‘Entrepreneurial capitalism vital for a sustainable economy’

KARACHI: The state-directed economies have created what some development experts describe as “oligarchic” form of capitalism — common to many frontier or emerging markets — in which bulk of the power and wealth is held by a few wealthy individuals and rich families.

Its distinguishing feature is the strong presence of oligopolies in which a few big companies or groups together hold a major or controlling share of their segment of the market. And quite a number of business tycoons are politicians with easy access to corridors of power.

However, in a changing economic scenario, oligopolies seem to be the route to entrepreneurial capitalism. Economists stress that large firms need to innovate and fully embrace entrepreneurial capitalism for building a globally competitive domestic economy and sustaining economic growth. According to some noted experts, the greatest challenge before the governments is to promote innovation and entrepreneurship.

“At some point of time, economies must innovate, rather than simply replicate. That is when state guidance would have run its course”

Historical record in Pakistan also shows that oligopolies have played a transformational role in modernising the country’s economy. They have also minimised the number of monopolies where one single company dominates its own market segment.

Oligopolies have dislodged much of the largely inefficient public sector from the commanding heights of the economy where the leftovers of privatisation such as Pakistan International Airlines and Pakistan Steel Mills continue to be a burden on taxpayers.

It is the large business groups or corporations which have the capacity to execute capital-intensive big projects or acquire — often sinking — small and medium businesses. That has intensified merger and acquisition activity.

Major banks, for instance, have primarily grown on their own, but they have also expanded by acquiring smaller banks and finance companies helped by tax incentives during financial stewardship of Shaukat Aziz and an active State Bank policy, supported by the International Monetary Fund, to make banks too big to fail. About half a dozen major banks control 70pc of the industry’s market.

However, the vital role of oligopolies in development of the private sector and the economy cannot be denied, and is universally recognised.

But, at this point of time, oligopolies now tend to squeeze the space for a level playing field for new entrants to develop a competitive, diversified domestic economy required for production of quality goods and services at competitive prices for much-needed exports.

Many big firms including multinationals produce quality products for the domestic market, but they lack the required focus to boost exports. They have created a large middle class and a huge demand for professionals who have a worldwide market.

Critics say that oligopolies, owing to their sway on the market, set the domestic prices higher than they should and manage official policy changes skewed in their favour. Such changes may hurt other economic agents as well as consumers. Some new entrants have been allegedly edged out of the market by a few big players.

Recently, big milk processing units were accused of “collusion” in persuading the government to allow imported skimmed milk that helped them to keep the purchasing price of “raw” milk depressed. And new entrants preferred to work with big firms rather than develop their own independent businesses.

The three big auto companies operate in three different segments of the automobile market and thus safeguard each others’ interests. It is a sellers’ market, be the price or the delivery period of cars booked against part payment with the manufacturers or dealers. Things may change if more automobile plants are set up as currently stipulated in the market.

One or the other segment of major industries has been accused off and on by the regulators for setting higher prices or deceptive marketing. Private interests often tend to irrationally prevail over public interests. The remedy lies in developing a free and integrated domestic market with selected yet temporary restricted foreign trade policies.

Some economists also criticise the hierarchical nature of the big firms and groups, and question their efficiency and productivity, particularly those dependent on questionable subsidies and unjustifiable incentives.

In their book Good Capitalism, Bad Capitalism, and the Economics of Growth and Prosperity, authors William J. Baumol, Robert E. Litan and Carl J. Schramm observe that growth is most difficult to accomplish in economies dominated by oligopolies where income is highly unevenly distributed. They stress that oligarchs do not give the highest priority to growth.

Corruption is universally considered as a great deterrent to private investment. The book argues that oligarchic economies are typically plagued by corruption more than in the earlier form of state-guided capitalism.

In Pakistan, big firms employ highly paid consultants to deal with cumbersome procedures of regulatory authorities to get their job done. Small investors cannot afford to spend time and money to secure regulatory approvals and prefer to operate in the informal sector.

As despite their drawbacks, the command economy, state capitalism, mixed economy, etc have played a useful role in various phases of economic and social progress and so have oligopolies.

It’s about time big firms moved rapidly towards entrepreneurial capitalism. As an eminent economist says: “At some point of time economies must innovate, rather than simply replicate. That is when state guidance would have run its course.”