Small enterprises engender large economies

LAHORE: People in Pakistan have the right to vote but they are disfranchised as far as participation in economy is concerned. Since excluded from the economic system, they are forced to operate informally and continue to live in poverty.

Ironically, the system has forced this exclusion on them. Other small bunches that have been excluded from economic mainstream are smugglers, tax evading traders, and manufacturers.

When we talk about the size of informal economy, we include both rich and poor, but we fail to realise that the rich exclude themselves from mainstream economy by design, while the poor are forced out through the loopholes in the system.

Exclusion from participation forces many entrepreneurs to engage in low-income, low-growth, informal business activities. Moreover over 90 percent of grey economy is in the hands of 5-10 percent people and the poor’s share in informal economy is less than 10 percent.

Majority of poor entrepreneurs produce legitimate products without proper permits or legal status because they lack the resources to comply with burdensome and excessive rules and regulations necessary to become part of the formal economy. Hence, they operate outside of it.

Small entrepreneurs do not participate in market-based economic system because institutional structures or the "rules of the game" are ill-designed and decision-making is undemocratic. This erects barriers to participation as the costs of doing business become prohibitively expensive. Even the democratic system has failed to remove these barriers.

It is the duty of the people elected through participatory process to remove impediments preventing routine/daily participation in national and local decision-making, which foster unresponsive policies, such as exorbitantly high costs of doing business.

These obstacles disenfranchise the citizens politically and economically, jeopardise the consolidation of political and economic reform and threaten exclusion from global markets.

The present regime like its predecessor is in firefighting mode and has no time to make efforts to bring the poor in mainstream economy. Pakistan desperately needs a well-designed, transparent, stable set of political and economic institutions that foster democracy and market-based economic activity and provide level playing field to all the citizens.

The level of public participation and transparency in the policymaking and legislative process has to be increased by instituting transparent, inclusive decision-making procedures. The general public must be provided with the opportunity to comment on existing and proposed laws and regulations. Exclusion from participation occurs when the legal and regulatory codes are not clearly streamlined by eliminating duplicative and superfluous laws.

Denial of participatory and consultative process in economic affairs provides opportunity for corruption resulting in increase in cost of doing business. Every citizen has the right to have access to private property rights. These rights should be clearly defined and strongly enforced. Entrepreneurs with modest means would become formal if the requirements to obtain business permits and licenses are simplified and inexpensive.

The planners should reform the taxation systems to enable small businesses to comply with ease. This would encourage profitable economic activity. Moreover there should be more flexibility in labour laws as practiced in developed economies.

Determined efforts are needed to reform economic systems for creating open markets in place of crony capitalist systems. This could be done through better corporate governance legislation. Reforms in bankruptcy laws, introduction of globally accepted accounting principles, and better standards of disclosure are need of the hour. The state should strictly discourage conflict of interest and insider-trading, besides strengthening its competition laws.

Small entrepreneurs are wary of the bureaucratic red tape. The government should remove discretionary powers of the bureaucracy and instead strengthen the government institutions through excessive reforms. Public institutions should be facilitators of business which they will if their administrative and enforcement capacity is enhanced. Laws and regulations should be so simple and elaborate that they are administered and enforced efficiently, effectively and inexpensively.

Small informal sector businessmen need relevant business-related information and training about various business procedures needed to become formal.

They should be facilitated by the state to obtain a license or permit. They should also be guided on how to start a business, form commercial entities such as joint ventures and incorporated companies, and run a business.

The state is duty-bound to provide adequate, capable, gainful infrastructure essential for market-based system (such as telecommunication and transport systems). This would induce informal sector towards documentation.