Friday September 24, 2021

The tech-enabled economy

It is unfortunate that Pakistan has become a slow-growth economy for several years, primarily owing to substandard leadership that has reigned over the last seven decades.

This has made our governments highly inefficient on the one hand, and on the other, has led to the creation of a rent-seeking business elite with little innovation mindset. One critical reason for lack of innovation is the utter neglect of human capital. Our education, from the basic to the higher level, remains at the bottom in global rankings, and the culture of the status quo fails to produce the required talent necessary for promotion of entrepreneurship and innovation. This is one major difference when compared to countries such Bangladesh and India, which made greater investments in their people, thus reaping the benefit of recent momentum in economic growth of six to seven percent during the last two decades, while Pakistan stagnated at below three percent.

Another reason that has caused Pakistan’s economy to languish is huge unplanned expansion in governments, resulting in major increase in government expenditure, while revenues remain static in real terms, leading to huge unsustainable fiscal deficits without improving the quality of service delivery.

While the rest of the world has progressed with time, our governments, in terms of systems and people, have maintained an amazing degree of status quo. Poor economic and social policies have made Pakistan uncompetitive; except for production of agricultural commodities and some low value products, the country is largely dependent on imports resulting in unsustainable current account deficits inevitably pushing the country towards an IMF programme every few years, which necessarily requires slowing imports and consumption to make the external account sustainable.

As discussed in my earlier article on this subject, Pakistan’s economy, which used to be one-fifth the size of the Indian economy has now descended to one tenth. The concern is that this proportion is likely to steeply worsen in the coming years, considering the robust size and growth of the tech-based innovation economy of India while Pakistan remains virtually absent in such space – partly for the two reasons cited above, and partly due to lack of attention by our governments as well as the private sector business community.

Admittedly, in the last few years, there has been some improvement in this ecosystem of formation and expansion of startups, as a number of incubators and accelerators have been established, including a significant initiative under the Ministry of Information Technology and Telecom (MOTT) through which five incubation centers were established; however, the scale remains very small. Key factors responsible for low investment in this space, besides the two fundamental ones described above, include a highly regressive tax system that imposes significant burden on new enterprises; a regulatory regime designed to stop business rather than promote it; negligible availability of venture capital funds; and complete absence of badly needed proactive leadership from federal and provincial governments.

As a comparison, India has a major programme that was launched in 2016 by Prime Minister Modi, which has made India one of the trailblazers in the tech-innovation economy. There are over 50,000 startups in India as against a few hundred in Pakistan. The annual investment by PE / VCs in India has been $10 billion per annum. According to one estimate, the Pakistani ecosystem hardly mobilized $250 million in the last five years, and most such funds came from international investors. Compared to 100 unicorns in India valued at $240 billion, we have not produced a single one so far. Clearly, neither the governments nor the business community appreciate the importance of a new idea-based innovation economy ; this puts Pakistan at serious risk of being completely left out, if the pace of development in this area is not steeply scaled up.

While the above weaknesses are serious impediments to the development of an innovation economy, it is fair to say that the country has made significant progress in terms of basic infrastructure, besides having a market that can provide a sound foundation for the digital economy. These include a large young population, 64 percent being 30 years or below, if they can be equipped with education and skills. Over 173 million (78 percent of the population) use mobile phones, 100 million subscribers of 3g/4g and around a similar number of broadband subscribers. More than 60 million use the internet, 46 million use social media, 65 million use some kind of smartphones and over 45 million use laptops or desktops.

The annual growth in internet and social media users is 21 percent and 24 percent respectively. But the problem is that these enablers are not unique to Pakistan, as the world is full of such infrastructure and population. Unless we have the right incentives and environment, that has to be mainly created by decisive leadership, I do not foresee significant capital formation happening in Pakistan.

There is a serious need for the federal and provincial governments to enhance their focus on digitization and development of the tech-based innovation ecosystem.

Globally, almost every country has developed and is continually evolving digitization strategies and programmes, which are led by heads of governments. For instance, both in India and Bangladesh, the digital strategies are led proactively by their prime ministers, whereas in Pakistan, the digital policy was issued by the MOITT in 2018, without much substance, lacking clarity of vision and necessary action steps, responsibilities and timelines.

The first and most urgent action required is to constitute a digital transformation committee (DTC) under the leadership of the prime minister to formulate and oversee necessary policies and programmes for the digital transformation of the government and to develop a tech-based innovation economy.

Second, the MOITT should be headed by a competent professional, who has the required expertise to lead the digital transformation of the government and provide leadership in developing the new tech-based innovation economy rather than a conventional politician. The head of the MOITT should also serve as secretary of the DTC.

Third, the MOITT should urgently develop a Digital Transformation Policy and programme to be approved by the DTC & the Cabinet. In addition to the federal government, all provinces need to develop such policies. In India, besides the Union Government, all states have such policies that are being actively pursued and coordinated. The policies should include the following: one, digitization and intelligent automation (IA) of governments, including process reengineering to enhance their own efficiency and effectiveness at minimum cost and improving service delivery; and two, promoting tech-based entrepreneurship and innovation ecosystem.

Fourth, develop specific steps and incentives to address tax and regulatory impediments. India has provided significant tax and other incentives to startups. Pakistan needs to exceed these to attract more investment, considering Pakistan is very small in this space.

Fifth, the biggest issue is lack of capital for investments in startups, as Pakistan has negligible private equity and venture capital firms that provide funding as can be seen by comparison of funding received by Indian startups mentioned above. In order to substantially improve this flow, in addition to promoting private equity and venture capital by providing fiscal incentives, the federal and provincial governments should allocate significant amounts from their budgets. In India, the government has allocated IR100 billion (equal to PKR200 billion) in FY21-22, and it has made a cumulative investment of IR450 billion (PKR900 billion).

Sixth, build a dynamic startup portal to promote, track and facilitate entrepreneurs and all stakeholders like incubators, accelerators, funds providers, academic institutions and others, and continuous monitoring and reporting on the new economy.

Seventh, initiate a public debate in the country to identify further ideas and steps to expand and continuous improvement in the innovation ecosystem.

The above are a few basic steps that should be urgently initiated, together with more steps that emerge from public debate to catch up with the world in developing a new ecosystem of innovation. All governments, organizations, institutions and all businesses must recognise that they have to transform and continuously reinvent themselves – taking advantage of new emerging technologies to remain relevant and competitive in the digital age.

Twitter: @Asad_Ashah

The writer is a former managing partner of a leading professional services firm and has done extensive work on governance in the public and private sectors.