There is a positive, mutually beneficial way of maintaining investments that come into any country. Then there is the Pakistan way. Part of my work involves advising a UN Conference on Trade and Development-affiliated international investment promotion agency, and when comparing the most active investment promotion fronts, other regional countries keep popping up as successes.
In Pakistan, even businesses established years ago are not just battling day-to-day operational woes, but also regulatory ones. Bringing in investment is not as much of a task as is persuading investors to stay. Take, for example, the regulatory management of the tobacco industry. Key players in the industry are investing heavily and yet have faced successive losses particularly in the past decade or so. The more established brands are being pushed to the wall faced with a non-level playing field. The ultimate loss here is ours. Companies from the industry have paid billions in taxes in the last five years alone. This includes excise duty, income tax, sales tax and custom duties. They employ hundreds of thousands of people in their manufacturing set-ups as well as on the retail side. That totals up to contributing to the livelihood of millions. It is hardly about these numbers though.
Much of it is about the sophistication that markets gain when multinationals set up shop — the backwards and forward linkages that are formed when cutting-edge processes are introduced and trade is modernised. These contribute to human development, augmented through corporate social responsibility initiatives, which can provide a massive boost to development projects. But these can only be realised if governments are not antagonistic towards the industry, but actually work with these companies.
Economic research shows over-regulation doesn’t work. It deprives the government of valuable tax income; people still trade in just as much quantities if not more and the black market flourishes. Applied to the tobacco industry, via regulatory harassment, the detrimental effects are only compounded. People end up buying illicit and unreliable products that escape the tax net. It makes economic sense to streamline the industry with more support, not less. It is high time we stopped the turbo-policing of our most lucrative brands, and let the market self-regulate. By all means, levy duties on the industry to deter use, but the end result will be the same — people will do what they want to do, consume what they want to and find ways to replicate more harmful prototypes of it. Economist Mark Thornton researched the government’s knee-jerk responses and concluded that hyper-regulation creates incentives for producers to inevitably increase the potency of products distributed through black markets.
The fact that these companies continue to operate is a miracle in itself — they face chronic power outages, insidious inflation and a volatile law and order situation. The list of large multinationals exiting the country is long: Singapore Telecom, British Petroleum, Chevron, GDF Suez, Royal Bank of Scotland and HSBC have all left. With HSBC leaving, it is evident that banking policies in Pakistan are investor-repellent. Bankers speak of large businesses shifting resources abroad to fetch better rewards. Although it can be argued that banking is to investment what a stalk is to a wheat shaft, the real issue is not so much that our investment’s support structure is cut to size, but that there is a continuous disregard for existing businesses that hold together the economy despite the odds.
In case of British Petroleum, it is seemingly the exorbitant taxation that choked it, forcing it to pull out. Chevron exited in 2012 and when it did, analysts hoped this would result in better regulation of the oil industry. That didn’t happen.
With lax enforcement, local players are allowed to run rampant, illicit industry continues to grow, and yet all regulatory measures are applied on legitimate industry. Combined with an ill-thought out tax policy, one has to wonder — whose side is the regulation really on? Investment will only flow in when established businesses continue to contribute to the economic development of industry. No new investments can be pooled in from faraway lands unless local industry is governed with equity and much-needed regulatory sense.
Published in The Express Tribune, November 24th, 2015.
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