Behind the picture: Pakistan a well-kept secret

Economy not as bad as portrayed; foreign firm predicts growth of GDP to be 12–15% .

LONDON:

Pakistan is probably the best-kept secret in South Asia.

Foreigners are not investing because they are kept at bay by security threats, widespread perception of corruption and the law and order situation in the country. Amidst all these adversaries, London-based Edbiz Consulting predicts that Pakistan will experience a GDP growth rate of 12-15% for five years, once the security threats are dealt with successfully and the law and order situation improves.

Local businesses too, do not want to see multinational corporations enter Pakistan as they fear that they will cannibalise the local industry. Nestle exemplifies this fear. It entered the market of packaged milk in 1988 and swept away all the local businesses in dairy and beverages, either by buying them out or pushing them to the edge of the market, so much so that they become non-existent or go into oblivion (eg Haleeb Milk). In bottled water business and other beverages too, Nestle has broken the backbones of all the local players. This has created an oligopolistic market structure with a dominant leader in these markets.

Nevertheless there are some examples of failure as well. Tutti Frutti, for example, entered the Pakistan market by way of selling franchise to a local group that reneged on its own contractual obligations. The result was a complete loss of business for Tutti-Fruitti while the local group rebranded its business to Fruitti5.

Interestingly, it is not only the local business groups and industrial families that are guarding the secret of the true of Pakistan economy but also a number of local NGOs and other social sector organisations. Here, the education sector is an excellent example, barring foreign universities from operating in the country.

In the presence of extremely stringent requirements imposed by Higher Education Commission and the Ministry of Education, it is almost impossible for a foreign university to operate a campus in Pakistan. Consequently, local universities (public and private) are serving the market, mostly with low quality and sub-standard curricula along with hefty fees and fat profits.

Pakistan could benefit a lot if foreign universities were allowed to operate their satellite campuses here.

Now whether deliberate or un-intended, it seems as if there is a quasi-conspiracy going on to highlight only the ills of Pakistan’s economy, especially in the context of the on-gong war on terror and adverse perception of the law and order situation.

Income inequalities are also being over-emphasised to attract more aid and grants from multilateral institutions in the name of poverty alleviation and combating financial exclusion.

A consequence of all this is that the market players are seeking grants rather than investments, from both the domestic and international sources. The end result is a thriving social sector and the businesses owned by NGOs.

The local business families are enjoying these implicit barriers to entry for the multinational corporations and are enjoying the plums and prunes.

Though good for local businesses, it has negative implications for foreign direct investment in the country. Existing multinationals are gradually winding up their businesses. Pharmaceutical sector is the best example here.

With the exit of five foreign pharmaceutical firms from Pakistan in the last six years, the new foreign direct investment is going down, as seen by a net FDI of negative $47.4 million in the first eight months of the ongoing fiscal year.

If the trend continues, Pakistan will not only suffer on the FDI front but it is also feared that it will have an adverse effect on the quantity and quality of production. In critical sectors like pharmaceuticals, this implies a long-run threat to health and longevity.

It is also a wrong concept that with the decrease in share of the production by multinationals in the GDP, demand for their products will also go down. On the contrary, it will keep on growing, necessitating increase in imports – a phenomenon known as substitution of imports for domestic manufacturing.

As a result, businesses in Pakistan will be more trade-oriented rather than focused on manufacturing and production.

It is, therefore, important to relook into the industrial policy and the strategy to grow businesses in Pakistan. While development of small and medium size enterprises (SMEs) is important for sustainable economic growth, it is equally important that big and renowned players are encouraged to enter the Pakistani market and those who are already here must be taken care of.

Economic isolation is not a self-contained phenomenon. It is, unfortunately, followed by political isolation in international relations, which Pakistan must avoid at any cost.

The writer is an economist and a Phd from Cambridge University

 

Published in The Express Tribune, April 6^th,  2015.

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