Determinants of Political Governance and Investment Trends in Pakistan By Athar Iqbal 021-10-13795 A thesis Submitted in partial fulfillment of the requirements for the degree of Doctor of Philosophy(PhD) to Dean (Business Administration Department) at the Iqra University, main campus, Karachi Karachi, Pakistan July , 2015 i CERTIFICATE It is certified that a PhD dissertation titled as “Determinants of Political Governance and Investment Trends in Pakistan” has been completed by Mr. Athar Iqbal, bearing a Registration No. 021-10-13795. It is being approved for the final submission. Supervisor, Dr. Muhammad Ayub Khan Meher Date: ii Dedication This dissertation is dedicated to my mother Mehrunnisa. Thanks for always being there for me, for her kindness, affection, thoughtfulness, devotion, and for her continuous encouragement. My mother has always encouraged me, even when I was in school. Her support, encouragement and interest in studies always gave strength to me to do something more in studies. She always took interest in the improvement of my reading and writing and forgave my mistakes when she realized that I am taking interest in studies. Her support, encouragement, determination and constant love have sustained me throughout my life. iii Acknowledgements All praises and veneration are attributed to Almighty Allah, the Compassionate and Merciful, who conferred upon me the wisdom, knowledge and ability to accomplish this thesis. It is my pleasure to express my profound gratitude to Dr. Muhammad Ayub Khan Mehar, Professor, Iqra University for his valuable guidance and encouragement as a research supervisor in completion of this dissertation. I am really thankful for his attention to details and for his demand for excellence. Without his wisdom, foresight, intellectual competence, regular feedback and guidance, this research work would not have been possible. He guided me from initial thinking process to the final completion of the dissertation. He showed immense patience during detailed work of checking the chapters and making corrections. I am also indebted to all my teachers Professor Dr. UAG Issani, Mr. Ghulam Abbas for their valuable guidance. I am also thankful to Dr. Akif Hassan who as vice president of Iqra University and registrar always trusted me, Dr. Zaira Wahab as head of M. Phil, PhD program for her valuable suggestions on various aspects of the dissertation. Special thanks to Dr. Javed Hussain, Dean, department of management science and associate dean Dr. Azam. iv I am most grateful to my colleagues, Dr. Irfan Hameed, Mr. Ghulam Abbas, Mr. Rujaib Naseem, Mr. M. Irfan Khan, Mr. Abdul Raheem, Mr. Shahzad Shamshad, Ms. Maria Kassim, Ms. Zahra, for their time, encouragement, and expertise throughout this study. In addition, my wife Sadaf and my kids Sharjeel Athar, and Wajiha Rubab should also be appreciated as they patiently allowed me to spend time on this research work. My brother Akbar Nawaz Shad in his usual rigorous analytical frame of mind provided extremely useful and insightful comments on the earlier drafts and final proof reading of the entire document. I am also indebted to the department of ORIC and its head Mr. M. Imtiaz Subhani who helped me in the preparation of the document. I wish to express my deep sense of gratitude to Dr. Najeeb Ahamd Malik and Mr. Aseem Rizvi for their encouragement to complete this dissertation. Special thanks to Mr. Yasir Ali Somro for his willing help and encouragement during the entire process over the years. v Abstract It is a generalized perception that democratic system leads to good governance, economic welfare and development. Surprisingly, the history of Pakistan shows a negative association between the democratic regime and economic development and governance. Non democratic regimes (Military rules) in Pakistan have been showing significant improvement in economic and business indicators and better governance as compare to the democratic governments. Such evidences have created a gap and contradiction between the political theories and ground realities. This study fills the gap by pointing out the frictions in transformation of the political governance into business and economic indicators. Studying the political economy of Pakistan is an interesting pursuit. Most problems emanate not due to lack of resources, but more because of mismanagement and rent seeking activities of various groups engaged in the governance of Pakistan. Various indicators to measure the governance and competitiveness have been referred and their associations with the business competitiveness and economic performance have been shown. Creation of feudalism in South Asia and its continuity in Pakistan; feudal influence in the political governance; Economic and political governance and its nexus with the feudalism; its impact on fiscal policy including patterns of taxes, development financing and provision of subsidies; leading to debt burden and weakening the corporate sector; Nexus of family business ownership, income inequality and wealth concentration. Impact on monetary system in terms of accelerated rate of banking defaults, subsidized investment packages, exemptions, subsidized interest rate, higher banking spread and liquidity crisis. The study explores the nexus of feudal lords, political parties, economic policies formulating institutions and big industrialists and players of financial markets determine the overall governance of the economy in Pakistan. vi Investment in terms of FDI, portfolio investment to GDP ratio and other indicators have always been discussed broadly to describe the performance of political regimes in Pakistan. What is the relation between the trends of investment and political governance? How political changes can affect the trends of investment in the country? This study unleashes the determinants of political governance and their relation with the investment patterns. The main emphasize of this study is to find the root causes of business un-competitiveness and weakening the corporate economy, financial markets and business sector in Pakistan. Today’s patterns of political and economic governance in Pakistan are deeply rooted in the political history of South Asia. The World Bank, Economic Freedom Network, Fraser Institute and World Economic Forum have been defining and measuring the governance indicators. These indicators have been used in this study with describing their limitations and academic implications. It is generalized agreement in the economic literature that political governance play a vital role in economic development and prosperity. It was observed in Pakistan that feudal lords have higher accumulation of wealth without economic contribution. Furthermore the higher return on their wealth does not reflect the increasing return to scale or managerial efficiencies; it was derived by deducing the economic logic and justifications that the use of political power plays a significant role in the earning of extraordinary and abnormal returns on wealth. Consequently, the wealth accumulation rate becomes much higher as compare to the normal ways of business. The unusual concentration of wealth and the income inequalities are the natural consequences of this mechanism. The prioritization of government spending, budget allocations, collection of revenue, financing the deficit, monetary and fiscal policies, and facilitation of business sector depend on the overall economic political governance of the country. vii Political governance uses the discretionary powers in those economic decisions which can affect the patterns of investment and businesses. Allocation of special permits and licenses for certain businesses, subsidized lending from the banks and financial institutions, allocation of funds for local development, prioritization of infrastructure development projects, and exemptions from taxes are the common tools of economic policies by political governance. The failure of governance in Pakistan are reflected in the energy crisis, low and stagnant tax to GDP ratio, high debt burden, high incidence of tax evasion, regressive tax system, high losses of public sector enterprises, burden of subsidies, high corruption and misappropriation in development funds, and human inefficiencies in public sector enterprises. This research recommends the consistent economic policies without political influence by ruling parties, equity and egalitarianism in taxation policy, autonomy of central bank with independent monetary policy, freedom of commercial banks from political influence, minimum sized and lean government. This thesis examined the impact of feudalism on wealth concentration as well as on governance of a country, business competitiveness and success of a country. Bad governance has deep impacts on economy of Pakistan. Excessive debt, high fiscal deficit, high inflation, low tax to GDP ratio, high trade deficit, lack of adequate capital formation and severe energy crisis are some of the economic challenges faces by Pakistan from decades. Economic policies are in the hands of feudal lords due to their majority in national assemblies. Their economic policy decisions are not in the favor of Pakistan as many economic indicators are negative or showing poor performance. Deteriorated foreign exchange reserve due to high debt payment, growth of imports, stagnant exports, declining foreign inflows, poor privatization proceeds, inability of government to obtain international debt and declining grant assistance are the main reasons behind this declining trend.