquire new capabilities through acquisition. The target company often has the technological know-how, market position or human capital that the acquirer would be unable to replicate independently, or that would be prohibitively expensive to acquire independently. But the SBP and the government’s economic policy make it very difficult for Pakistani companies to acquire capabilities this way.

Capital controls impact big business and the budding entrepreneur alike. Technology entrepreneurs are not allowed to set up a corporation to commercialise new social media ventures. Opening a foreign bank account is next to impossible. And our corporations can’t make even a modest foreign investment without the approval of the Economic Coordination Committee (ECC) of the federal cabinet, the government’s highest economic decision-making forum. The ECC is ill-equipped for this task. Existing policy thus ensures that Pakistani companies remain midgets on the global corporate stage and that Pakistani Zuckerbergs do their best to take the first flight out of the country.

It is not only outbound movement of capital that is controlled. Our interior ministry requires all foreign investors to seek clearance from it. Openness to foreign direct investment (FDI) is a hallmark of an innovative economy. Pakistan gets negligible FDI. And yet, a foreign investor faces the prospect of setting up a company in Pakistan, capitalising it, and then learning a month later that he/she has been denied security clearance.

One of the metrics that global innovation surveys use to measure innovation and creativity is the number of uploads on YouTube per capita. But the Pakistan Telecommunications Authority, another of the country’s more respected regulators, as well as the information technology ministry are unable to answer a question that my nine-year-old son asks, which is that why must we continue to block YouTube? The issue of internet censorship is a complex one, but an effective government and an empowered regulator should have anticipated and handled it in a less heavy-handed manner. Existing policy ensures that we continue to stifle online creativity, thus stifling innovation.

Why is it that decent, no-frills office space is cheaper and more readily available in San Jose, in the heart of Califorina’s Silicon Valley, than it is in Islamabad? After all, Pakistan has a per capita income about one-twentieth that of the US. How can our bright young men and women come up with earth-shattering ideas and businesses when they can’t find affordable office space in which to work? How has the CDA’s regulatory supervision or lack thereof contributed to this? Regulatory inertia, as evidenced by zoning regulations drawn up nearly five decades ago, is one reason that our cities do not become the engines of innovation that they should be.

Effective regulation can ensure that markets generate the right mix of competition, profitability and innovation. Poor regulation means that many industries in Pakistan have this mix wrong. For example, Pakistan’s banking sector continues to be extremely profitable, seemingly defying the mathematical concept of mean reversion, which states that returns or prices will eventually move towards the mean or average. This is good for the shareholders of banks, but other than the area of branchless banking (and the SBP gets a lot of credit here), this sector hasn’t become particularly innovative. It is still very difficult to get a mortgage; home ownership remains a distant dream for most of us. Banks still don’t lend to small businesses. Banking spreads are too high, borrowers pay too much and depositors get too little. Clearly, the policy framework is resulting in too little innovation.

Yields for many Pakistani crops continue to stagnate. The absence of intellectual property protection makes seed companies unwilling to offer better, higher-yielding seeds that could earn higher incomes for our farmers. The Pakistani farmer has the dubious distinction of being paid the world’s lowest price for his cotton. Despite this, Pakistan’s textile industry remains in a perpetual state of existential crisis (if one is to believe its frequent advertisements). No one benefits from this lack of innovation.

Why don’t we generate more of our power from solar sources? Does policy encourage innovative and enterprising private parties to come forth and solve this problem for us? Again, the unfortunate answer is no. The Alternative Energy Development Board, like the country itself, is powerless. The policy on the feed-in tariff is unclear. There is no net metering policy on the horizon. Poverty of policy begets poverty of innovation.

Innovative countries don’t necessarily need national innovation policies (Pakistan has a National Science, Technology and Innovation Policy 2012), although these can be good signals of intent. What they do need are sensible, forward-looking and light touch policies in a host of economic and social areas. It is time that our government recognises this. High-level visions, investment conferences and grand projects are fine, but the devil often lies in the small details.

Published in The Express Tribune, October 23^rd, 2014.

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