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BDE - Session 1

Key Takeaways

• After emerging out of primitive existence, mankind spent several millennia

organizationally stagnating in feudal structures before a break down of this systemtook place in response to a variety of significant developments, events and stimuli

which differed widely from region to region.

• In Europe, the impetus for change initially came with the activities of the

“itinerant merchant followed by urbanization, the impact of the !rusades, the

emergence of consolidated national states with commercial proclivities, the wealth

that flowed in conse"uent upon discovery of the #ew $orld, the advent of

commerce%supporting protestant religious notions, and the monetization of

manorial dues as well as the enclosure movement in England.

• &urther, not only has the timing of this avowedly “deep seated transformation

varied greatly but also there are dissimilarities in the nature, texture and extent of

change actually achieved. It is clear that even today, in remote parts, the feudal

system ' remains extant in its pristine glory( and importantly, some aspects of

feudalism ' notably feudal attitudes ' persist even where an otherwise complete

change to a modern society has occurred. )his is particularly evident in *ritain,

the first European country to move decisively out of the manorial system into a

free market, open, economy.

• *usiness executives conscious of, and sensitive to, the precise societal state are

likely to be decidedly more operationally effective.

• A free market, modern society %%% with economic life distinct and separate from

the rest of the polity, with trading based on monetized values, with surpluses

basically represented by tradables, and with commoditized and commercially

priced “factors of production %%%was recognized by Adam +mith as having in

essence the profit motive at its core( and that higher profits or “betterment as he

called it- are the conse"uence of higher productivity achieved through capital

investment and through efficiencies arising from ever%finer divisions of labour.

• )he aforegoing lay behind Adam +miths thesis that market societies had a

tendency to grow and that any temporary dislocations e.g. adverse impact on

profitability/growth through higher wages as a conse"uence of greater demand for

labour- would be corrected by the “market mechanism i.e. the free inter%play of

forces of demand and supply.

• Advances in technology including improved organizational methodologies and

mass distribution techni"ues- enhance profit potential and the tendency to grow.

• )he market mechanism is centered on0

i- economic agents buyers, sellers, investors- being motivated purely by

self%interest( and

ii- competition among economic agents on a level playing field.

Key Takeaways for MBA class of 2016



o specialization at the international level on the basis of comparative

advantage

%%%% alongwith a venturesome spirit imbued in the English by fortuitous

circumstances the countrys system of inheritance, common law tradition,

location etc- paid rich dividends. Initially, tremendous wealth accrued to thecountry through the commerce in which it was engaged as a global maritime

power, and also subse"uently, through mass industrial production that naturally

followed-.

6. 7rivate entrepreneurial investment in a large number of navigable canals and a

wide network of railways partially financed by savings mobilized through a

vibrant capital market and made possible with the help of residual, government

support, as needed- greatly enhanced private industrial activity.

8. After several decades of rapid progress, industrialization in *ritain faltered and

slowed in the mid%nineteenth century as the “fat cats then at the helm of industry

were less inclined to make intense efforts at the same level as their forbears %%% a

natural phenomena. 9owever, all manner of services in the areas of international

trade, shipping, insurance, finance etc were provided by the !ity of :ondon

making it a world trade and financial centre unparalleled in the history of

mankind. )he services provided by the !ity gave a big boost to the revenues

earned by England largely compensating for the slowing down of industrial

growth.

BDE - Session 3

1ey )akeaways

6. In the second half of the 2;th century, as a conse"uence of mass production and

distribution engendered and facilitated by advances in technology /innovation, a

wider base of knowledge and skills and greatly enhanced deployment of capital-,

business enterprise became far more sizeable, sophisticated, and complicated than

ever before. )his prompted the need for professional management separate and

distinct from the owners( and without a carefully devised and implemented

management structure it was not possible for the enterprise to achieve its business

goals.

8. A single%unit mass producer, functionally integrated, both forward as well as

backward, reaching out to customers over a vast territory would be as much

beyond the managerial competence of a sole proprietor or partners as a multi unit

group- enterprise. As a matter of business necessity '%% to achieve business goals

%%% an appropriate hierarchy of business executives as well carefully defined

operational proceduers- would be re"uired in either case, not necessarily only in

the case of a multi%unit group as suggested by !handler in his definition of the

modern enterprise.

<. $hether a modern enterprise is a single unit organization or takes the shape of a

multi%unit group, and as to whether it is integrated backward to assure raw

material supplies or forward to cover certain aspects of distribution are essentially business issues to be addressed and determined in terms of what is feasible and




makes the most sense keeping in view the totality of circumstances in which the

business operates.

=. >espite !handlers views regarding the so%called “visible hand of modern

management, it would be somewhat fatuous to suggest that the management of an

enterprise supplants or supersedes or can operate outside the market mechanism.)he market is a significant aspect to consider and management has necessarily to

respond to market forces, directly or indirectly. Any suggestion that management

can arrogate itself to a position that is oblivious of the “invisible hand of the

market i.e. market forces-, whatever be the size and reach of the enterprise, does

not appear sensible.

;. ?f course, an enterprise which through organic growth or through merger /

ac"uisitions- becomes a “monopolist or “dominant i.e. it is in a position to act

independently of competitors, customers and other market agents- comes within

the mischief of “antitrust or “competition laws and the scope of its operations iscircumscribed by such laws. It must not then abuse its dominance e.g. through

predatory pricing, tieing, discrimination, exclusionary practices, unreasonable

increases in product prices etc.

2@. In the case of vertical integration, the enterprise can become dominant under the

law at the level of an intermediary product as well as in regard to the final

product. Also, it should be obvious that horizontal integration can also be

monopolistic or take the contours of a cartel and be in restraint of trade. In most

competition regimes, prior approval of the competition agency is mandatory in the

case of mergers and substantial ac"uisitions beyond certain prescribed thresholds.

&urther, an exemption has to be sought from the competition agency for any

practice or agreement that has the obect or effect of preventing, restricting or

reducing competition and this would only be granted if it is possible to

une"uivocally demonstrate economic merit.

22. )he purpose of a competition or anti%trust regime is to ensure that free

competition amongst economic agents on a level playing field which is at the

heart of the market function- is protected from abuse or distortion. Any business

enterprise, big or small, multi%unit or single unit, integrated or not, that acts to

thwart competition thereby adversely affecting the market mechanism- would be

liable to severe penalties under the competition law.

BDE - Session 4

1ey )akeaways

Bround breaking developments in transport and communications in the mid%

nineteenth century %%%railroads, steamship, cable, telegraph %%% that made mass

distribution feasible encouraged enterprises to mass produce, integrate forward aswell as backward, and also to diversify into related product lines.




$hile a variety of factors and circumstances could influence the decision to

become an integrated mass manufacturer, it is clear that, in essence, production

levels and extent of integration sought are hard business decisions based on

commercial considerations and feasibility. In this connection, assuring customersatisfaction and uninterrupted raw material supply are often important

considerations for forward and backward integration respectively. Also inter%

product compatibility is naturally given due consideration when the product range

is augmented. &urthermore, another factor is the nature of the financial system, in

particular the capital market, and its ability to address the growing needs of

enterprises that are expanding %%% and that are becoming increasingly more

complex and riskier than before %%% by means of competent risk intermediation

through a range of institutions and instruments capable of meeting the needs of

investors with varying risk preferences and investment obectives.

It is clear that a decision to enhance production substantially is rooted in first

establishing the feasibility of being able to successfully market the product which

may have to be re%engineered in order to meet customer need-. )hus mass

production is predicated on the viability of mass distribution, and in many

instances, close co%ordination between sales staff, production engineers, product

designers, and on occasion, research staff.

?rdinarily, it makes business sense to eliminate the wholesaler if the "uantum of

production is large enough to result in a distribution cost per unit that is less than

the distribution cost per unit of the wholesaler notwithstanding the economies of both scale and scope achieved by the wholesaler-. Cery often, disintermediating

the wholesaler is a sensible business proposition in the case of sophisticated

machine tools/e"uipment where the sales endeavour entails professional product

demonstrations, after sales service/repair, and necessary financing arrangements to

enable the customer to make the purchase.

7rofessional management structures naturally evolve and get perpetuated in

response to the owners inability to manage growing and complicated enterprises

%%%% as the enterprise becomes bigger and more sophisticated, owners have little

economic option but to recede and take a back seat allowing a professionalmanagement hierarchy to take charge. &irst and foremost, the separation of

ownership from management on a sustainable basis is in essence a purely

commercial matter. &urther, it is important to advert to functionality0 an enterprise

must have a professional management structure that ade"uately covers its

commercial needs whether or not the owner participates in management as a

manager. In any case owners can be expected to sit on corporate boards and

provide oversight.

Achieving size and economies scale through trusts or holding companies or other

forms of business combination often eliminates competition and is fraught withthe possibility of corrupting or rendering the market mechanism dysfunctional.

An eventual conse"uence of this is both productive inefficiency and exploitation




of the consumer. )he Dnited +tates suffered greatly from the wave of trusts and

other forms of business combines in the second half of the 2; th century.

$hile the exploitist element in capitalism does appear to have a tendency to

promote under development largely derived from the capitalist systems inbuilt,ruthlessly self%interest driven orientation and there are several persuasive

instances of empirical evidence that support this thesis, there is also some

evidence that negates this proposition.

BDE - Session 5

1ey )akeaways

• In the initial phase, 2;5<%6=, policy makers in 7akistan largely the elite

bureaucracy inherited from the *ritish a- ignored the comparative strength of

the countrys economy, namely its agriculture, and took measures to build an

industrial base, inter alia comprising the production of consumer goods. In itszeal to promote the industrial sector, the Bovernment went so far as to repress

agriculture by keeping prices of agricultural output well below international prices

through a combination of controls and procurement measures designed to achieve

this obective. Industry was thus provided cheap raw material at the cost of

agriculture.

• )o encourage industrialization and by way of classical infant industry support,

various steps were taken to protect domestic industry from external competition

by erecting high tariff walls or through outright import prohibition and also to

enable it to enoy the benefits of i- cheap raw material as stated above-, ii- non%

unionized labour, and iii- a variety of tax concessions. +uch “goodies are almostinvariably a sure panacea for inefficiency and the furtherance of uneconomic

industrial units unless the “supports or “props provided are clearly temporary

and phased out over a short period. In 7akistans case, this unfortunate situation

was further compounded by the fact that industrial units were promoted by

persons without any industrial experience %%%% primarily drawn from migrant

ethnic communities engaged in trading, and who were merely looking to make “a

fast buck hardly an ideal background or orientation for industrial promoters-.

• #o effort was made to dissuade the business community mainly ethnic 9indus-

from migrating to India nor was any effort made to persuade established industrialgroups in India or *ritain to sponsor viable industrial proects possibly in oint

venture with high net worth locals and/or the government as unior partners-. It

seems that 7akistan lost its business nucleus and the Bovernment was basically

relying on traders that had re%located from *ombay/!alcutta with very little

knowledge or insights regarding the situation on the ground.

• $hile the above flawed policy dispensation provided those licensed to set up

industrial units the ability to access enormous profits without much effort, the

Agriculture sector %%%% the economic strength of the country %%% suffered greatly on

account of the lack of cogent measures to support it, and actually stagnated, or

even retarded.




• )he decision not to devalue in sync with the Indian devaluation had a negative

impact on 7akistans limited export potential, including export of agricultural

commodities. 9owever, by lowering the cost of imported capital e"uipment, this

decision encouraged the setting up of industries targeting the domestic market i.e.

import substitution.

• Apart from adherence to a general policy thrust towards the promotion of import

substitution industries by the private sector, the bureaucracy retained all cards in

its hands. #o industrial unit could be set up unless it was licensed regarding

which there was very little clarity %%% apparently, grant of industrial approvals was

fairly whimsicalF An industrial license was clearly a license to get rich without

much effort. 7akistan Industrial >evelopment !orporation to set up industries in

sub%sectors where the private sector was shy- and the Industrial >evelopment

*ank of 7akistan to provide medium%term credits to industry- constituted the

main institutional support for industry.

• A radical policy shift occurred with the advent of &ield Garshal Ayub 1hans

government. Apart from the much needed focus on the development of

Agriculture, 7akistans primary economic pillar, a carefully devised, transparent,

and liberal policy to develop the industrial sector was instituted. )he 3nd &ive Hear

7lan was a model in economic planning and implementation. In several sub%

sectors, industrial units could be established without permission, and in others

permission had to be obtained through a well%defined process involving one or

two government committees depending upon the size and kind of proect-. )he

fact that long%term credit lines were available from international financing

institutions like the $orld *ank- was of great help in implementing this policy.

)he setting up of a sophisticated proect financing institution like the 7akistanIndustrial !redit Investment !orporation 7I!I!-, which, alongwith I>*7 and

the E"uity +upport &und, ensured to a large extent that only those proects were

financed that were both financially and economically viable. )here was also a

discernible shift towards export orientation as well as fre"uent

revisions/rationalization of the duty structure/import licensing to ensure that the

level of protection was appropriate and not excessive. At the end of the 3nd &ive

Hear 7lan, 7akistan was universally acknowledged as a “model developing

country.

• )he Ayub Bovernments economic policy consciously promoted concentration ofwealth as a necessary element to achieve capital formation. In some respects, the

policy prescription was dependent on subsidies and was possibly ine"uitable,

which may have been accentuated by inefficiencies. All this, together with the

lack of reinvestment at optimal levels as well as a vulgar display of consumption

by the business community, had adverse conse"uences for the regime. #ot only

did this lead to social ine"uality but also a deep seated sense of alienation among

the middle and lower classes that was the cause of political unrest.

• )he 2;86 war had several adverse conse"uences, inter alia, a sharp reduction in

international aid and a huge increase in defence expenditures. All this had adebilitating impact on the )hird &ive Hear 7lan which was designed to move

7akistan to the “take%off stage and other than the goal of a leap forward in




?n assuming power, *hutto proceeded to address the countrys issues over a

broad front. *huttos political achievements, both domestic and international,

were phenomenal e.g. revitalizing the morale of a defeated nation, a unanimously

approved democratic constitution, recovering 6@@@ s"uare miles of 7akistaniterritory and ;@,@@@ 7?$s held by India, the holding of a splendid Islamic

+ummit !onference in :ahore, a successful military operation in the ann of

1utch, the institution of a focused nuclear development program etc.

*huttos socio%economic program followed the script of the 777 manifesto for the

2;<@ election. It essentially entailed0

i. an enlargement of the scope of government by transferring very nearly alleducational and health institutions to the public sector and making serious

efforts to enhance the reach of education and health services(

ii emphasizing infrastructure development vital to economic activity(

iii implementing a range of measures, including land reforms, to develop

and strengthen agricultural activity( and

iv taking over all private enterprises and financial institutions on the

commanding heights of the economy as well as those that were critical to

economic success at the national level.

)he underlying idea was to promote welfare by ensuring that vital social services

and basic goods and services that are essential building blocks for business

activity are provided by the public sector, sans any form of exploitation.

$hile the lack of technical/management capacity and the lack of needed resources

were serious impediments to realizing his laudable aims, *huttos plans %%%% in

fact, his entire economic scheme %%%% floundered because he did not build a proper,

carrot and stick, incentive structure to ensure success.

It is noteworthy that *hutto retained a cogent and significant, albeit limited, role

for the private sector in his economic dispensation. A much needed maor

devaluation alongside withdrawal of the *onus Coucher scheme, further

rationalization of the tariff structures, abolishing the managing agency system, and

induction of e"uitable labour laws meant a far healthier, and less distorted,

environment to sustain business activity.

)he economic management of the *hutto government represented a significantdeviation from the approach of previous regimes not only because of the pre%




eminent role accorded to the public sector but also the fact that greater reliance

appears to have been placed on lateral entrants to public service and others

outside the established bureaucracy- to deliver the goods. $hether one agrees

with the policy direction of the *hutto government or not %%%% and at that time

there were a great many who did not largely because of their vested interest in the

previous system %%%% it is clear that implementation was abysmal and addled.Attention to detail was missing and on occasion the *hutto government seems to

have gone overboard e.g. when it took over small agro%based units like flour mills,

risk%husking mills, and cotton ginning factories. #onetheless, there was

significant space in the economy left wide open for the private sector. In actual

fact, businesses continued to be promoted, developed, and actually did play an

active role.

)he Jia%ul%9a" government essentially reversed whatever *hutto had done, the

governments role in running business enterprises was drastically reduced, the established bureaucracy was back in the forefront of economic management, and the system of

patronage with which top businessmen were "uite comfortable- re%asserted itself. ?ther

than a broad reversal to the Ayub%era mode, the Jia government did not break new ground

or do anything uni"ue or noteworthy in economic policy and management.

Jia%ul%9a" exploited the Afghan situation fully. At the cost of serious damage in

the shape of the ill%effects of gun running and drug running brought to the country

via the huge Afghan refugee influx/Guahideen, 7akistan enoyed the benefit of a

huge "uantum of international aid which created an illusion of prosperity. Also,

during the Jia regime, there were periods in which the economy also enoyed the

uncertain and temporary beneficial effects of good harvests and enhanced

remittances by workers.

BDE - Session 7

1ey )akeaways

As a matter of policy, the governments headed by *enazir *hutto and #awaz

+harif during the period 2;==%2;;; relied upon private initiative and private

enterprise as the engine for growth and development. All four governments two

each of *enazir and #awaz- were committed to progressively privatize state%owned enterprises, deregulate economic management, and liberalize the working

of the economy.

*oth the #awaz governments commanded an absolute maority in parliament, a

fair element of control over the provinces, and strong backing of the

army/establishment who considered #awaz a product of theirs and were,

therefore, fairly comfortable with him. !learly, the #awaz government had the

authority and wherewithal to make substantial progress and achieve a lot. As it

happened, in the matter of privatization, the #awaz government was able to move"uite aggressively and expeditiously but without much study, planning, or careful

aforethought. As a result, a large number of privatizations were carried out but




most of these cannot be adudged as successful. As a matter of fact, the +upreme

!ourt has declared that these privatizations were not done in a manner consistent

with the constitution. )hus, while the #awaz +harif government had the ability to

act they appear to have been somewhat incompetent.

?n the other hand, both the *enazir governments were minority governments in

collision with other political forces, control over the provinces was at best tenuous

other than in +indh, and the army/establishment were outright hostile, or at least,

did not give any support to either government of *enazir. )he cards were clearly

stacked against *enazir who was thus severely handicapped in her efforts to

implement the 777 program. )hough keen on privatization, her approach was

studied, ponderous, and slow %%% what was achieved was rather limited in scope.

Also, privatizations done by *enazir were perhaps a little more successful in

relative terms when compared with the privatizations carried out by the #awaz

governments.

*oth the *enazir and #awaz governments emphasized private initiative and

private enterprise in order for the economy to progress. :eaving aside their

special “pet proects, it is clear that while *enazir did not have the necessary

authority and leeway which was inter alia one reason why her achievements

remained limited-, #awaz +harif was both empowered and aggressive, albeit the

results achieved were ineffectual, or even flawed.

)he first part of the Gusharaf government i.e. the period preceding induction of a

parliamentary government and his attempt to achieve legitimacy through the

political process- was noteworthy for its modest efforts to achieve structural

reform and for endeavoring to put in place as well as strengthen institutions of

economic governance %%% all of which constitute significant elements conducive

for a healthy investment climate to emerge, businesses to flourish and develop,

and the private sector to thrive.

)he second part of the Gusharaf government, i.e. the parliamentary government phase, was characterized by a reversal to ineptitude as well as a slow down in the

process of reforms and institutional development. It is, however, noteworthy that,

like the #awaz +harif and *enazir governments, the private sector was not

discouraged in any way and steps were not taken to adversely affect business

development.

*roadly speaking, during the *enazir and #awaz governments, as well as during

the Gusharaf years, business development was negatively impacted by the fact

that0




- ideological "uestions pertaining to the state remained unsettled(

- the state was not at peace within itself or on its borders(

- lack of law and order subsisted throughout the country(

- the udicial system was incapable of delivering ustice and enforcing

rights/obligations without fear or favour(

- there prevailed a general absence of good governance except for the salutary

fact that sound regulations enforced by independent institutions of economic

governance were put in place by the Gusharaf government(

- carefully devised monetary and fiscal policies were absent except, perhaps,

for the initial years of the Gusharaf government-(

- the central bank was not really independent(

- sector development plans were not carefully formulated and executed e.g. for

energy-(

- cogent steps to enforce recognized competition norms were not taken till the

setting up of the !ompetition !ommission in 3@@<-(

- measures were not taken to impart education/develop needed skills except for

tentative steps taken by both the *enazir governments-( and

- minimal efforts were made to develop a sound financial system capable of

providing a raft of financing alternatives to meet the varying needs of business

enterprises.

It is also noteworthy that these governments did not institute robust policies and

schemes to capitalize on the countrys comparative strengths and fully exploit its

export potential.

BDE - Session 8




1ey )akeaways

)he current state of business and commerce in the area now constituting 7akistan,

i.e. essentially the Indus iver basin, has been inter alia shaped by historical

antecedents. #otable, and relevant in this respect is the massive colonization oflands made possible owning to the most extensive irrigation system in the world

constructed during the *ritish a. )he land opened up was colonized by people

who were in one way or another subservient to the a. 7rotected and shielded

from competition, income tax, exappropriation via enforcement of mortgage laws

by non%agriculturist lenders etc these people were0

- firstly, loyal to the a/successors to the a(

- secondly, sufficiently empowered politically through their prestigious land

holdings to be able to safeguard their interests( and

- thirdly, barring few exceptions, they did not have any incentive to save and

invest in order to improve productivity.

Also, the other maor population component of the Indus basin viz the original

semi%nomadic inhabitants of the riverine tracts, had suffered greatly over the last

two or three millennia at the hands of invaders who had looted and pillaged and/or

exacted tributes without giving anything in return. #aturally, these people were

and are0 rebellious and have a great distrust of any form of authority( they are

often at loggerheads with those in power except those accepted as community

leaders-( and will go to great lengths to avoid tax payments or levies imposed by

the government. )hey are also consumption%oriented and have no inclination to

either save or invest for productive purposes.

#otwithstanding the fact that at one stage i.e. pre%+ikh rule in the 7unab- there

were thriving urban centers replete with artisans and skilled tradesmen, the

stimulus or incentive to utilize this reservoir of skills in combination with

surpluses from land of the upper peasantry to achieve productive enterprises of

scale and depth was minimal. )his could only occur if the societal ethos had a

strong commercial orientation and the self%satisfied land%owning gentry with the

resources- did not look down upon commercial activity as being beneath their

status. In any case, these urban centres suffered a decline during the +ikh rule andwere also negatively impacted by the 2;th century peasant rebellions.




$hile the Indus basin suffered and wallowed in the overall situation described

above, the rest of the sub%continent with less protected land ownership, the strong

presence of commercial castes, and exposure to international maritime trade

essentially in the +outh- benefitted from a progressive build up of business andindustry. Gore often than not, purchase of land was treated as a commercial

proposition, which, alongwith the envisaged further investments in it, had to be

viable i.e. it had to render a rate of return that compared favourably with the

opportunity cost of capital. An obvious conse"uence of this was the much higher

levels of agricultural productivity. Apart from this, the business communities

invested in trade and industry in terms of the feasibility of each proposal and in

the light of their exposure to global or regional developments.

>espite the historical legacy indicated briefly above, as also policy issues

regarding which one can have differing views, industry has developed in 7akistan

and there are indeed a number of land owning families who are "uite progressive.

In view of the enormous political power that the landed gentry still wields,

business enterprises would do well to recognize and factor in their business plans

the interests and predilections of the landed gentry as aspects to be dealt with

appropriately-.

BDE - Session 9

1ey )akeaways

*oth cases draw attention to anomalies inherent in the governments micro

management of the economy.

Ganufacture of pumps and tractors was tariff%protected %%% could only be

carried out if licensed by the government and only on terms specified by

the government.

KSB

As both the supplier of iron castings main “raw material- re"uired by

1+* as well as the maor buyer of the pumps manufactured by 1+*, thegovernment was both a monopolist as well as monoponist vis%K%vis 1+*.

)he government thus exercised enormous economic dominance and power

over 1+*, "uite apart from its political authority. It made business sense

for an enterprise in such a position of subservience to the government to

do whatever was necessary to free itself from the stranglehold. )his was

particularly important since the Bovernment %%% as it becomes evident from

this case %%% was both inept and demonstrably unfair.

1+*s perfectly sensible, commercially%driven, proposal to set up a state%

of%the%art foundry was initially turned down mainly owing to opposition

by the >efence Ginistry which was obviously serving the commercial

interests of its attached enterprises. Eight years later, the proposal was




)he tractor industry in 7akistan was on “subsidy crutches in as much as

both the tractor manufacturers and the agriculturists the buyers- had got

accustomed to sales of tractors being financed by $orld *ank funded

Agricultural >evelopment *ank A>*- “subsidized loans. Any “drying

up of $orld *ank lines of credit to A>* for financing tractors would

automatically dry up tractor sales. )he tractor industry and potential buyers of tractors had locked themselves in this invidious position.

?f the five units licensed in 2;=4 to engage in progressive manufacture of

tractors, only two, i.e. Gillat )ractors and Al Bhazi )ractors, producing

Gassey &erguson and &IA) tractors respectively, were efficient and fairly

profitable- units that had not only achieved the deletion targets set for them

but also were producing tractors of near international "uality albeit sold at

below international prices-. *oth these units were nationalized enterprises

that still retained a little bit of their previous private sector ethos( however,

these enterprises were suspected to be in cahoots and to have engaged in

collusive cartelized- behavior although significant price gouging was not,

and is not, in evidence.

)he tractor and tractor parts manufacturing industries were threatened by0

reduced $orld *ank credits to Agricultural >evelopment *ank of 7akistan

A>*7- for tractor purchases( liberalized imports of tractors along with a

reduction in the mandatory deletion levels in compliance with $)?

guidelines prohibiting local procurement stipulations( and the Awami

)ractors +cheme involving the import of 23@,@@@ low "uality tractors from

Eastern Europe for being sold at the low price of s. 26@,@@@ per tractor.

Aggressive selling of tractors on cash basis has to some extent reduced

dependence on A>*7 financing( mandatory deletion levels have been

replaced by a tariff based approach to achieve the same goals in a manner

consistent with $)? guidelines( and subse"uent “tractorization schemes

were essentially based on a direct subsidy say s. 2@@,@@@ or 3@@,@@@- on

the purchase of tractors, whether locally procured or imported.

BDE - Session 10

1ey )akeaways

It is well established that a !entral *anks monetary policy measures, increasing

or decreasing the "uantum of money and raising or lowering short%term rates of

interest, have strong implications for the real economy affecting commercial

activity, savings, and investment. A business enterprise that chooses to remain

oblivious of, and does not advert to, monetary policy actions of the !entral *ank

does so at its cost.

)he leverage of monetary policy actions in particular, sharp movements in

monetary policy i.e. “monetary policy shocks- over short term interest rates and

the conse"uential influence of these actions over the cost of capital as well as

levels of spending are well understood. )o be efficacious, business executives

must “factor in these considerations in their decisions. $hat is not fully clear or




understood is where the impact is greatest and its timing, as also the manner in

which the impact is transmitted.

Empirically, the cost%of%capital effect on spending is difficult to establish very

clearly since alongside it there are invariably other non%neoclassical factors that

have a significant influence. Also, empirically, it appears monetary policy shockshave the greatest effect on spending on long%lived assets e.g. durables like

housing, productive e"uipment etc-. It has been observed that a monetary policy

shock0

- firstly, has an immediate transitory impact on short%term interest rates

followed by sustained declines in B>7/price levels(

- secondly, causes a "uick fall in final demand followed, after a lag, by a fall in

production, with inventories initially rising as a result of the contraction of

demand and then declining in response to reduced production(

- thirdly, a decline in housing investment occurs fairly rapidly, and also in

spending on durable goods followed by a fall in non%durable spending( and

- eventually, thereafter, results in a decline in fixed business investment.

)he conventional view of monetary transmission rests conceptually on a rise or

fall in short%term interest rates being caused by a sharp change in monetary policy

direction. It is not understood why should the greatest impact be on long%lived

assets %%% perhaps, there are frictions and also possibly elements of imperfect

information that may be responsible for this.

)he role of “the credit channel in monetary transmission may provide a partial

explanation. A significant aspect in this connection is the External &inance

7remium E&7- which is simply the difference between the cost of funds raised

externally and the cost of the funds generated internally i.e. the cost of capital-.

+ize of E&7 reflects credit market imperfections that drive a wedge between the

expected return of the lenders and the costs faced by potential borrowers.

Gonetary 7olicy not only affects interest rates but also the size of the E&7. )he

“credit view is that a lowering or raising of interest rates arising from a change in

monetary policy would tend to change the E&7 in the same direction on a more or

less sustained basis and that this would affect production by way of its longer termconse"uential effect on terms of credit, extent of borrowing, revenues, profits,

cash flows etc %%%% and further that the effect on production is likely to remain in

play even after the interest rate rise or fall has reversed itself.

As opposed to a commonly understood hypotheses that the monetary policy

induced effect on interest rates would, in linear fashion, directly impact

production, the story is somewhat more complicated and it seems that the change

in interest simply triggers other variables, which then work through over a period

eventually affecting production/price levels even though the original trigger may

have retracted. $hile the causality and effect chains may not be entirely

convincing and may need to be further researched-, based purely on empirical




evidence, businesses need to be conscious of the likely short%term and long%term

conse"uences of monetary policy shocks and position themselves accordingly.

Fiscal Polic

A tax structure that is discriminatory or oppressive is clearly harmful for business

development and constitutes a significant element contributing to an unhealthy

investment climate. Included in this are distortions in the tariff structure e.g. the

levy of higher import duties on an intermediate product vis%K%vis the final product

would encourage costly, possibly inefficient, production at the intermediate level

and discourage manufacture of the final product.

Apart from a discriminatory tax structure, competition is harmed if the taxes

levied are not uniformly collected. An obvious competitive harm is imposed on

those who honestly pay taxes as against those who are able to get away without

suffering this liability.

A business house has the right to expect that it functions under a taxation system

that, in form and substance, is e"uitable and fair( and also that this system is

efficiently and effectively enforced. +uch a taxation regime not only provides the

business community a level playing field within which to operate and thenecessary degree of certainty with respect to tax liabilities with the saving in

executive time this would necessarily entail- but also serves to ensure that the

governments finances are in sound condition lessening the need to resort to

deficit financing %%% and this inter alia harms the business environment by

bringing to bear inflationary pressures on the economy.

Apart from deficiencies mentioned in the previous three paragraphs, a serious

shortcoming in 7akistans taxation regime is the extremely poor implementation.

)here are several “sacred cows that are exempted from tax such as income from

agriculture which also provides a huge loophole for land%owning non%agriculturists to evade tax. )he privileged classes have other means to evade taxes

as well, all of which together with the level of indirect taxation obviously means

that the burden of taxes falls disportionately on the poor. &urther, the ruling

classes have prevented the introduction of a modern value%added tax alongwith

the documentation of the economy this would have necessarily entailed- and

continue to implement, from time to time, tax amnesty schemes that obviously

discriminate against honest tax payers.

BDE – Session 11

1ey )akeaways




!hinas experience, in relation to its efforts to achieve an efficacious financial system

supportive of business development, indicates several lessons that are mutatis mutandis

applicable to most developing countries, namely0

2. If, for any reason, it is not possible to divest/privatize state%owned financial

institutions, it would be best to take appropriate steps to encourage growth andexpansion of the non%state, private sector part of the financial sector while

endeavouring to contain or limit the state%denominated part.

3. It is important to comprehensively develop the financial system %%% banking as

well as non%banking. In most urisdictions, including !hina, the risk%averse aspect

of the financial system, i.e. banking, develops first. )he risk%taking part, i.e. non%

banking e.g. capital markets, investment banking, lease finance, asset

management etc- is often weak and/or inade"uate. )his needs attention so that a

financial system emerges that is capable of addressing the diverse needs of

modern corporates that are growing and are becoming much more sophisticated

and complex than ever before( and it should be ensured that this is done through arange of institutions and instruments that meet the needs of investors with varying

risk preferences and investment obectives. An essential component of all this is

the development of a viable bond market as well as a market in short term debt

instruments.

4. )he governance of state%dominated banks has to be addressed in a pragmatic

manner and an appropriate incentive structure put in place that ensures that credit

allocations/investments are carried out on the basis of sound, hardnosed, and

purely commercial considerations without adverting to any political agenda. )he

goal of independent, professional managements that adhere to the best corporate

governance norms, in form and substance, must not be compromised in any way

%%% this includes non%intervention by the state in the matter of senior appointments.

5. In many urisdictions as in !hina- %%% and in particular, in developing countries %%%

it is necessary to effectively address the solvency of the banking system through

inter alia asset resolutions, write%offs, and capital inections in order to restore the

health of key banking institutions. In this connection, it is also necessary to

institute appropriate governance arrangements as well as enforce an efficacious

regulatory framework that ensures that banks operate in accordance with

recognized prudential norms. A necessary aspect of the latter is loan%loss

provisioning as per global standards and implementing the *asel capital ade"uacyconcordat in letter and spirit.

6. A sound, fully integrated or properly co%ordinated- regulatory framework must be

in place and duly enforced by competent regulators. In most developing country

urisdictions, regulatory bodies need to0 strengthen their monitoring, surveillance

and enforcement capacity( adopt a disclosure%based, as opposed to a merit%based,

approach( and institute and implement prudential risk management and conduct

norms albeit leave price determination to market forces to reap the full benefit of

the market-. )he pressure on the !hinese stock market as a conse"uence of the

public sector share over%hang demonstrates how regulatory mispricing in a merit%

based framework- together with inade"uate disclosure %%%% all of which wasinduced by invidious public sector goals %%%% can be highly problematic for the

securities market. Also, regulations must cater to the proper commercial pricing




and management of risk by financial institutions fully capable of doing so rather

than avoidance of risk %%% this will allow the allocation of funds, as needed, on a

risk adusted basis.

8. &urthermore, in most countries the informal market works, and therefore, must be

allowed to function( also, it is essential that the supply of securities be encouragedand not hindered if the capital market is to develop( and it must be borne in mind

that for the small borrower the supply of credit/funding is infinitively more

important than its price.

<. ?n a general note, to achieve a robust economy, prevention of financial instability,

and economic growth, there are four fundamental elements0

a. maintenance of macro%economic e"uilibrium and stability(

b. building efficacious financial institutions(

c. compliance with recognized governance norms( and

d. putting in place capable, fully empowered, and independent regulators as wellas competition enforcers.

=. &urthermore, it is important not to forget the profound impact of globalization and

the I) revolution in all its forms, including the internet- on the financial system.

&inancial services are getting disintermediated, commoditized and globalized.

BDE - Session 12

1ey )akeaways

!" !n#es$%en$ &li%a$e

)he investment climate is basically the business environment within which

commercial enterprises operate i.e. the specific factors that impinge upon and

govern the opportunities and incentives for firms to invest productively. $hile

the overall macro%economic situation and the state of the body%politic are

fundamental aspects underlying the environment, for the most part investment

climate refers to specific matters that a business unit faces in the pursuit ofinvestment activities and also in managing its operations-. Gore pertinently,

when considering to what extent the investment climate is conducive to growth

and whether or not it is investment friendly, it is usual to give due consideration

to the constraints that business enterprises encounter in this connection.

)he list of such constraints is fairly long. 9owever, it is noteworthy that the more

important ones include0 poor governance and corruption, lack of access to

finance, oppressive and discriminatory regulations, oppressive and discriminatory

taxation, poor infrastructure, failure in maintaining law and order, lack of access

to ustice and poor enforcement of contractual obligations, and unfair labour




laws. An overlay of ineptitude and poor implementation invariably compounds

these constraints in many developing countries, including 7akistan.

As part of its analysis of growth in developing countries from a micro%economic

perspective and to assist developing countries take measures to induct aninvestment friendly business environment, the $orld *ank carries out, if so

re"uested by the government of the country, and on as obective a manner as

possible, an exercise called0 “)he Investment !limate Assessment I!A-. +uch

exercises have been carried out in respect of a large number of countries

including 7akistan- or in respect of certain cities/provinces of some countries,

and have been known to have had both a narrow and a broad focus as necessary

under the circumstances. )hese assessments are based on firm%level surveys

comprising "uestionnaires put to a large number of business firms in the urisdiction concerned. +upplementing the $orld *anks Investment !limate

Assessments are I&!s annual “>oing *usiness eports that assess and grade

each country on the ease of doing business essentially for a hypothetical firm- %%%

these reports are based on views elicited from relevant experts like lawyers,

accountants etc by way of replies to obective, specific "uestions put to them.

Investment climate surveys based on which the I!As are prepared- are designed

to elicit responses to "uestions that are straightforward, simple and obective.

9owever, it has been observed that on the one hand this is not always the case

and, on the other, the replies sought leave a lot of room for subectivity and

inaccuracy. As a conse"uence the results that get embodied in the I!A are

occasionally skewed or even misleading.

Even more dangerously %%% perhaps because a more comprehensive or

sophisticated survey would be too cumbersome, difficult to comprehend, and

time%consuming for participants %%% it is observed that at times the information

sought is, in and of itself, too “simplistic and can give rise to unwarranted

conclusions in the I!A. &or instance, treating the mere ability to possibly access

bank loans as a conclusive indicator regarding access to finance which actually

covers the whole range of e"uity and loan financing instruments and institutions-

is hardly tenable. Also, I!As appear to regard as ideal the managements

unfettered ability to hire labour on any basis temporary, casual, daily wage,

regular- and to fire at will %%% I!A %%% do not seem to advert to the perverse

implications of such an extreme situation. &urther, another example is the

number of days taken to register a company which is a valid indicator but its

importance seems exaggerated in the I!A and >oing *usiness eports. In the




first place, it is obtaining the commencement of business certificate that is

significant not the initial registration, and then, notwithstanding the horrendous

number of days taken to register a business as is reported in many countries, it is

difficult to find an astute businessman that cribs about this problem %%% they seem

to be able to register their companies whenever they wish to do so.

A favourable investment climate is well worth aspiring to attain, yet it would not

be sensible to exaggerate its importance. +ince the pursuit of profit is the pursuit

of rent and businessmen earn profits out of solving problems the risk%reward

ratio as well as the opportunity cost of capital being important considerations in

this connection- a perfect or near perfect investment climate does not really

constitute an attractive environment for investmentF

&rom a practical point of view, there is no doubt that prior to making an

investment, a business entity must determine the investment climate constraints

that need to be addressed and whether the risk%reward ratio is worthwhile. )he

$orld *anks I!A could be %%% though not necessarily in all instances %%% a

starting point for the consideration of such constraints. Also, it is noteworthy that

the $orld *ank officials are conscious of the short comings in I!As and >oing

*usiness eports. )hey look upon these reports as being in the nature of routine

medical test reports which often merely raise red flags but do not give any

definitive diagnosis of ailments-. )he value of these reports is that they are a

starting point for discussions with the governments economic managers perhaps

eventually leading to reform measures- or as indicating the basis for further

detailed study of a particular aspect of the business environment.

!!" En$e'('ise ) De#elo(%en$

$hile the capitalist paradigm, embedded in the $ashington !onsensus that is

currently dominant in the thinking of economic managers across the globe, has

boosted economic activity in many urisdictions, this also has significant

shortcomings which cannot be ignored. )he $ashington !onsensus arises from

Adam +miths basic assertion that the success of the market mechanism is inter

alia based on economic agents being driven purely by the profit motive and self%

interest( and there is no doubt that this has resulted in phenomenal economic

growth. 9owever, at the same time, the system has demonstrated remarkable

failings due to the no%holds barred extremes of avarice, greed and exploitative

conduct that have got perpetuated in the system.




)he much%touted trickle down effect is increasingly less and less in evidence.

Instead0

- the rich%poor divide is ever%widening and absolute poverty is on the rise(

- there is an unconscionable level of environmental pollution(

- malnutrition and health standards are falling(

- the essentials of food, clothing and shelter are on the decline(

- the tendency for ever%multiplying operational risks to precipitate financial

risks is growing( and

- a host of other depressing factors have rendered this system %%% in the

freewheeling shape it has taken %%%untenable and incompatible with the

present day needs of society.

*usinesses need to be conscious of all this economic distress and the fact that the

system has the potential to eventually lead to a fall in demand below

economically sustainable levels and a breakdown of the social contract. $hile a

call for responsible business conduct is not likely to achieve a success greater

than a cry in the wilderness, an effort to adust the current free market societal

paradigm to one that involves a positive role for the state is clearly needed.

educing the role of the state close to that of a vestigial organ in society is not in

the interest of business enterprise and its development. It is most necessary for

the state to at least0

- underwrite the provision of social services at a certain minimal level health,

education, sanitation, basic infrastructure, a poverty safety net etc-(

- provide, as needed, laws and regulatory systems to govern economic activity

that are duly implemented as well as enforced by sound and competent

regulatory bodies/institutions of market governance %%% to ensure that

economic agents act in accordance with prudent norms and engage in

behaviour that is compatible with civilized society(

- duly enforce rights and obligations of contractual parties( and

- to get directly involved in economic activity only in the event of market

failure and where the private sector is not forthcoming, for a limited period

only.

)his is, of course, apart from the usual functions and responsibilities of the state

pertaining to defence, law and order, a non%discriminatory and fair taxation

system, currency and macro%economic stability etc.




)he aforesaid steps, if sensibly implemented, would adust the free%wheeling,

totally uninhibited, capitalist system aligned to the $ashington !onsensus-

without incurring the unsustainable cost of the $estern Europe welfare%based

social democracy model and hopefully render it viable i.e. it meets the recognized

tests of legitimacy, sustainability, and stability.

BDE - Session 13

1ey )akeaways

)he purpose of economic regulation and competition law enforcement is to ensure that

the market functions thereby facilitating entrepreneurship and private%sector led growth.

7utting in place capable, fully empowered, independent and incorruptible regulators/law

enforcers is a fundamental element in order to achieve a robust economy, financial

stability and economic growth.

)he most significant institutions of market governance i.e. regulators/ law enforcers- are0

the +tate Bank of Pakistan for the banking sector( the Securities & Exchange Commission

for the corporate sector, non%banking institutions, and securities markets( and the

Competition Commission of 7akistan to ensure that there is no manipulation and all

economic agents interact with each other on a level playing field. )hese institutions have

an economy%wide remit. )here are, of course, sectoral regulators like ?BA, 7EGA,

#E7A etc with a narrower, sector%wide focus.

Even in the rather difficult environment of a developing country as specified in the

reading- a regulator can be effective if he/she0 a- has the necessary determination( b- isadept in not only “working the system but also in operating “above and below the radar

screen( and c- has the moral authority to back the actions taken/measures adopted.

Benerally speaking, in developing countries the most significant factors that adversely

affect an institution of market governance as also detract from its independence- are0 a-

the udicial system simply does not work, b- the political will to support

regulation/competition enforcement is non%existent( and c- the institution does not have

its own tied/secured sources of funding so that it is not dependent upon subventions from

the governments budget.

:iberalization of an economy almost invariably calls for stronger regulation, not lessregulation. )he most important current issue with respect to regulation is not lack of

regulations but lack of implementation thereof and lack of enforcement. Also, the

imperative is to ensure disclosure%based regulation carried out at a high moral plane in a

competent, professionally savvy and discerning manner by bold and incorruptible

regulators. )his is a tall order but is possible to achieve provided the necessary political

will is brought to the table.

BDE - Session 14

1ey )akeaways

In order for the market to function properly and not be dysfunctional, it is important for

institutions of economic governance to be efficacious. In this connection, the three

primary institutions, i.e. the State Bank of Pakistan, the Securities & ExchangeCommission, and the Competition Commission, must faithfully fulfill their mandates as




)he prescribed procedure will bind the government to make the appointment within 25

days of the *oards recommendation %%% if not the *oards recommendation will

automatically get converted into the appointment.

As regards “accountability, apart from being accountable to parliament as already

provided by law-, being subect to the prevailing appellate/writ urisdiction of the courts,and being subect to audit by the Auditor Beneral of 7akistan, it is important to institute

accountability by civil society. As in many countries, it is important to encourage the

setting up of at least one think tank comprising highly reputable and capable persons of

unimpeachable integrity the function of which would be to publish its duly considered

opinion on each regulatory directive/decision emanating from the institutions of economic

governance. )his should keep these institutions on their toes since the opinion of a think

tank of the caliber and standing described above is likely to be picked up by the media

and should develop its own gravitas %%% as often happens in countries where such think

tanks are active. egulatory institutions that are subected to such scrutiny by civil

society are not likely to deviate from the “narrow and straight path.

Download - Takeaways for Session 1

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