Tuesday, March 25, 2014

Businessmen

The current narrative is that all businessmen are cheats who evade taxes, indulge in bribery for gaining monopoly rights and bending rules, exploit labour, act contrary to national interests in a crisis and overall keep their selfish interests at the forefront

“Does anybody have a problem with me making provably false accusations about honourable people, just so my side can win?” -Alan Shore, from the television serial Boston Legal.
 

‘Provably false accusations’ is an aptly coined phrase to categorise heated exchanges in political entanglements; the question is, which side is everyone on? Most likely, taking a short cut and avoiding the hassle of a survey, the response that everyone is on Pakistan’s side will have universal acceptance. That being said, if this condition precedent is kept in the forefront always, debates on most issues become irrelevant. Hence, charged political scenarios are indeed mysterious.
 

Serendipitously, the only time there can be a disagreement on fundamental national issues is when one of the parties is misinformed about the facts; this essentially suggests that as nations mature, a single party system might be more efficient. This conclusion is supported by the observation that there is an apparent continuity of policies within mature democracies that have a two party system. Electoral arguments mostly centre around same sex marriage, abortion and similar key issues, while a consensus is always and quickly achieved on trivial matters like foreign policy. Perhaps someday Pakistan will also achieve this nirvana but for the moment let us focus on the economic side of the equation.
 

The prevailing conventional wisdom, irrespective of certain contrarian views, recognises that the private sector plays a primary role in the growth and maintenance of the national economy. The public sector is deemed inefficient in running businesses mostly due to political interference, hence privatisation of all state owned enterprises is propagated as a wise course of action. But whom do you sell to?
 

While foreign direct investment is useful for technology transfer, even in the west there are concerns about handing over national corporations to foreigners, especially of Chinese origin. Even if this paradigm is ignored, foreigners loathe investing in a country where domestic entrepreneurs are moving their investments abroad, or practice self-exile. Additionally, security concerns and continuing political noise combine to adversely impact investor perception of risk. At high country risk, foreigners inadvertently look for a higher return and a shorter payback period. The net result is that cash starts flowing out of the country faster than it comes in.
 

It is not, therefore, rocket science to conclude that domestic businessmen play an indispensable role in a free market economy. Keeping this in view, close cooperation between those who represent the domestic private sector, the businessmen and the political elite, appears prescient. The current perception created due to ‘provably false accusations’ from each side is however quite the opposite.
 

Since everyone loves to imitate the west, lessons therefrom indicate that cajoling and providing seamless and unflinching support to businessmen is a wise strategy for creating employment and enhancing capital investment. Even when the private sector makes a mess of things, the policy is to provide direct assistance from taxpayers’ money, under the pretext of corporations being too big to be allowed to fail. Politicians even go as far as modifying century-old legislation considered problematic for private business, notwithstanding the eventual consequences to the national economy. While the conspiracy theorist will quickly point out that this is because of the campaign funds doled out by the private sector to every party in power, this view essentially ignores the underlying parameters. If businessmen are responsible for the health of the economy and by default the nation, it is imperative that they have a say in the political edifice.
 

Trust perhaps is the key ingredient for this, perhaps uncomfortable, partnership. In successful free market economies the private sector, relatively or at least in theory, enjoys a free hand, largely shielded from the activism of politicians and the bureaucracy, and for these services or absence of services, takes charge of the social construct of society. Investment in projects, creation of employment, ensuring provision of necessities to the poor at affordable prices, supporting art and literature through corporate social responsibility, active philanthropy, grants for universities and beautification of the communities are all costs in a corporation’s financial statement. The thing is — there is no written contract for this arrangement; it is all about trust.
 

Frankly, the west is currently on uncertain tides; regulatory activism is hardly beneficial for maintaining this trust. Perhaps their private sector defaulted on the trust and should pay the price. However, there is a thin line between over and under regulation and private investment is a fair weather friend. Stricter controls on currency flow, which are coming back into fashion, may keep the currency home, but rather than productive investment it will move towards bubbles.
 

The older generations will recall a similar culture in Pakistan up until the 1970s. Back in those days, most universities were funded and a host of schools were trusts owned by leading business houses, investments in new technologies and projects were a regular feature and so on. What were the causes behind the distrust thereafter is not relevant but what is critical is that the majority of the business houses has, over time, dissipated or has not grown to requisite levels. The west has its Gates, Buffett, Bezos and many more; even the next door neighbours have a bunch of famous business houses. Pakistan comparatively lags behind. If the domestic private sector had flourished uninterrupted, would things be different today? If the answer is yes, then perhaps there is a need to revisit provably false accusations.
 

The current narrative is that all businessmen are cheats who evade taxes, indulge in bribery for gaining monopoly rights and bending rules, exploit labour, act contrary to national interests in a crisis and overall keep their selfish interests at the forefront. 

No wonder most businessmen shy away from investment opportunities with a long term horizon, subject to regulatory oversight. In the light of this narrative, policy decisions dependent upon the magnanimity of the business community are rather confusing. If businessmen are categorised as tax evaders, why is a reduction in corporate tax expected to bring about desired results? The expectation that the business community will play, after decades of marginalisation, a larger role in the much needed economic kick off, may be slightly misconstrued. If entrepreneurs have restricted movement and limited input in policy matters, it would be highly unlikely that they will rise.
 

If the public sector is categorised as inefficient or corrupt and the private sector is deemed selfish and dishonest, then the only option left to operate and manage all businesses is foreigners, which can hardly be in the best interest of the nation! By default, the rational choice is between the domestic private sector and the domestic public sector, and indications are that the current leadership is tilted towards the former.
 

Without deliberating on the appropriateness of the choice, which rightly is the domain of the elected representatives, expectations from the private sector need to be accompanied by credible actions that facilitate businessmen across the board. At the very outset, the narrative has to be revisited in line with the policy direction.

Businessmen are honest, pay all their taxes, facilitate employment and employees and are sincerely committed to investing in Pakistan, which is necessary for its economic growth and stability. Minus this change, the policy initiative will not translate into legislation and regulatory actions and the environment will remain hostile for domestic investment. The dream will remain just a dream.
 

Barring views on strategic assets, one has always believed in the veracity of the trickledown theory, which supports the view that businessmen, risk takers and entrepreneurs are crucial for the health of a nation and need to be given this recognition. For Pakistan to come out of its economic doldrums, everything must be done to facilitate the business community to rise. The only way the ability to play golf can rise is a miracle.

It has been suggested that private businessmen caught indulging in corrupt practices or bribing officials or making use of shoddy materials should be blacklisted and be barred from government projects for, say, 10 years and bigger instance of private businessmen cutting corners in public projects by colluding with corrupt officials should attract exemplary punishment—here it may be pointed out that provision already exists for blacklisting and for punishment.

Many people reading about the recent spate of business scandals in the USA may conclude that capitalism is a pretty dreadful system. We have long moaned and groaned about crooked Indian businessmen who inflate profits, hide liabilities, manipulate markets, and break a hundred laws. But the US scandals show that crooked businessmen exist everywhere.

This week, some of the biggest energy companies in the US such as CMS, Dynegy and Reliant admitted that up to 80 per cent of their electricity trades in California were bogus. They indulged in fictitious sales to one another to create the illusion of a boom in revenue. They also indulged in various dirty tricks (some of which could be criminal and lead to prosecution) to exploit loopholes in power regulations (like artificially creating power congestion and then getting paid to relieve it).

This showed there was nothing unique about the peccadilloes of Enron, the seventh biggest company in the world some months ago, that hid huge debts off its balance sheets and overstated profits to create an illusion of prosperity when in fact it was heading for bankruptcy. Enron was abetted by one of the celebrated Big Five of accounting, Arthur Andersen, which is now in the dock for criminal obstruction of justice. The most celebrated giants like General Electric and Boeing stand accused of fudging their accounts to show ever-rising quarterly profits. Microsoft, the biggest of all, is on trial for monopolistic behaviour. Pfizer, the biggest drug company, stands accused of manipulating drug prices, and last year, a cartel of drug companies were fined for trying to rig vitamin prices. Big oil companies are being investigated for rigging petrol prices.

Crooked behaviour is not uniquely Indian or American. It is inherent in human behaviour, and can reach great heights in a capitalist system. Now, market systems have enabled many countries to achieve stunning improvements in living standards that would have been considered impossible a century ago. Businessmen seek to enrich themselves, not society. But competitive, transparent markets force businessmen to compete on a level playing field, because of which the main gains of all their innovation and enterprise go to consumers. For the 500 biggest companies listed in Fortune magazine, net profit averages only 3.3 per cent of sales.

For that very reason, however, businessmen are constantly tempted to find ways to reduce competition and transparency to increase their profits at the expense of customers. This can take legal forms (lobbying, innovative book-keeping, exploiting loopholes) or illegal forms (bribes, fraud, rule-breaking).

No wonder, then, that so many people are utterly disgusted with capitalism and seek alternatives. No wonder they find the profit motive a morally unacceptable basis for ordering an economic system. When the main actors of such a system are self-serving, manipulative and greedy; when they fudge facts, make false claims and promises, bend the law in various ways and indulge in outright crimes, how the outcome be at all satisfactory? Answer: for the same reason that self-serving, manipulative and greedy politicians produce a satisfactory outcome called democracy.

The argument for a market system is exactly the same as for democracy. Winston Churchill once said that democracy is a very flawed system, but all the others are so much worse. The same is true of capitalism: it is a very flawed system but the others are so much worse. Enron hid its liabilities and exaggerated its assets. But do not all political parties hide their political liabilities and exaggerate their political assets? Many crooked business promoters promise investors the moon in order to raise money. But do not politicians also promise the moon to get votes?

Companies fudge their books and make inflated claims to mislead gullible investors. But do not politicians make inflated claims to mislead gullible voters? Businessmen claim to represent the national interest while feathering their nest (by, for instance, demanding high import barriers in the holy name of swadeshi). But politicians in a democracy also claim to represent the national interest while feathering their own nests. Businessmen indulge in bribery. So do politicians. Businessmen revel in black money. So do politicians. Businessmen hire hoodlums to beat up workers or ruin a rival’s business. Politicians too hire hoodlums to capture polling booths and sabotage rivals’ rallies. Businessmen intimidate and buy up rivals to reduce competition. Politicians too use intimidation and money to buy defectors.

There are many criminals in business. There are many criminals in politics too. The use of money, muscle and influence to sabotage rivals and competition is a feature of democracy no less than of capitalism. Why, despite all this, do we regard democracy as the best political system? Because it is grounded in choice for the ordinary man, and freedom to choose is a paramount virtue that makes other freedoms possible. In democracies, the ruler is chosen by ordinary citizens and voted out by them too.

Politicians do their best to subvert free choice through the use of money, manipulation and muscle. Yet the freedom to choose empowers ordinary citizens so much that, despite a thousand flaws, democracy turns out to be more desirable and beneficial than the most well-meaning autocracy.

Democracy creates a market for political goods. Capitalism creates a market for material goods. In both cases, the freedom to choose gives the ordinary man in the street greater power than the biggest political or economic giant. By shifting his vote, the ordinary citizen can oust the most entrenched politician, and by shifting his custom he can bankrupt the most entrenched company.

Lenin was logically consistent in refusing to allow freedom of choice in either political or material goods. What I find amusing is the notion of many democratic socialists that the people must be free to choose their own rulers, but cannot be allowed to choose what goods to buy; that political licensing is abominable but industrial licensing is moral. There lies the road to serfdom.

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