The original sin

It’s business as usual

The people and the media these days are fixated on Panama Leaks and there are endless debates by self-styled paragons-of-virtue on what actually constitutes corruption and definitions of business ethics and morals. Politics aside, for me the real question is how have we ended up at such low ebb in our economic history and what sorts of policies have brought us here: The Original Sin? After all, we have an environment in the country where every student wants to study abroad, every worker wants to work abroad, every manager wants to mange abroad, every saver wants to deposit abroad; every investor wants to invest abroad; and every entrepreneur wants to move abroad. Any by the way the notion of ‘abroad’ itself is quite broad: China or even the Caribbean will do – people actually risk death to flee this system. Obviously something is seriously wrong and powers that be, who may be contemplating to bring about a correction, will do well by focusing on the root cause or the underlying malaise; merely changing faces will not achieve much and before long things will again slide back to ‘business as usual’.

The origins of efficiencies often associated with the private sector management are traceable back to various forms of right-to-ownership. The more secure stockholders feel about their rights to the assets they own and about their right of deployment in a competitive environment the more likely they are to expand portfolios or reinvest. Unfortunately, the shock of nationalization in the seventies shook the very foundations of right to asset ownership in Pakistan and our economy never truly recovered from that debacle. A damage further exacerbated by successive military and civilian governments who coined their economic policies on political grounds, leaving Pakistan’s economic management per se in hands of those who had little or no understanding of how to create a just corporate culture in an evolving economy. As merit got lost in the lust to retain power at any cost and mediocrity became the order of the day, the required policymaking to keep us in the hunt for global competitiveness and achieving sustainable economic progress went missing. Further, somewhere across the journey, governance was inter-twined with personal gains and suddenly a national culture of get-rich-quick took root. Thrown out were the lofty principles of good corporate governance, in came vices of corruption, and rent seeking. Today, this virus stands embedded in the very structure of some of the leading cum key industrial sectors of the country who thrive on a trail of dodgy ownerships, a history of rent-seeking and stubborn cartelization, e.g. Sugar, Fertilizer, Cement, etc. Sadly, to succeed as an entrepreneur in Pakistan today the pre-requisites are not management skills but the art to tap into crime; be complicit with law enforcement institutions; indulge in naked corruption with the bureaucracy; and, shamelessly ignore limitations arising from conflict-of-interest. Little wonder that despite higher taxes and stricter controls, genuine and honest investors rather operate abroad than at their own home base!

So where do we begin? To start we need to ascertain how other nations are responding to such disclosures of offshore wealth. It’s no coincidence that no American name has overtly appeared in the Panama, Swiss or other such leaks. We all know that from sheer perspective of quantum of wealth, the USA is most affected, since it’s wealthiest of corporations and individuals legally use loopholes to avoid high taxes in the US by declaring their wealth in offshore havens. Apple, Amazon, IBM, Micro Soft, rich CEOs etc are all indulging in it, albeit on a varying scale. To lure them back the US administration is looking inwards and not outwards by contemplating some prudent yet permanent solutions. This is the reason that debate today in the USA is not on how to name and shame the offshore wealth owners, but about how to effectively provide them with a window to come back in the US revenue net. Offshore laws and treaties are being re-examined and even the havens themselves (e.g. Switzerland, Panama itself, Seychelles, Virgin Islands, etc) are lobbied to amend their internal law in a way that it shuns illegal wealth or ‘hot’ money. The idea’s to first concentrate on fundamentally creating wealth and once wealth is tangibly created then only to go on to find ways to redistribute it equitably. A key argument to this route being that while over the last 8 years the US federal debt has doubled to $20 trillion, it failed to generate GDP growth even to the 3% mark during this period – courtesy non-conducive environment to wealth creation in the US. The argument goes that though wealth created was much more than what the numbers reflect, it found its home outside of the US! And the remedy: Tax reforms; mainly, tax cuts and drastic simplification of tax codes. Pakistan, as we know today has unrealistically high rates of taxes in most sectors and probably one of the most complex tax filing and assessment systems in the world; instead incentivizing the non-filers!

The wake-up call is not just limited to the US but taken seriously in almost all continents. The European Union is busy simplifying its revenue systems to attract more  domestic private capital and in many ways, this forms the corner stone in its quest to avoid Brexit. Recently, a series of China’s opening-up policies have addressed overseas investors’ concerns by freely allowing two-way capital movement: meaning if it will attract foreign investment, it will also allow Chinese private capital for investment outside of China. Going forward, according to Investec, China’s private capital’s expected to reach up to 10-15 percent weight age in global indices by 2020 and 25 percent by 2025. Moreover, China’s bond market will become the fastest-growing market over the next five years, the most important fixed-income market in the world and an important asset transaction destination that attracts global investors. Underlying argument being to present China as an attractive home for all local and foreign capital and not create an atmosphere of witch-hunting or uncertainty – something that we know does not prevent but aids flight of capital. India – which is always eager to see its corporate footprint expand on the global corporate map – is also playing the leaks very cautiously. Unlike Pakistan, no media trials or unnecessary hype, but a discreet soul searching and a corrective action plan. For example, contrary to our public parade of anyone who used the permissible tools of loan swaps, settlements, moratoriums, etc, India’s answer to a similar problem has come about in the shape of channelling its collective rage over its big bad-debt or loan default problem by finally formulating a much-needed Indian Insolvency Code.

The trouble here is that every time someone wants to draw government’s attention to devising rational and civilized solutions to failed business transactions, politics jump in. While such a political fuss is understandable to an extent, because the local business scene over the years has deteriorated to a level where thugs, political rent-seekers, criminals and wilful defaulters now rule the roost, still we must realize that if real and sustainable progress is to be achieved, the current system will first have to be cleansed to filter good from the bad and then to be re-constructed to ensure it doesn’t drift back to its present state. Unless ‘original sin’ is washed there can be no salvation in the offing!