Pakistan’s Charter for Free Enterprise
By: Malik Ahmad Jalal
Tags: Industry, Public Policy, East India Company, Pakistan, Economy

Pakistan’s Charter for Free Enterprise

How Private Corporations Helped Enhance the Power of the British Empire

William Dalrymple’s review of the most valuable corporate entity ever — the mighty East India Company (EIC) — is brilliantly insightful. It has many timeless lessons for management and history enthusiasts, particularly as to the role of enterprises in the rise of the British Empire.

This is a most profound and yet hidden lesson of history that the rise of nations is complimented by the rise of it’s entrepreneurs and enterprises. Strong nations require strong economies built upon large enterprises and the profit, employment and taxes they generate. The British parliament was a willing facilitator and supporter of EIC — as EIC strengthened, so did the Crown’s influence and coffers with taxes.

Across the Atlantic, the rise of another power coincided with the rise of the next generation of entrepreneurs and enterprises aided by the State — concessions given to the Union-Pacific Co. to build railroads, access to energy to Standard Oil and iron-ore to Carnegie Steel, being some examples.

More recently, the government backing of the Chaebol conglomerates played a critical role in upskilling work force and wealth generation. This fueled the economic resurgence of South Korea. The per capita GDP of South Korea was only $146 in 1963 but up to $10,315 in 1996, partly due to deliberate state policy of supporting chaebols as a national cause.

The chaebols built new industries and became global giants: Hyundai (ship building), LG (consumer electronics), Samsung (semiconductors), Daewoo (construction). National pride and socio-economic impact followed — it is estimated that roughly 14% of the entire population of South Korea benefitted from Hyundai’s vocational skills training, leading to upward economic and social mobility for millions. Chaebols success was seen as South Korea’s success.

In China too, the nexus between government and enterprises is evident in the large state-owned enterprises. Strong nations nurture and protect their national business champions, providing R&D grants, relaxed regulation etc. to run their operations without day-to-day state intrusion. But there is the other side of this collaborative relationship.

When the mega corporations undermine national interests — then they are reined in through regulation. For example, the breakup of Standard Oil and the prosecution of Chaebols post-1997 financial crisis, leading to bankruptcy of 16 out of the 30 top chaebols. It is, as if there is an unwritten charter or contract between state and the enterprises; and when it is broken, a price is paid. Even the EIC was prosecuted for undermining the British Empire.

Since nationalization in 1973 and later the appropriation of foreign currency accounts in 1998, there is an unfortunate adversarial relationship between the State and enterprise in Pakistan.

This relationship is extractive from the State — with its tools like the Federal Board of Revenue and Customs extracting what it can from enterprises — squeezing and slaying the goose, rather than nurturing and supporting it so it can lay bigger or more frequent eggs. Large businesses can barely cope with this aggressive intrusion, while SMEs are crushed by the pressure. This creates an extreme disincentive to formalize, invest and scale, undermining the quest for tax transparency and expanding the tax base.

On the other side, the behavior of enterprise is that of a rent seeker; extracting cash from business instead of investing back into its human resources and systems, in fear of being expropriated by the state.

There is a lack of trust and mutually supportive mindset on both sides, with the result that it is estimated that most medium enterprises declare only c. 30% of their actual revenues. As a result, the state is deprived of substantial taxes, resulting in budget deficits, while the informalization of enterprises limits their access to institutional capital, lowers investment in R&D and operational enhancements. Hence, they remain sub-scale and globally noncompetitive. This is reflected by Pakistan’s low ranking in World Economic Forum indices — human development (125/130) and competitiveness (107/140).

Throughout history, enterprises played a positive, complimentary role in the strengthening of countries and vice versa. But, with our history of state-enterprise mistrust, this simply does not happen! What Pakistan requires is a Grand National Bargain between business and state institutions for the promotion of free enterprises — a Charter for Free Enterprise.

The Charter between State and the enterprises will bind the state to forgo its past behaviors of expropriating property, freezing bank accounts, withholding refunds and other rights of the enterprises — provide a facilitating environment, as well as protecting the national champions, when foreign powers act against them.

In return, enterprises will forgo their habit of informalization and extractive divestment policy; instead becoming fully transparent in taxes, investing in HR to build core competitiveness, and avoid undermining core national interests in the pursuit of profits.

Any breach of the Charter may lead to the State acting against enterprise, as it did against Standard Oil or EIC. On the other hand, enterprises can withhold their cooperation when the State does not fulfill its end of the grand bargain, leading to low tax collection, slow growth and a sub-optimal outcome for state institutions for many years into the future.

Such a Charter of Free Enterprise exercised through state institutions will align incentives of entrepreneurs with that of state institutions, rather than keeping them opposed. A virtuous win-win of increasing the size of the economic pie, most important factor in reducing poverty, rather than a zero-sum fight to maximize their respective shares at expense of each other.

It is estimated that India’s growth rate is higher by 4% per annum, compared to Pakistan’s. A four percent differential over 20 years will result in India’s economy size growing by 2.1x larger than Pakistan, greatly increasing its already skewed economic advantage. There is only one sustainable solution to our economic challenges — and that is a complete re-negotiation of the social contract between the State and enterprise, that fosters goodwill and bridges the trust deficit. This will harness the entrepreneurial aspirations of citizens to attain economic and political sovereignty for our State.

It is time for our internal stakeholders to demonstrate true statesmanship for the benefit of Pakistan, and rise above past practices and short term interest. The Charter for Free Enterprise is a national necessity.

Malik Ahmad Jalal is the Founder of Cordoba Ventures and Rahgeer Fellowships.