Ishrat Husain: The role of the private sector and government in Pakistan's
economic development
Convocation address by Dr Ishrat Husain, Governor of the State Bank of Pakistan, at the Institute of
Business Management, Bahauddin Zakariya University, Multan, 4 February 2003.
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Mr. Vice Chancellor, Dean of Faculty, Director IBM, Distinguished guests, Faculty members and dear
students,
I would like to thank the Vice Chancellor, Faculty of the Dean and Director of the Institute of Business
Management for inviting me this evening at their graduation ceremony. I would extend my sincere
felicitations to all those who will receive their M.B.A. degrees today and also to their parents. As an
employer who recruits about 50 candidates from among several thousand applicants through a
competitive process every year I am quite sure to see some of you in the State Bank of Pakistan in
near future. We already have more than 50 graduates from this University and the Institute and they
have demonstrated high standards of integrity and professional competence. As your Director has
pointed out some of the able graduates of this Institute are unable to cross the threshold of 70 percent
marks at the M.B.A. examination used by the S.B.P. to screen the candidates because of your
rigorous grading. But you must realize that we receive 11,000 applications every year and it is not
possible for us to test all of them. Hence we have to adopt a certain cut-off point. We would examine
other possibilities such as ranking of the Universities and Business Institutes to adopt alternative
system of screening.
Today, as it is a tradition on such occasions I am going to address on an important topic i.e. the role of
private sector in the economic development of Pakistan. Most of you will end up in this sector and I
would therefore like to give you some advice - as to what role you should play.
Pakistan has made considerable progress during the last 55 years since its independence. A country
with about 30 million people in 1947 was heavily dependent on imported food, imported cloth and
imported energy to sustain itself. There were serious doubts raised at that time about the country's
economic survival. Today, in 2003 Pakistan one of the largest countries in the world with a population
145 million is not only self sufficient in food grains, meat, milk and poultry but also exports wheat and
rice. Pakistan does not only clothe its population but is one of the leading exporters of textiles in the
world. More than 50 percent of the energy needs of the country are met from local reserves of natural
gas and hydel power. Pakistan was one of the few developing countries that achieved an impressive
economic growth of 6 percent annually for over four decades and tripled its per capita income.
Incidence of poverty had declined from almost 50 percent of the population to less than 20 percent by
the late eighties although it has resurged to 34 percent by the late nineties. An average Pakistani
today has higher life expectancy, enjoys higher food per capita and consumes more calories than his
father's generation. We have built large dams such as Tarbela and Mangla, motorways, super
highways and modern ports. We are better connected to the rest of the world through fast means of
telecommunications, internet, cable and satellite channels.
Despite these spectacular achievements for which we should thank Almighty Allah for His blessings
we are still a poor and underdeveloped country and the benefits of this progress have not been shared
universally. Too many people have been left out: One-third of the population still lives on about
Rs.60 per day, one-half of the population is illiterate with extremely low female literacy rates in the
rural areas, a large segment of population does not have access to safe water for drinking and
personal hygiene; disease, malnutrition, infant and maternal mortality rates are still quite high,
population is growing more rapidly than other countries in the region and income and regional
inequalities are rising. In essence, we have lagged behind in our social and human development
indicators and our performance has been much below our potential. This lack of social progress has
also created problem of social cohesion. This therefore, brings me to a series of questions: How can
we catch up with the rest of the world and start improving on our social and human development
indicators? What can we learn from our own historical experience and the mistakes we have made in
the last? What can we extract from the success stories of other developing countries and apply them
to Pakistan? Although there is always a lack of unanimity among economists about the prescriptive
aspects of development let me venture to share my own thoughts with you today.
The last five decades of development experience have taught us clearly that the respectively roles of
the Government and private sector should be clearly delineated, defined and put into practice. Those
who think in terms of dichotomy between market and government are sadly mistaken. Government
has the primary responsibility to (a) provide security - internal and external to its citizens (b) maintain
law and order (c) dispense quick and fair justice and enforce contracts (d) build physical infrastructure
(e) provide basic social services such as education, health and water supply (f) implement good
governance (g) maintain macro economic stability, (h) regulate the markets where there are
monopolies, externalities, economies of scale (i) build social safety nets for the poorest and vulnerable
segments of the population. Markets need government and government needs markets. The state is
not a substitute for the market but a critical complement and that Government action is essential to
ensure that development process is inclusive and the benefits of growth are not pre-empted by a small
class of elite in the country.
Private sector, on the other hand, has the capacity and ability to produce, distribute and trade goods
and services in the economy efficiently and at least cost. There is hardly any justification for the
Government or the bureaucrats to be running businesses. The record of public sector enterprises and
nationalized commercial banks in Pakistan for the last 30 years speaks volume of the damage that has
been inflicted on our economy. To just give you one example, if 50 percent of the allocation of
Rs.100 billion which was made last year to bear the losses of the public sector corporations and
enterprises was diverted to education, health and other social services, imagine how much it would
have helped the common man in this country. Profit making is not dirty provided it is made through
competition, hard work, entrepreneurship, in an environment where there is a level playing field for all
economic sectors, where the rules of game are applicable to every one, where implementation of
policies and regulations take place across board, where taxes and other government dues are paid on
time and loans are repaid without any write off. Under such circumstances private enterprises
generate production, employment, opportunities and create income in the economy. This will only
happen when they make profits and invest those profits in expansion of their existing businesses or
creating new businesses. Economic growth takes place through this investment, incomes rise and the
countries get prosperous. Those of you who still believe in old socialistic ways of thinking in which
profits were condemned as socially exploitative should shed this thinking as this is flawed and
empirically incorrect. Privatization, Deregulation and liberalization are the key instruments through
which private sector can flourish and thrive. Those of you who believe that Governments should create
jobs for all educated youth are sadly mistaken as it only burdens the Government budget with
artificially inflated and unsustainable, wasteful expenditures and results in larger fiscal deficits. These
deficits can only be financed through borrowing or printing currency. If the former route is taken then
we are caught in a debt trap and if the latter route is adopted we are in any inflationary bind. Both of
these routes lead us to a path of disaster and instability for the economy.
You must realize that the private sector employs 90 percent of the labor force in Pakistan and Public
sector hardly 10 percent. Private sector is thus not only the main engine of growth but also the main
provider of economic opportunity and activity. 60 percent of the country's labor force is employed in
agriculture through tenancy, self-employment, owner-cultivated land or farm and non-farm labor.
80 percent of the non-agricultural labor force depends on small and medium enterprises including
small shops, hawkers, thela wallas, hotels and restaurants, social and personal services, construction,
transport services. Only 20 percent of non-agricultural labor force is employed in organized sectors in
Government, manufacturing, electricity, gas and water, financial institutions and other services. Thus
private sector growth, particularly of smaller firms and farms, is vital to both employment generation as
well as reduction of poverty in Pakistan.
How can the private sector, particularly small and medium enterprises and agriculture be encouraged
to expand, invest and generate employment? First and foremost, good economic governance must
prevail and be practiced. Unless there is transparency, predictability, consistency, rule of law and
uniform application of law, private sector would not be forthcoming as the uncertainties in economic
governance do not allow them to make accurate calculations of their costs and benefits. Bureaucratic
harassment, corruption and extortion are all damaging to the investment climate as they impose
barriers to entry, add to operating costs and create uncertainty once the firm is established.
Second, there should be sound economic policies in place - fiscal discipline, market determined
exchange and interest rates, lower trade barriers and tariffs, reasonable taxation levels, openness to
trade, and well functioning financial system. In absence of sound, clear and consistent economic
policies the private entrepreneur will always be reluctant to part with his capital. Unsustainable fiscal
policies crowd out private sector and make it more difficult for them to access credit from financial
system at reasonable price.
Third, changes in political regime should not create abrupt and radical shifts in the underlying rules of
game. Contracts and projects approved by the preceding governments should be scrupulously
honored by the subsequent governments without any interruption or hiatus. Commercial disputes or
allegations of corruption should be tackled according to the due process of law and arbitration
procedures. Whims and caprices of individuals should not be allowed to play havoc as they not only
undermine the confidence of existing firms but also deter new investors from engaging in production.
Fourth, the Government has to ensure that physical infrastructure and adequately trained and
educated labor force are available in sufficient quantities so that the private firms derive benefits from
reduced cost of production. If electricity or water charges are exorbitant, transportation costs are
overbearing or the educational level of labor is quite low the returns to prospective investment are
considerably reduced and the investor is unwilling to commit his funds.
Fifth, adequate credit availability from financial institutions to agriculture and SME sectors has been
one of the major constraints for growth. The SBP has taken measures recently to accelerate credit
delivery to these sectors by involving commercial banks on a large scale and giving them incentives.
Prudential regulations are also being revised to remove the hurdles in the way of credit delivery to
small and medium enterprises. The multiplier effect on the economy through higher credit and
enlarged access to the economic actors in these two fields is likely to be quite large and sustainable.
As both these sectors are labor intensive they would generate a greater demand for labor absorption.
China was able to reduce rural poverty from 250 million people in 1978 to about 34 million in 1999 by
focusing on agriculture and Town and Village enterprises (TVEs). There is no reason as to why we
cannot succeed in achieving the same results over the coming decade.
But, in facilitating the private sector to play the role we have outlined above I come back to the need
for investing in education and training at all levels - higher, secondary, vocational and primary. It is not
only the quantity that matters but also the quality of education. At this point I must commend the
faculty and students of Bahauddin Zakaria University for maintaining high standards of education. I am
confident that the students graduating from this University will be highly competitive and earn the
respect of employers. These days, the reputation of institutions matters a lot and this reputation can
not be acquired overnight. It is also not the buildings and infrastructure which contribute to this
reputation but the curriculum, instruction, assimilation of knowledge, and its application to day to day
life, problem solving approach which distinguishes one institution from the other. It is also easy to lose
reputation although more difficult to acquire it. Therefore I will appeal to the faculty as well as students
of this august university not to become complacent but remain on their toes. They should continually
try to excel in their respective fields, maintain high standards and traditions of knowledge seeking and
discourage the bad habits of memorizing the material, cheating at the exams, skipping the classes,
selecting only the material which is likely to appear at the exam. Those of you who devote themselves
to continuous and inquisitive learning will come ahead in life. No amount of sifarish or nepotism or
connections with the right people will help you in the long run. It is only the innate qualities of hard
work and systematic learning which will keep you in good stead. I wish all those who are graduating
today the best of luck in their careers.