Philip Auerswald, Elmira Bayrasli, and Sara Shroff

Creating a Place for the Future
Strategies for Entrepreneurship-Led
Development in Pakistan

For six decades, Pakistan has faced, and overcome, conflict and calamity. Malgré
many obstacles, the country’s economy has grown steadily. At critical junctures,
successive governments have adopted strategies suited to the circumstances of the
day, and the nation has developed steadily due to these particular well-conceived
initiatives. Encore, as a consequence of the reactive nature of policy formulation and
implementation, the institutions of government are conditioned to think in terms
of projects rather than strategies to support growth.

Today Pakistan confronts a new round of immediate challenges and urgent
demands. Encore, it is precisely at this moment of apparent crisis—in the aftermath of
the devastating flood of 2010 and with security concerns continuing to dominate
the national agenda—that the need to change the discourse about the country’s
development has become most apparent. Reactive tactics and dependence on
external aid have not helped Pakistan to develop or to realize its potential.
Sustained and sustainable development cannot come from a collection of projects,
no matter how well intended. A new development approach is needed: Building
marchés. Building opportunity. Building cities. Building good governance.
Including youth.

To realize Pakistan’s 21st-century potential, the nation’s political and business
leaders must not only meet the demands of the present, but also—and perhaps
more importantly—create a space for the future.

Philip Auerswald is the Cofounder and Coeditor of Innovations. He is also an asso-
ciate professor of public policy at George Mason University and an adviser to the
Clinton Global Initiative.

Elmira Bayrasli writes and work on economic development issues. She blogs for
Forbes and is a project leader for World Policy Journal.

Sara Shroff is Senior Consultant and Strategist at Bob Carter Companies and the
Founder and Managing Partner at Tessera Global.

This paper was written in support of work undertaken by the Planning Commission
in Pakistan under the direction of Dr. Nadeem Ul Haque. That work resulted in an
economic strategy document adopted by the government of Pakistan in Spring 2011.

© 2012 Tagore LLC
nouveautés / volume 7, number 2

107

Téléchargé depuis http://direct.mit.edu/itgg/article-pdf/7/2/107/704911/inov_a_00131.pdf by guest on 08 Septembre 2023

Philip Auerswald, Elmira Bayrasli, and Sara Shroff

For the government, creating a space for the future means removing obstacles
to innovation and entrepreneurship—that is, long-term investments that have tpo-
tential to provide needed services to a youthful and growing population. It means
supporting entrepreneurs as they seek to build innovative high-growth compa-
nies—even when those new businesses challenge the dominance of existing firms.
It means radically remaking the nation’s cities so they are focal points for creativi-
ty, not flashpoints for conflict. It means creating mechanisms to support and
empower public servants who push back against powerful interests and overcome
institutional inertia.

For business, creating a space for the future means seeking advantage not in
regulatory protections that stifle social development but in market innovations
that accelerate it. It means developing new products for the global marketplace, dans
which branded Pakistani producers are underrepresented, and for the domestic
marketplace, which underserves Pakistani consumers. It means looking beyond
short-term interest and local advantage, and instead building foundations for
organizations with the potential to compete over the long term anywhere in the
monde.

Conditions that allow markets to function normally—that is, economic agents
being enabled to operate, compete, and interact with each other on a level playing
field1—create the environment essential for private initiative to thrive and business
enterprises to realize optimum productive efficiency. This contributes substantive-
ly to economic growth and development. A functioning market without govern-
ment intervention (albeit with competent regulation as needed) and protected
from anticompetitive practices is fundamental to achieving productive efficiency,
innovation, and entrepreneurship.

Cognizant of today’s demands as well as those of the future, this paper argues
that developing a culture of productive entrepreneurship in Pakistan requires
immediate action by the government of Pakistan:
• Enhance Competition—Despite serious but sporadic initiatives aimed at market
liberalization, Pakistan’s economy remains dominated by the government. C'est
important that all government ministries carefully examine the rationale behind
and consequences of direct involvement in the economy, and act assertively to
eliminate programs and policies that crowd out private business initiatives. Le
government should (un) map out, with respect to goods and services, the econom-
ic subsidies and protections that are currently operative; et (b) implement a
plan to gradually eliminate laws and policies that have the unintended conse-
quence of promoting unproductive entrepreneurship. While the pushback from
incumbent firms against a comprehensive competition strategy is likely to be
intensive, the alternative to the implementation of such a plan is economic stag-
nation—an outcome ultimately detrimental and unacceptable to all.

• Encourage Entrepreneurship—Pakistan has many entrepreneurs. Cependant, le
state of competition in many Pakistani industries is such that too many entrepre-
neurs direct their energies toward rent-seeking rather than productive entrepre-
neurship. A key objective of a New Development Approach should be to create

108

nouveautés / Entrepreneurial Ecosystems

Téléchargé depuis http://direct.mit.edu/itgg/article-pdf/7/2/107/704911/inov_a_00131.pdf by guest on 08 Septembre 2023

Creating a Place for the Future

an economic environment conducive to entrepreneurship in general, and specif-
ically to the formation and development of both small-scale entrepreneurial ven-
tures and innovative high-growth firms.

• Minimize Transactions Costs—Entrepreneurship doesn’t happen without deal-
making in circumstances of uncertainty, which depends to a great extent on
trust. While Pakistan is rich in talent and has ample capital resources (particu-
larly when the economic assets of the Pakistani Diaspora are taken into consid-
eration), it suffers from a significant trust deficit that not only undermines the
relationship between citizens and government but also, and significantly,
impedes the conduct of business by increasing the cost of business transactions.
Rebuilding trust will take time. Par conséquent, the government should undertake
to mitigate adverse consequences of the trust deficit by decreasing transaction
costs in its dealings with citizens at the same time that it increases the trans-
parency of government decisionmaking. In practical terms, this means seizing
every available opportunity—in particular, opportunities created by the wide-
spread availability of information and communications technologies—to
improve the efficiency of government service delivery and to make government
information easily available to citizens.

By acting simultaneously to enhance competition, encourage entrepreneur-
ship, and minimize transactions costs, the government can promote the business
innovation necessary to provide essential goods and services to its citizens,
encourage the development of domestic markets, and drive sustained economic
growth. In doing so, it will achieve broad-based societal development and realize
national potential in the long term.

PREREQUISITE TO PROSPERITY

Pakistan is a nation whose promise has yet to be fulfilled. Finding evidence of this
is as inexpensive as a one-way ticket from Karachi to Istanbul, Séoul, or Bangkok.
Turkey, South Korea, and Thailand were all roughly on a par with Pakistan until
the 1970s. Pakistan has progressed substantially in the four decades since then, yet
these three countries—and others similarly endowed—have surged even farther
ahead in terms of human and economic development.

Malheureusement, recent trends have not been any more favorable to Pakistan. Dans
the past two years, as entrepreneurship and innovation have driven an upsurge in
prosperity in many parts of the developing world, the Pakistani economy has been
stuck in low gear. With turnover and external competitive threats suppressed by
government action (and inaction), key industries serving the domestic market
have failed to seize new market opportunities both inside and outside the country.
Intensified flows of overseas direct assistance have deepened a reliance on govern-
ment, rather than on markets, as a source of opportunity. Longstanding shortcom-
ings in the country’s physical and educational infrastructure have remained far
from a solution. The result is a society in which present interests have been pro-
tected to such an extent that the future has been obstructed.

nouveautés / volume 7, number 2

109

Téléchargé depuis http://direct.mit.edu/itgg/article-pdf/7/2/107/704911/inov_a_00131.pdf by guest on 08 Septembre 2023

Philip Auerswald, Elmira Bayrasli, and Sara Shroff

Strategies for National Transformation—The Turkish Example

Par 1980, Turkey’s state-planned economy had come to a halt. Inflation was in the
triple digits, unemployment was rampant, and debt was through the roof. Turgut
Ozal, a World Bank economist, took the reins of power and made radical
changes that led to Turkey’s development and enabled entrepreneurial growth.
They are seen as radical, which they were, but they were also simple. Ozal’s
reforms were intended to bring legal order to what was being done on the black
marché. He didn’t have a grand scheme for turning the country into a second
Sweden; he instead changed the rules so that everyone would have the incentive
to participate in the formal economy.

Export-led growth: Ozal’s signature reform was redirecting government
support to those (businesses) that could export and generate badly needed for-
eign revenue. Tariff rules, exchange rates, and subsidies were all changed to pro-
mote exports. Among those who thrived especially well were makers of textiles
and furniture, which were clustered mostly in industrial zones in the Anatolian
heartland, far from Istanbul. Par 1990, Turkish designers and engineers had start-
ed to create their own products rather than simply filling orders for foreign
firms. Others started investing in factories and franchises in various communi-
liens.

Capital: Ozal made it a priority to allow capital to move freely in and out of
the country. One way he did that was to bring into circulation unused capital
help from those opposed to interest-bearing banking. He also developed eco-
nomic ties with wealthy Gulf states and encouraged them to invest in Turkey.

Bureaucracy: Ozal cut through red tape. There were 35,000 categories of
civil servants in Turkey in 1983; he reduced the number to 150. Bureaucrats were
forced to come back to him five times before they had succeeded in simplifying

A recent “growth diagnostics” analysis of the Pakistani economy undertaken
by a team at the Pakistan Institute of Development Economics and NUST confirms
this assessment. This analysis finds “the failure of governance and that of institu-
tions to be the binding constraint to growth” in Pakistan. En outre, “rent seek-
ing in the shape of licenses, subsidies, and tariff protection has not allowed the
development of a competitive environment which is essential for innovation to
occur.”2

With these and similar findings in mind, this paper, which offers an assess-
ment of the state of entrepreneurship and markets in Pakistan, is intended to
inform government policy and planning. It is based on three tightly linked prem-
ises:

• Entrepreneurial talent exists everywhere. The objective of policy is not to cre-
ate entrepreneurs where they don’t exist but to ensure that those (many) individu-

110

nouveautés / Entrepreneurial Ecosystems

Téléchargé depuis http://direct.mit.edu/itgg/article-pdf/7/2/107/704911/inov_a_00131.pdf by guest on 08 Septembre 2023

Creating a Place for the Future

the country’s foreign currency regulations from 75 pages of instructions to 15.
(Bien sûr, this is not a realistic comparison to Pakistan, which is grappling with
an insurgency problem. Cutting government positions seriously increases the
risk of political destabilization. The point is that Ozal sought to change, au-dessus de
tous, mentality and habit.)

Talent: “The best people,” Ozal once said, “work as inspectors, the middling
ones in the executive. The state trusts neither its own officials, nor its own citi-
zens. Everybody is frightened of making a mistake or taking responsibility.” He
approached Turkish governance in the same way Washington, D.C.’s school
commissioner Michelle Rhee did—by cutting out the dead wood and replacing
it with talented individuals who can deliver results.

Communication: Ozal liked to visit countries and see what was new in
stores and shopping malls. He worked to communicate his consumer hunger to
his people. Par conséquent, he made it a priority to bolster Turkey’s statistics office.
He made statistics available on a large scale. This transparency and access boost-
ed public confidence.

Imports: Ozal lifted quotes on imports. Free trade, he believed, would force
Turkish businesses to improve their products. The sight of fancy foreign goods
on previously monotonous shop shelves would encourage the Turkish people to
work harder to earn more money to buy them.

Infrastructure: The biggest change Ozal made was to shift resources from
supporting state industries to infrastructure projects. He spent huge amounts on
new motorways, bridges, dams, and airports. He was famous for his BOT (Build,
Operate and Transfer) effort, which called on foreign companies to undertake
infrastructure projects at their own expense, turn a profit, and then hand oper-
ation over to the Turkish state.

als in the society who have a predisposition for entrepreneurship are adequately
supported.

• The outcomes for any given society depend significantly on whether poten-
tial entrepreneurs direct themselves to productive, unproductive, or destructive
entrepreneurship. Not all entrepreneurship is positive. The same energy that goes
into building a globally competitive company can, if social incentives and individ-
ual motivations are so aligned, go into chasing business advantage through govern-
ment protections or organizing criminal activity. Support for productive entrepre-
neurship directs talent toward social development and away from both unproduc-
tive (rent-seeking) and destructive (criminal) entrepreneurship.

• Small-scale entrepreneurs can play a vital role in providing needed goods and
services. Entrepreneurs who work on a small scale—for example, operators of
rural, craft-based enterprises or urban khokhas (kiosks) and rehris (carts)—are
essential to the functioning of any dynamic economy. Government policy must

nouveautés / volume 7, number 2

111

Téléchargé depuis http://direct.mit.edu/itgg/article-pdf/7/2/107/704911/inov_a_00131.pdf by guest on 08 Septembre 2023

Philip Auerswald, Elmira Bayrasli, and Sara Shroff

enable small-scale entrepreneurs to establish, formalize, and grow their operations
with minimal difficulty.

• A subset of productive entrepreneurs—those who create high-growth
firms—make a significant and critical contribution to development. Most entre-
preneurs start small and stay that way. The small share of productive, opportunité
entrepreneurs who create rapidly growing companies (sometimes called “gazelle”
firms) play a particularly significant role in social development through job cre-
ation, industry revitalization, and philanthropic giving.3 As a result, ensuring that
high-growth firms have the space to form (in both urban and rural areas) et le
resources to develop is an important social priority.

Putting Pakistan’s economy back in a position to reap the dividends of global
growth in the 21st century will require nothing short of a fundamental shift in the
discourse about the country’s development. Projects focused narrowly on the
demands of the moment will be no more effective in reinvigorating Pakistan’s
economy than will recipes from the past—from 1960s-style large infrastructure
projects to 1990s-style liberalization. What is needed is a redirection from the
hardware of development to the software; from external aid to internal enterprise;
and from implementing projects to investing in people.4

Planning for the future in Pakistan will have succeeded not when donor organ-
izations have disbursed funds or government agencies have expended their budg-
ets, but when more people believe that they have a stake in a shared future that is
as valuable as dividends derived from protecting the present. Such a belief, quand
translated to action, is an absolutely prerequisite to prosperity—for Pakistan, juste
as for any other country.

Why Does Pakistan Need Innovation and Entrepreneurship?

Today’s dynamic global economy is driven by innovation and entrepreneurship.

Both high-growth, disruptive entrepreneurship and small-scale, opportunité

entrepreneurship are vital to national development global competitiveness.

Turkey, Brazil, and China are recent examples of countries that have con-
sciously emphasized entrepreneurship and innovation as core elements of their
growth and development strategies.

This new economic order is an opportunity for Pakistan to realize its potential
in the 21st century by enhancing competition, nurturing entrepreneurial talent,
and building a high-trust, low-transactions-cost society.

ENHANCING COMPETITION

Markets are the part of the economy in which forces of demand and supply, et
the resulting prices, determine the allocation of goods. The internal operations of
government, the military, and large companies lie outside markets. Within those
domains, resources are allocated by an administrative mechanism—for example,
via the Public Sector Development Program—not by a market mechanism. Pour
markets to serve the interests of the public, they must be accountable to consumer

112

nouveautés / Entrepreneurial Ecosystems

Téléchargé depuis http://direct.mit.edu/itgg/article-pdf/7/2/107/704911/inov_a_00131.pdf by guest on 08 Septembre 2023

Creating a Place for the Future

demand and subject to competitive pressure, in particular from new firms enter-
ing the market.

Ensuring that competition occurs in markets must be an urgent government
priority because markets that function effectively can meet Pakistan’s critical need
for economic opportunity and vital goods and services, such as reliable energy,
accessible financial products, and affordable housing. Actuellement, markets in
Pakistan are not adequately competitive and are not providing economic opportu-
nity and vital goods and services efficiently. The primary reason for this is that
entrenched business practices and government policies have stifled competition
and innovation in relevant industries—notably banking, cement and construction,
and power generation and transmission. With the notable exception of mobile
communications (an industry we address in detail later in this paper), nearly every
market in Pakistan is structured to disadvantage entrepreneurs and discourage
innovation.

Obstacles to competition act like a brake on progress throughout a society;
until that brake is released, it should come as no surprise that outside aid causes
increased friction rather than forward movement. The Competition Commission
(2009b, 2010un, 2010b, 2010c), and Ghazanfar and Kazmi (2009) profile competi-
tion in five critical markets—the three just mentioned, as well as sugar, automo-
biles, and fertilizer.5

The Nature and Consequences of Market Distortions
While the state of competition varies significantly among industries, certain gener-
ic distortions are present in most markets in Pakistan.

Distortion 1. Excessive government engagement in the economy

The Pakistani government needs to shift its role in the development process from
hands-on engagement to a facilitator of private action. In response to inflows of
donor funds sustained over decades, the very functions of government in Pakistan
have evolved toward direct engagement in development and away from the essen-
tial magisterial functions of government, including maintenance of law and order,
enforcement of property rights, and application of judicial procedures. This “big-
push” approach to development worked for a time (presque 40 années), but it is not
working today. As a consequence, the quality of governance in the country—
notably, professional standards in the civil service—has declined. Rent-seeking and
corruption have been reinforced.

Distortion 2. Ubiquitous “rent-seeking”

Business leaders have become conditioned to an environment in which the short-
term gains from seeking advantage from the government are systematically greater
than longer-term gains from the identification and exploitation of genuine eco-
nomic opportunity. As Haque (2007) observes:

nouveautés / volume 7, number 2

113

Téléchargé depuis http://direct.mit.edu/itgg/article-pdf/7/2/107/704911/inov_a_00131.pdf by guest on 08 Septembre 2023

Philip Auerswald, Elmira Bayrasli, and Sara Shroff

When wealth transfers can be achieved through government licenses,
policies and directives, entrepreneurial efforts will be directed toward
gaining such transfers. Economic agents will expend efforts toward
attempting to influence government actions in their favor in order to
accumulate wealth. Examples of such government provided wealth trans-
fers are conferring of a monopoly through a license, obtaining resources
at below the market prices (par exemple., publicly provided land at cheaper rates
than market to influential groups), protection from competition (par exemple.,
restriction of number of players in a market) and the manipulation of
government subsidies, tariffs and tax policies. In all such cases, the gov-
ernment directive or policy confers wealth on an individual often at the
expense of the rest of society. (p. 5)

In this way, government policies that encourage rent-seeking and short-term
gain act as a reverse tax of sorts that is imposed by a favored group on the rest of
society. Once in place, the favored group will be willing to expend real resources—
including creative business practices that we have termed “unproductive entrepre-
neurship.” When the returns to rent-seeking are sufficiently large, potentially pro-
ductive entrepreneurs will be drawn away from entrepreneurship and toward gov-
ernment patronage.

Distortion 3. Inadequate incentives to innovate

The most severely negative consequence for the economy of rent-seeking behavior
is that it undermines the incumbent firm’s incentives to innovate and the willing-
ness of investors to take risks. The banking industry in Pakistan offers a prime
illustration of this phenomenon. Pakistan is the world’s least banked nation.
Depending on the measures used, only between 4 percent and 15 pour cent de la
population of Pakistan has access to financial services.6 At the same time, le
Pakistani banking industry is among the region’s most stable and profitable as a
result of spreads that are 2-3 times those sustainable in the U.S. and other advanced
industrialized countries.7 Financial service innovation is possible, of course.
Leading banking firms are undoubtedly capable of developing the new products
that could lead to greater financial inclusion and overcome historical neglect of
agricultural credit, petit- and medium-enterprise (SME) financing, and housing
finance in particular. Cependant, as the Competition Commission noted in a 2009
report,

The solution to the chronic problems of policy neglect and bank compla-
cency…must be sought outside the banking industry. No amount of
exhortation or incentives to commercial banks has worked in the past 60
years because…the opportunity costs of entering [the agricultural credit,
SME financing, and housing finance] markets are clearly much too high
[due to] the existence of “monopoly rents” in the shape of high spreads
between deposit and lending rates accruing elsewhere in more lucrative

114

nouveautés / Entrepreneurial Ecosystems

Téléchargé depuis http://direct.mit.edu/itgg/article-pdf/7/2/107/704911/inov_a_00131.pdf by guest on 08 Septembre 2023

Creating a Place for the Future

markets from which there is no competitive compulsion to diversify. (p.
20)

The government’s direct engagement in financial markets has the effect of fur-
ther distorting the environment for competition. En particulier, the “success” of the
National Savings Schemes has the unintended consequence of drawing capital
away from the private sector.8

Although each industry has its own particular competitive dynamics, innova-
tion is similarly hindered in many other sectors of the economy by the absence of
competition and the “monopoly rents” that such an absence permits.

Actions by Government That Affect the Attainment of a Level Playing Field

Like entrepreneurs, not all market institutions are created equal. As a consequence,
the mere existence of a market does not, in itself, indicate the presence of econom-
ic dynamism. In societies where the extensive involvement of the government dis-
torts market signals, competition is dulled and markets stagnate.

In the long term, societies with adaptable market institutions tend to edge out
those with rigid market institutions.9 For this reason, improving the environment
for competition is not a matter of policy aesthetics or whim—it is an absolutely
essential element of adaptability and effective competition for Pakistan, as it is for
any country in the 21st century.

That said, while acting to ensure that markets are competitive sounds simple
in theory, it is not so in practice. The key to competition policy, as described by the
Competition Commission in its 2009 report on the state of competition in
Pakistan, is the notion of a “level playing field” for market participants:

A “level playing field” in the market is one in which companies (and countries,
Par exemple, in the realm of international trade) can compete fairly with each other
in a rule-based environment because no one enjoys, or is given, any special advan-
tages. All competition agencies regard the attainment of such a level playing field
in individual sectors of the economy and, en effet, in the economy as a whole, comme
their primary responsibility. (p. 10)

The Competition Commission details four mechanisms by which government

actions impede the attainment of a level playing field:

D'abord, the overall duty structure on imports varies enormously between raw
materials, intermediate inputs, and no clear rationale is discernable in terms of the
objectives that are being pursued…The actual result of the high tariffs has been
widespread abuse in the form of smuggling or informal imports. The government
in the meantime has become dependent on the duties as a vital source of revenue
and is reluctant to rationalize them…

Deuxième, in order to attract foreign direct investment (FDI), tax holidays and
tax-free zones have been the modus operandi in Pakistan as elsewhere. But tax
concessions for FDI, aside from leading to significant revenue losses, also lead to
unevenness in the domestic playing field…

nouveautés / volume 7, number 2

115

Téléchargé depuis http://direct.mit.edu/itgg/article-pdf/7/2/107/704911/inov_a_00131.pdf by guest on 08 Septembre 2023

Philip Auerswald, Elmira Bayrasli, and Sara Shroff

Troisième, the government is often forced to subsidize the production and sale of
staples in the household budgets, wheat flour and sugar being particularly apt cases
in point in Pakistan today. Cependant, the actual impact of subsidies on production
and prices is often unpredictable and the situation is rendered even more compli-
cated in an inflationary environment…

Enfin, public procurement procedures have a major impact on competition in
the country. The prime examples are the Frontier Works Organization (FWO) et
the National Logistics Cell (NLC), two entities dominant in road building and road
haulage and indirectly controlled by the state. Over time, their dominance has
tended to increase rather than diminish leaving only a small area of activity in their
respective sectors where competition exists. (p. 13)

To revitalize competition in Pakistan will require a determined and compre-
hensive effort to simplify and rationalize, inter alia, the duty structure on imports,
the tax code, the government’s direct involvement in commodities markets, et
the government’s approach to procurement.

Competitive Cities as Drivers of Growth

Competition is not only vital on the national level, it is also vital to the function-
ing of cities. Pakistan’s cities, like its markets, have not yet had the opportunity to
develop in an organic manner.

In Pakistan, as elsewhere in the world, cities are key drivers of growth.
Innovative entrepreneurs live in cities, and development policy must meet innova-
tive entrepreneurs where they live. This is not to say that rural entrepreneurs are
not innovative or not vitally important to a New Development Approach for
Pakistan. They are, most emphatically, as Pakistan remains a substantially agrari-
an society. Cependant, experience over decades shows that (1) rural entrepreneur-
ship thrives where there are urban markets for rural output, et (2) innovation
thrives where populations are sizable and diverse. Cities are what will dominate
Pakistan’s development. The most effective way to induce rural entrepreneurship
and innovation is to improve conditions for entrepreneurship and innovation in
markets generally, and in cities in particular.

For the success of cities, investment is needed in “relational assets” and local
collective goods. These include transportation, affordable housing, and other pub-
lic infrastructure. But they also include building links between universities and sci-
ence-based industries and strengthening relationships between firms and suppli-
ers, including small businesses. En effet, the entire range of creative capabilities in
the arts, éducation, and the broad range of service industries must be tapped, thus
paving the way for vibrant cities across Pakistan.

ENCOURAGING ENTREPRENEURSHIP

Economic growth is impossible without, and to a significant extent synonymous
avec, the creation and growth of business. Businesses are created and grow when
they provide needed services and introduce innovations into the marketplace.

116

nouveautés / Entrepreneurial Ecosystems

Téléchargé depuis http://direct.mit.edu/itgg/article-pdf/7/2/107/704911/inov_a_00131.pdf by guest on 08 Septembre 2023

Creating a Place for the Future

Successful firms return revenue into the economy through wages, procurement,
capital investments, returns to investors, and the payment of taxes. When the state
(et, potentiellement, foundations funded via philanthropic giving) provides the infra-
structure required for business creation and growth to be an ongoing process, un
virtuous cycle ensues.10

Supporting New and Rapidly Growing Companies

Nearly 20 years ago, UN. R.. Kemal, then the joint director of the Pakistan Institute
of Development Economics, published a paper titled, “Why Do Small Firms Fail to
Graduate to Medium and Large Firms in Pakistan?” The question posed in his
paper still holds. While small firms, in the aggregate, continue to grow in Pakistan,
instances of small firms becoming midsize and large firms remain relatively rare.
A sequence of studies over the past two decades has identified a consistent set
of challenges that impede the growth of small firms. Foremost among these are the
following:
• Government regulation of trade (both internally and with respect to exports) dans

a manner unfavorable to small firms

• Financial-sector business practices and government interventions that have

failed to reach to small firms

• Relative difficulty coping with high fixed costs of licensing requirements, the lack
of clarity with regard to taxation, and the development of alternatives to poorly
performing infrastructure (energy in particular)

Additional impediments include cultural barriers, such as social sanctions in
the face of failure, lack of peer experience to enable realistic assessment of risk, un
paucity of mentors and entrepreneurial role models, and inadequate understand-
ing of markets and global business practices.11

It is important to note that these obstacles do not prevent entrepreneurship;
they inhibit it. Entrepreneurs never scale-up beyond a certain point. Without scale,
entrepreneurship cannot contribute fully to a country’s growth, and thereby its
development. It is only when an enterprise is expanding the number of jobs in a
community, increasing its profits, and investing those profits that it contributes to
GDP growth.

Facilitating the Transition of Family Businesses to Business Families

Globally, a natural path of development has led from family businesses with a tra-
dition of moral reciprocity to the modern, professionally managed corporation.
Where this transition has occurred it has been based upon faith in the legal and
judicial system, including respect for contracts and property rights.

In Pakistan this transition has come slowly. Mistrust of professional managers
stems not only from inadequacy of the legal and judicial systems but also from the
limited ability of existing institutional structures to prevent fraud, theft, and mis-
use of business information. This is where the government can a play a critical role
in helping to nurture an environment of trust. In order for Pakistan’s family busi-

nouveautés / volume 7, number 2

117

Téléchargé depuis http://direct.mit.edu/itgg/article-pdf/7/2/107/704911/inov_a_00131.pdf by guest on 08 Septembre 2023

Philip Auerswald, Elmira Bayrasli, and Sara Shroff

nesses to capture national and international growth in their sectors, they must
transition into business families that are focused on growth through leadership
development, succession planning, operational effectiveness, management, et
transition of ownership.

Large professionally managed businesses, particularly in high-trust societies
such as the U.S., Japan, and Germany, emerged due to a host of technological,
financial, and market factors, but also because of an evolution in corporate man-
agement. U.S. corporations such as Du Pont, Eastman Kodak, Sears Roebuck,
Tyson, Pitney-Bowes, and Kellogg all started out as small family businesses in the
19th century. Today they are large conglomerates and strong brands that rely heav-
ily on professional management; current generations of the founding families are
often majority stockholders with little exposure to business operations.

Many low-trust societies, such as China and Italy, went through a period of
strong political centralization, as did Pakistan. In the absence of high trust, a soci-
ety has three options for building large-scale organizations, each of which is amply
in evidence in Pakistan:

(cid:2)(cid:1)Evolutionary growth of family businesses with only family members in deci-

sion-making positions

• Formation and subsidization of state-owned and state-managed enterprises
• Foreign direct investment or joint ventures with large foreign partners
En général, the challenges faced by family businesses vary according to the size
of the company and its level of development, and in Pakistan this is no different.
The good news is that some large family owned and operated companies in
Pakistan do have global operations. These companies have made the transition
from family business to business or corporate families. They have professionalized
their management, developed professional boards, diversified their ownership, et
issued shares in the stock market.

Ironically, many professionally owned and managed companies seek to pro-
mote family-type values in their businesses in order to engender the commitment
and trust that are hallmarks of family companies. They do this so the essence of
family businesses and the social capital they have built are not lost. Donc, as family
businesses decline, businesses seek to replicate the strong social ties that bind fam-
ilies.

The real issue, alors, is not the preponderance of family businesses themselves,
but rather how effectively family businesses manage and adapt to change. For fam-
ily businesses to transition into becoming professionally managed business fami-
lies, they may continue to have a say in the vision of the business but also to cap-
ture creativity and entrepreneurial spirit within the spheres of their businesses
through a focus on professional management driven by efficiency and growth.

Encouraging Rural Entrepreneurship

Agriculture accounts for 25 percent of GDP in Pakistan. That figure alone, howev-
er, underestimates the opportunity for rural entrepreneurship; non-agricultural
entrepreneurship in rural areas generates substantial income and employment

118

nouveautés / Entrepreneurial Ecosystems

Téléchargé depuis http://direct.mit.edu/itgg/article-pdf/7/2/107/704911/inov_a_00131.pdf by guest on 08 Septembre 2023

Creating a Place for the Future

within non-farming communities. Policies and strategies to support rural entre-
preneurship must therefore focus as much on non-farming communities as on
small farmers.

Rural entrepreneurship already contributes to increased economic opportuni-
liens, workforce development, income generation, and food security in rural areas
of Pakistan, but there is still a critical need for training and assistance to both
enhance the skills of small entrepreneurs and improve their connections to market
opportunities—throughout Pakistan, but notably in Balochistan and North-West
Frontier Province. The long-run solution for sustainable agricultural development
is competitive agriculture.

Entrepreneurship in rural areas can benefit from public-private partnerships
among governments, NGOs, universities, and the private sector to build capacity
and the entrepreneurship ecosystem in rural Pakistan. A number of research uni-
versities in Pakistan are producing technologies that have significant potential to
boost rural entrepreneurship. Cependant, due to the inadequate development of the
institutional infrastructure to support the transition from invention to market-
ready innovation, the market potential of many of those university-generated con-
cepts remains underdeveloped.

Creating Space for Urban Micro-Enterprise

The urban population in Pakistan is likely to increase threefold over the next 25
years to 130 million. Dans 2030, the urban population in Pakistan will constitute 50
percent of the total population, making it among the largest urban centers in the
monde. The urban development in Pakistan is likely to pose new challenges in gov-
ernance, development of micro-enterprises, and urban service delivery; these chal-
lenges must be addressed to allow urbanization to fuel growth. While urbanization
does pose challenges, it will also create new opportunities for growth and prosper-
ville. The emergence of a middle class will create a domestic market for goods and
services and provide a skilled workforce that can become the engine of growth.
This dividend can only be leveraged if government creates a “formal” and “afford-
able” space for urban micro-enterprise to prosper.

Supporting micro- and small business is most effective where the legal and reg-
ulatory environment provides both security and opportunity while creating an
effective balance of incentives and disincentives. A policy and legal environment
that lowers the costs of establishing and operating a business, including simplified
registration and licensing procedures, appropriate rules and regulations, and rea-
sonable and fair taxation, will help new entrepreneurs to get a start in the formal
economy and existing informal businesses to enter the formal sector. En outre,
the security that formality provides will facilitate access to formal markets, favor-
able credit terms, legal protection, contract enforcement, foreign exchange, et
local and international markets. A coherent legal, judicial, and financial frame-
work for securing property rights and utilization of productive capital through
sale, lease, or use as collateral should be a high priority.

nouveautés / volume 7, number 2

119

Téléchargé depuis http://direct.mit.edu/itgg/article-pdf/7/2/107/704911/inov_a_00131.pdf by guest on 08 Septembre 2023

Philip Auerswald, Elmira Bayrasli, and Sara Shroff

MINIMIZING TRANSACTIONS COSTS

Entrepreneurship doesn’t happen without deal-making in circumstances of uncer-
tainty, which depends to a great extent on trust. While Pakistan is rich in talent and
has ample capital resources (particularly when the economic assets of the Pakistani
Diaspora are taken into consideration),12 it suffers from a significant trust deficit
that not only undermines the relationship between citizens and government but
aussi, and significantly, impedes the conduct of business by increasing the cost of
business transactions. Building trust takes time. Par conséquent, the government
should undertake to mitigate adverse consequences of the trust deficit by decreas-
ing transaction costs in its dealings with citizens and increasing the transparency
of government decisionmaking. In practical terms, this means seizing every avail-
able opportunity—in particular, opportunities created by the widespread availabil-
ity of information and communications technologies—to make government infor-
mation easily available to citizens and to improve the efficiency of government
service delivery.

The economic structure of an economy, and its competitive potential, is deter-
mined not only by the nature of competition in core industries and the latitude that
exists for entrepreneurial entry: underlying both entrepreneurship and competi-
tion is the need for trust. As Frank Fukuyama has observed:

Although there are other factors accounting for firm size, including tax
politique, antitrust, and other forms of regulatory law, there is a relationship
between high-trust societies with plentiful social capital—Germany,
Japan, and the United States—and the ability to create large, private busi-
ness organizations. These three societies were the first—both on an
absolute time scale and relative to their own development histories—to
develop large, modern, professionally managed hierarchical corpora-
tion…In [low-trust] societies the reluctance of nonkin to trust one
another delayed, and in some cases prevented the emergence of modern,
professionally managed corporations.

If a low-trust, familistic society wants to have large-scale businesses, the state
must step in to help create them through subsidies, guidance, or even outright
la possession. The result will be a saddle-shaped distribution of enterprises, avec un
large number of relatively small family firms at one end of the scale, a small num-
ber of large state-owned enterprises at the other, and relatively little in between.13
It is clear from the foregoing that Pakistan conforms to the profile of a low-
trust society. En outre, as Fukuyama’s analysis further indicates, the low level
of trust in Pakistan is as much the cause as it is the result of the country’s econom-
ic stasis. To be sure, government actions that intervene in favor of powerful incum-
bents undermine trust within the society but, as Fukuyama notes, such interven-
tions may, at the outset, themselves be induced by low levels of trust within the
society. Low levels of trust translate into the high cost of business transactions.

120

nouveautés / Entrepreneurial Ecosystems

Téléchargé depuis http://direct.mit.edu/itgg/article-pdf/7/2/107/704911/inov_a_00131.pdf by guest on 08 Septembre 2023

Creating a Place for the Future

A key element of the New Development Approach, alors, is to implement
strategies that minimize transactions costs and build trust by focusing on the inter-
action between the government and the citizens of Pakistan along three dimen-
sions:

• Information—Timely, consistent, and easily accessible information is critical to
building trust. Where citizens can access information about laws and govern-
ment processes—including hours of operation and the documentation required
to complete a process—trust increases. Where the media provides accurate
reporting with verified sources, trust is increased. The Pakistani government has
put some of its processes online. Le 2008 Securities and Exchange
Commission’s e-Services are an example. E-Services have enabled online compa-
ny registration, which has resulted in an increase in the number of companies
registered in Pakistan.

• Transparency—The ease with which citizens can access information is as critical
as the accuracy of the information itself. Trust is increased whenever a citizen
can easily identify operative laws, rules, and procedures, and otherwise access
information vital to business and personal functioning in society.

• Connections—Networks are well known to be critical to an entrepreneur’s suc-
cess. People trust one another when they interact with and know one another.
Bringing people together is another way to enhance trust. Societies in which offi-
cials seek votes, reach out to the community, and hold town hall meetings have
an increased level of trust. The government can increase the connectivity of the
society by making the most of its potential role as a neutral convener.

ACCOMPLISHING THE TRANSITION
TO AN ENTREPRENEURIAL ECONOMY

Little, si quelque chose, in this report is new. En effet, some of the analyses and proposed
initiatives are over two decades old. This prompts one to ask why a new round of
initiatives to enable firm growth would be likely to succeed when previous efforts
have not been successful. There are at least three reasons:
1. Previous initiatives to support entrepreneurs were sporadic and contradicted by
other aspects of economic policy. The opportunity exists today for the govern-
ment to deploy a coherent and consistent entrepreneurship-led growth strategy.
2. Competitive and demographic challenges facing Pakistan have only intensified
in the past two decades, making support for entrepreneurship and innovation an
even more urgent national priority now than before. This increases the likeli-
hood that interests that otherwise might be opposed to market reform might
align in favor of policies to support entrepreneurs.

3. Perhaps most significantly, the dramatic diffusion of information and commu-
nications technologies and other distributed technologies creates new pathways
to address longstanding disadvantages to entrepreneurship and innovation.

nouveautés / volume 7, number 2

121

Téléchargé depuis http://direct.mit.edu/itgg/article-pdf/7/2/107/704911/inov_a_00131.pdf by guest on 08 Septembre 2023

Philip Auerswald, Elmira Bayrasli, and Sara Shroff

Accomplishing the transition to an entrepreneurial and innovative economy
will require directly addressing fundamental and longstanding issues, but at the
same time it will require making the most of particular opportunities inherent in
the historical moment. This section focuses on four such opportunities:

• Acting assertively to capture the “demographic dividend”
• Engaging Diaspora talents and resources
• Accelerating the mobile revolution
• Supporting the deployment of distributed energy technologies

Acting Assertively to Capture the “Demographic Dividend”

Pakistan’s population has tripled in less than 5- années, and it will increase by an
additional 85 million by 2030. Half of Pakistan’s citizens are under age twenty; deux-
thirds have yet to reach their 30th birthday. To meet the needs of its growing pop-
ulation, Pakistan’s economy must grow by 6 percent each year; that means it must
add 36 million new jobs in the next ten years.

The education and social systems do not encourage or facilitate entrepreneur-
ship as a preferred career option among the youth. High-growth, opportunité
entrepreneurship is excessively restricted to those belonging to existing business
families or by students at premier business schools. Par conséquent, the economy wit-
nesses the creation of too few new enterprises; those that are created are dispropor-
tionately in traditional areas of business, creating congestion in a few markets
while other markets are dramatically underserved.

Encore, with the proper institutional context in place, experience elsewhere (comme
well as from the Pakistani Diaspora) suggests that that the entrepreneurial capabil-
ities of the Pakistani people remain a significant and untapped resource for devel-
opération. If this entrepreneurial potential can be unleashed by providing a level
playing field, information, awareness, and support in establishing enterprises,
Pakistan can witness fast-paced growth as new enterprises create new employment
opportunities, thereby improving the distribution of wealth and exploiting the
opportunities offered by international markets.

There is a need to promote entrepreneurship actively (1) by implementing cur-
ricular enhancements pertaining to entrepreneurship (Par exemple, modeled after
Jordan’s successful Injaz al-Arab program); (2) by creating awareness among
youth; et, more importantly, (3) by providing effective support mechanisms,
including access to capital, mentoring, and skill-building, to those who want to
establish new enterprises. The ultimate objective of entrepreneurship education
policies should be to facilitate the creation of an entrepreneurial culture, which in
turn will help potential entrepreneurs to identify and pursue opportunities.
Government policies on entrepreneurship education are critical to ensure that
entrepreneurship is embedded in the formal education system and offered through
partnerships with the private sector, with the informal community, and with
apprentice training programs in rural areas.14

122

nouveautés / Entrepreneurial Ecosystems

Téléchargé depuis http://direct.mit.edu/itgg/article-pdf/7/2/107/704911/inov_a_00131.pdf by guest on 08 Septembre 2023

Creating a Place for the Future

Pakistan currently is experiencing an unprecedented “demographic dividend”
as the working-age population bulges and the dependency ratio declines. This shift
is as much an opportunity as it is a challenge. The demographic dividend available
to Pakistan and its implications for the country mainly reflect three key issues:
labor supply, savings, and human capital. For economic benefits to materialize,
there is a need for policies dealing with education, santé publique, and those that
promote labor market flexibility and provide incentives for investment and sav-
ings. In contrast, if appropriate policies are not formulated, the demographic divi-
dend might in fact be a cost that leads to unemployment and puts an unbearable
strain on education, health, and old age security.15

If young Pakistanis can be properly educated and successfully absorbed into
the labor force, the country’s demographic dividend could boost social well-being
and spark economic growth.16

Engaging Diaspora Talents and Resources

The Pakistani Diaspora community could be an invaluable resource for the nation-
al development of Pakistan. Their contributions to economic development could
be substantial through platforms of the knowledge economy and via knowledge
networks if leveraged strategically and diligently.

The Pakistani Diaspora is significant, numbering roughly ten million people
around the world. Formal remittances to Pakistan were $8 billion in 2008. This was nearly same level as foreign direct investment, which was only $500 million per
year in the 1990s and more than $8 billion in 2008—an increase by a factor of 16
for Pakistan, compared to a factor of 10 increase for emerging markets as a whole.17
The “brain gain” from this group could indirectly improve overall governance
in aspects of social, économique, and political life by further activating the entrepre-
neurial space. Clear examples of this include the following:
• Lahore University of Management Sciences (LUMS) and the Organization of
Pakistani Entrepreneurs (OPEN) signed a memorandum of understanding for
cooperation to establish the OPEN Centre @ LUMS for Innovation and
Entrepreneurship on July 29, 2010, for a period of five years. The center aims to
create an entrepreneurship network that sustains entrepreneurs and promotes
the creation of new ventures to foster economic growth in Pakistan.

• The Indus Entrepreneurs (TiE) has three chapters in Pakistan: Karachi, Lahore,
and Islamabad. It provides a platform for business plan competitions, réseau-
ing forums, start-ups, mentorships, entrepreneurial summits, and much more.
All these local chapters are operated by well-known Pakistani entrepreneurs.

Done on a larger scale, this could also pave the way for direct links between
entrepreneurs in Pakistan and entrepreneurs of Pakistani origin that would enable
them to invest in high-impact entrepreneurial ventures. The Pakistani government
should seek to encourage such exchanges by improving the business environment
and offering incentives, as has been demonstrated successfully in South Korea,
India, and China.

nouveautés / volume 7, number 2

123

Téléchargé depuis http://direct.mit.edu/itgg/article-pdf/7/2/107/704911/inov_a_00131.pdf by guest on 08 Septembre 2023

Philip Auerswald, Elmira Bayrasli, and Sara Shroff

There are signs that Diaspora entrepreneurship of this kind might be growing,
albeit in different shapes and forms. The key Diaspora-driven entrepreneurship
showcases a safer way to enter a new market like Pakistan and minimizes risks for
foreign companies seeking to operate there. It ties a lot of the reputation and net-
work capital of these Diaspora founders to the venture capital of U.S. investors,
thus considerably enhancing the chances of success. One model of Diaspora entre-
preneurship is the “straddling expatriate,” who lives in the United States or Europe
(the developed “market”) but operates a company whose development hub is in a
developing country—in this case, Pakistan. The second model of Diaspora entre-
preneurship is the “returning expatriate” who, after spending several years abroad,
has now returned to his native country—at least partially—and now helps to devel-
op a foundation for innovation and employment in his native country.

Accelerating the Mobile Revolution

Pakistan represents a growth market for mobile communications and applications
that can provide a significant impetus for the development of an enterprise econ-
omy.

The widespread use of mobile phones creates a particular opportunity in the
financial services industry to increase competition and thus extend financial inclu-
sion through branchless banking. Through the Branchless Banking regulation
issued by the State Bank of Pakistan in March 2008 and the Branchless Banking
guidelines issued by the Pakistan Telecom Authority in June 2008, the government
has set the stage for the widespread deployment of branchless banking services.
Cependant, in part for the reasons outlined at the outset—excessive monopoly rents
derived from core lines of business—as well as the fragmented (and highly com-
petitive) nature of the Pakistani mobile phone industry, branchless banking serv-
ices have been slow to develop in Pakistan. À ce jour, only one consumer offering
exists—Telenor’s “easypaisa”—and that service has limited functionality and reach
when compared to mobile-enabled branchless banking services elsewhere in the
monde. Accelerating the deployment of branchless banking could be a key driver of
competition in the financial services industry, and potentially also a facilitator of
entrepreneurship in Pakistan.18

The government of Pakistan can act in other ways to accelerate the beneficial

impact of the mobile revolution, potentially including:
• Accelerating the adoption of leading mobile services, such as mobile payments
• Developing shared standards for data exchange, facilitating interoperability

(including via “cloud computing”)

• Encouraging flexible regulation that does not impede innovations that could

transform the delivery of essential products and services to the poor

• Easing the process by which remittances can be transferred via mobile phones
• Actively supporting the development and deployment of open-source, interoper-
able mobile applications (in particular SMS) in a range of areas, including health

124

nouveautés / Entrepreneurial Ecosystems

Téléchargé depuis http://direct.mit.edu/itgg/article-pdf/7/2/107/704911/inov_a_00131.pdf by guest on 08 Septembre 2023

Creating a Place for the Future

and financial services, through direct funding, prizes, and the facilitation of
advance-usage commitments

• Nurturing entrepreneurship in the development of mobile applications among

youth with programming skills

Supporting the Deployment of Distributed Energy Technologies

Two-way metering, dynamic pricing, and other market-based policy initiatives can
open the door to market entry by a variety of new ventures in electric power gen-
eration and transmission.

Distributed solar-, wind-, and hydropower are all well adapted to different
parts of Pakistan. With the right government policies in place to support their
exploitation, each has the potential to positively disrupt the electric power indus-
try in Pakistan—which today is needlessly dependent on oil, an inefficient and
volatile energy source for electric power generation.

Consider, Par exemple, hydropower. Hydroelectric generation is one of the old-
est forms of electricity production, but in the 20th century, hydroelectric develop-
ment focused on ever-increasing generation capacity. Large, capital-intensive
hydro efforts, such as the Hoover Dam and Tennessee Valley Authority in the U.S.,
led to similar projects throughout the world, such as the Aswan Dam in Egypt.

More recently, cependant, research and entrepreneurial activity have spurred
renewed interest in smaller hydroelectric generation facilities, especially for inter-
national development. The term “micro-hydro” commonly refers to facilities with
generation capacities generally less than 100 kW, which do not significantly alter
local environmental conditions or river flows.19 One relatively new subset of micro-
hydro is pico-hydro, which includes very small systems that generate less than 5
kW of capacity. These concepts are especially relevant for communities in rural
and developing areas as a way to generate cost-effective, low-impact electricity.20

Pakistan is ideally situated geographically for implementing micro-hydro facil-
ities. Micro-hydro generates electricity by diverting upstream river water through
a side chute to a set of turbines downstream. Micro-hydro facilities operate in
“low-head” environments, where the difference between the upstream intake and
downstream outlet is at least 30 meters. Depending on energy usage, infrastruc-
ture, and geographical distribution, a micro-hydro facility can provide electricity
for about 100 households. Chattha, Khan, and Haque (2009) estimated the total
potential hydro resources of Pakistan to be 41 GW, avec 1290 MW suited to micro-
hydro development. They estimate that the “off grid micro-hydro systems are very
essential for the consumers living in the remote areas of Pakistan and may be
installed on canals and water falls which are abundant in the remote areas.” Indeed,
development programs in Pakistan and neighboring Afghanistan have broadened
rural access to electricity through innovative micro-hydro systems. They not only
built the facilities, they also developed the community-based governance mecha-
nisms that regulate output and pricing.21

nouveautés / volume 7, number 2

125

Téléchargé depuis http://direct.mit.edu/itgg/article-pdf/7/2/107/704911/inov_a_00131.pdf by guest on 08 Septembre 2023

Philip Auerswald, Elmira Bayrasli, and Sara Shroff

Given the favorable geographical characteristics in Pakistan for micro-hydro,
an equally favorable environment for entrepreneurship could induce the develop-
ment of a regional entrepreneurial cluster related to micro-hydro installation.
Novel micro-hydro designs could also integrate other services needed by rural
populations, such as drinking-water filtration, making Pakistan an entrepreneur-
ial laboratory within the hydroelectricity sector.

To enable the entry of new firms into distributed solar-, wind-, and hydropow-

er generation and transmission, the government of Pakistan should
• fully implement two-way metering and dynamic pricing in energy markets;
• institute lower-bounds for regulatory oversight in energy markets and otherwise

lower barriers to meso-scale energy generation.

CONCLUSION

Conventional wisdom holds that a country can transition from a 20th-century
industrial economy to a 21st-century entrepreneurial economy only after its polit-
ical institutions have fully matured. That is backwards: a country’s political institu-
tions mature only as its economy produces broad-based opportunities on a sus-
tainable basis. De la même manière, internal security and political stability are not prerequi-
sites for, but the consequence of, broad-based social development that is driven by
competition and entrepreneurship and supported by increasing levels of social
trust. Actions taken in the name of near-term stability that undermine competition
and economic dynamism not only make a country less prosperous—they also
make it less secure and less stable.

In any country—Pakistan is no exception—the real cost of an excessive preoc-
cupation with the “hardware” of both national security and development is that it
draws attention and resources away from the “software”—competition, entrepre-
neurship, and trust. En effet, crises of any type have the same effect: they divert
resources from the future and toward the present.

International perceptions to the contrary, Pakistan is a no more violent or dan-
gerous place than many other countries in the vicinity. India (Naxalite rebels,
Hundi extremists, sectarian violence), Sri Lanka (Tamil Tigers), and Turkey
(Kurdish nationalists) are all places where indigenous and imported terrorists have
been active; that fact has not prevented those countries from developing rapidly.
Taking the comparison farther afield, gang and politically related deaths in Mexico
during the past three years have been nearly four times more numerous than in
Pakistan. The difference is that Pakistan’s security challenges have an internation-
al profile, and thus they attract greater attention than would otherwise be the case.
As a consequence of diverse pressures, alors, the demands of the present have
been so great for the past 20 years in Pakistan that the future has persistently been
put on hold. Now the time has run out on that approach. Oui, there will be new exi-
gencies of the moment. The impetus will be great to revert to familiar modes of
argumentation and action: crise, assistance, projects. What is needed, cependant, est
a decisive break with the past. What is needed is a New Development Approach

126

nouveautés / Entrepreneurial Ecosystems

Téléchargé depuis http://direct.mit.edu/itgg/article-pdf/7/2/107/704911/inov_a_00131.pdf by guest on 08 Septembre 2023

Creating a Place for the Future

that creates new modes of argumentation and action: competition, entrepreneur-
ship, and trust.

In short, for Pakistan to be a place of the future, it must create a place for the

avenir.

ANNEX. THE PROCESS OF DEVELOPMENT

Decades of quantitative, macro-level studies of development offer little, if any, evi-
dence to support the claim that official development assistance—foreign aid—can
accelerate development on a national scale. If anything, historical evidence sug-
gests that aid has a corrosive effect on governance and distorts the evolution of
marchés. Countries heavily dependent on development assistance characteristical-
ly suffer from an “aid curse” that is functionally comparable to the “resource curse,»
which is known to undermine the development of countries dependent on rev-
enues from natural resources. In both settings, a similar irony is at work: greater
revenue and diminished accountability to citizens in the short term lead to slower
development in the long term.22

Fundamentals

To be sure, the realities of research in development economics are such that even
the most able scholars have difficulty establishing with confidence proof that any
approach to accelerating development has been “successful” in one place or anoth-
er. Yet while academics and policymakers are still searching for the best approach-
es to accelerate development, the process of development itself is actually fairly
well understood. Ample historical evidence supports the following general asser-
tions about the manner in which development occurs:
• Development is an ongoing process of social change—subject to regular disrup-

tion—that involves institutions, culture, and technology.

• While societies can advance for a short while through incremental adjustments
to the status quo, long-term development requires entrepreneurship and innova-
tion.

• Entrepreneurs and innovators exist in all societies, but not all societies are equal-

ly welcoming of the disruptive changes they provoke.

• Individual entrepreneurs and innovators thus face three options: seek economic
rents within the status quo; challenge the status quo through disruptive innova-
tion; leave the society altogether to seek an environment more welcoming of cre-
ativity.23

• When too large a fraction of potential innovators and entrepreneurs choose
either to seek rents within the context of the status quo or to leave the society
altogether, development slows or comes to a halt.

What this means is that creating a place for the future in any country means
creating a space for entrepreneurship and innovation—and, in particular, encourager-
aging the subset of potential entrepreneurs and innovators who choose neither to
conform nor to depart, but rather to stay and build something new.

nouveautés / volume 7, number 2

127

Téléchargé depuis http://direct.mit.edu/itgg/article-pdf/7/2/107/704911/inov_a_00131.pdf by guest on 08 Septembre 2023

Philip Auerswald, Elmira Bayrasli, and Sara Shroff

Entrepreneurship is present in all societies but manifests itself differently
depending on the context.24 While there is little evidence that government action
can affect the overall supply of entrepreneurs in a given economy, there is strong
evidence that it can influence the manner in which entrepreneurs—or entrepre-
neurially inclined individuals—direct their abilities. As William Baumol has noted,
“Policy can influence the allocation of entrepreneurs more effectively than it can
influence its supply.”25 Strategies that support development at a national scale thus
must consider not only the quality of the business climate in general, mais aussi, et
importantly, the way government actions affect the relative returns to entrepre-
neurship of different types.26

The challenge in designing and implementing policies to support entrepre-
neurship is that such policies are effective only if they shift existing incentives in a
direction that leads to preferred social outcomes. In work spanning two decades,
Baumol has explained that the objective of policies that support entrepreneurship
is less to create entrepreneurial talent than it is to affect the allocation of that tal-
ent among productive, unproductive, and destructive options:

How an entrepreneur acts at any given time and place depends heavily on the
“rules of the game”—an economy’s laws and regulations—that happen to prevail…
An economy’s laws and regulations—not the total supply of entrepreneurs or the
nature of their objectives—undergo significant changes from one period to anoth-
er and, in doing so, help to dictate the allocation of entrepreneurial resources.27

This observation has important empirical implications. Par exemple, alors que
microfinance has, over the past three decades, proven to be an effective tool to
allow people to gain control over their own income, it has not unleashed the inno-
vation and capital flow required to help to stimulate growth. En effet, microloans
only rarely fuel the creation and growth of entrepreneurial ventures.28 Though
there is no doubt that the availability of finance does facilitate entrepreneurship,
contrary to popular belief, financing is not the primary obstacle to entrepreneur-
ship: the primary obstacle is action (or inaction) by government that has the unin-
tended consequence of directing entrepreneurial talent—whether in rural areas or
at the heart of major cities—from productive activities to unproductive or destruc-
tive activities.

As seen in the West and increasingly in emerging markets, such growth comes
from high-growth businesses such as Walmart, Microsoft, and Infosys, which have
created millions of jobs and generated billions in revenues.29 A county’s success in
supporting such “Schumpeterian entrepreneurship” is reflected directly in the
number of new but rapidly growing companies it produces. In Pakistan, firms with
fewer than ten employees employ nearly 80 percent of the non-agricultural work-
force but contribute only 30 percent of GDP—figures that have remained largely
unchanged for the past two decades.30 In contrast, small firms in developed coun-
tries typically are less dominant in terms of employment, but they contribute a
greater share of GDP; small and growing firms also contribute to economic growth
to an extent disproportionate with their size.31

128

nouveautés / Entrepreneurial Ecosystems

Téléchargé depuis http://direct.mit.edu/itgg/article-pdf/7/2/107/704911/inov_a_00131.pdf by guest on 08 Septembre 2023

Creating a Place for the Future

En outre, today as in the past, there is no viable bridge linking small and
large firms. Small family businesses are essentially precluded from growing into
large groups; large corporations rarely invest in, or develop, small enterprises. Même
buyer-supplier relationships with subcontractors—key to the functioning of large
firms in advanced industrialized countries—in most industries are either poorly
developed or absent. The economic environment lacks—in addition to trust—an
ecosystem that connects the various levels of the private sector: large corporations,
innovative high-growth firms, and micro-enterprises. The challenge is how to
bring all of those into an ecosystem where they’re working and reinforcing one
another.

Implications for Economic Strategy

A strategic imperative for Pakistan, as for governments around the world, is in the
design and implementation of policies and programs that encourage entrepreneur-
ship in general, and the creation of high-growth firms in particular—rewarding
rather than penalizing entrepreneurs who are successful in providing new and
innovative goods and services.

Contrary to widespread belief, a national economic strategy emphasizing
development led by entrepreneurship is not the same as a strategy emphasizing
either support for small- and medium-enterprises (SMEs) or improvements in the
“business climate.”

While all new and rapidly growing firms fall, at first, into the category of SMEs,
it is important to note that implementing strategies to accelerate entrepreneurship
is not the same as building institutions to support SMEs. SMEs are small, mais ils
are not necessarily new or growing. Schumpeterian ventures are new and innova-
tive, but when successful they do not remain small or midsize for long. En effet,
programs to support SMEs, if improperly conceived and implemented, may actu-
ally undermine entrepreneurship if they diminish incentives for entrepreneurial
innovation and growth-directed strategies—for example, by creating a program of
subsidies not available to firms that grow beyond a certain size.

Support for entrepreneurship and innovation is similarly often confused with
generic strengthening of the “business climate.” What is the nature of the differ-
ence? The business climate pertains to all firms—both incumbents and new
entrants. Some elements of the business climate (Par exemple, the time required to
register a new business or the difficulty of obtaining business licenses) are relevant
to entrepreneurship. Cependant, others (for example, the stability of the financial
sector) may actually imply the concentration of market power.

Given that development depends on the decisions made by entrepreneurs to
allocate their talent to productive activities rather than unproductive (rent-seek-
ing) or destructive ones, effective development planning begins with consideration
of two key questions:

• What actions does government take (or fail to take) that affect the incentives

of entrepreneurs?

nouveautés / volume 7, number 2

129

Téléchargé depuis http://direct.mit.edu/itgg/article-pdf/7/2/107/704911/inov_a_00131.pdf by guest on 08 Septembre 2023

Philip Auerswald, Elmira Bayrasli, and Sara Shroff

• How can government adjust its actions to increase the allocation of entrepre-

neurial talent to productive activities?

These two questions suggests a domain of inquiry that spans almost every
dimension of government activity at the federal, provincial, and local level—from
fiscal and monetary policy, to land use and urban planning, to legal protections
and antitrust policies. Effective action must connect this broad domain of inquiry
to specific areas of work.

Remerciements

This study was prepared for the Planning Commission by Tagore LLC under con-
tract with the Competitiveness Support Fund, a joint venture of USAID and the
Pakistan Ministry of Finance. Khalid Mirza, former chair of the Competition
Commission, acted as senior adviser to the study team. A full list of those consult-
ed in the preparation of the study appears at the end of the report. The paper draws
analysis and insights from Haque (2007, 2010), Planning Commission (2010un,
2010b), and Competition Commission (2009un), in addition to other works cited in
the text.

The authors thank the following people who offered input into this study:

Pakistan

Islamabad
1. Mosharraf Zaidi, Advisor and Writer
2. Tariq Shafi Chack, Additional Secretary, Ministry of Industries and Production,
Government of Pakistan

Karachi
3. Firoz Shroff, Chairman, SASI Group of Companies
4. Muddassar M. Malik, Co-Founder, CEO &Executive Vice Chairman, BMA
Capital
5. Sabeen Mahmud, President, The Indus Entrepreneurs (TiE) Groupe, Karachi
Chapter and CEO of Peace Niche
6. Saqib Shirazi, CEO, Atlas Honda Limited
7. Shakir Husain, CEO, Creative Chaos
8. Shamoon Sultan, CEO, Khaadi
9. Sono Khangarani, CEO, Thardeep Rural Development Program (TRDP)
10. Zafar Siddiqui, Director, IBA Centre for Entrepreneurial Development

Lahore
11. Docteur. Ahmad Jan Durrani, Vice-Chancellor, Lahore University of Management
les sciences
12. Anwar Khan, CEO, Small and Medium Enterprise Development Authority
(SMEDA)
13. Fahd Bangash, CEO, Amaana
14. Docteur. Ghazanfer Ali, Professsor, Lahore School of Economics, Banking Expert

130

nouveautés / Entrepreneurial Ecosystems

Téléchargé depuis http://direct.mit.edu/itgg/article-pdf/7/2/107/704911/inov_a_00131.pdf by guest on 08 Septembre 2023

Creating a Place for the Future

15. Monis Rahman, CEO, Naseeb Networks
16. Seema Aziz, CEO, Bareeze
17. Shahad Khawaja, Senior Advisor, Competitiveness Support Fund, Former
Secrétaire, Ministry of Industries & Production, Government of Pakistan
18. Syed Babar Ali, CEO, Packages Limited and Chairman, Lahore University of
Management Sciences

United States and United Kingdom
1. Asim Khwaja, Associate Professor of Public Policy, Kennedy School of
Government, Université Harvard
2. Awais Khan, CEO, American Pakistan Foundation
3. Kashif Zafar, Managing Director, Barclays Bank
4. Molly Kinder, Center for Global Development
5. Peter Mandeville, Associate Professor of Government & Islamic Studies, Georges
Mason University
6. Eric Manes, World Bank
7. Rabia Nusrat, British Asian Trust

Endnotes
1. See Competition Commission (2009un).
2. Qayyum et al. (2008).
3. See Schumpeter (1911, 1942) and Auerswald and Acs (2009).
4. Haque (2010) and Planning Commission (2010un).
5. All are available at the website of the Competition Commission of Pakistan. Available at

http://www.cc.gov.pk.

6. Competition Commission (2009un), Ghazanfar and Kazmi (2009).
7. Ibid..
8. Dans 2009 et 2010, respectivement, the NSS attracted Rs224 billion and Rs267 billion, in contrast with

Rs87 billion in 2008.

9. The paradigmatic example of this phenomenon was the collapse of the Soviet Union, which fol-
lowed directly from the antipathy toward innovation and inherent informational challenges
inherent to central planning. Olson (2000).

10. Auerswald and Acs (2009).
12. Voir, par exemple., Qayyum et al. (2008), Legatum (2010), and Competition Commission (2009un, 2009b,

2010un, 2010b, 2010c)

12. Qayyuem (2008).
13. Fukuyama (1995, p. 30).
14. Volkmann et al. (2009).
15. Nayab (2008). Pakistan Institute of Development Economics, Islamabad. The Pakistan

Development Review, 2008, vol. 47, issue 1, pages 1-26.

16. Bloom and Freeman, 1986.
17. Ref. Legatum (2010).
18. CGAP (2010).
19. See Moreire and Poole (1993).
20. See University of Nottingham (n.d.); The Ashden Awards for Sustainable Energy (2010).
21. See Aga Khan Rural Support Program (2004); DAI (2010).
22. Easterly (2002), Quadir (2009).
23. These three options (taken in reverse order) are analogous to the fundamental political options
articulated by Albert Hirshman (1970) long ago: exit, voice, and loyalty. As Hirschman (1958, p.

nouveautés / volume 7, number 2

131

Téléchargé depuis http://direct.mit.edu/itgg/article-pdf/7/2/107/704911/inov_a_00131.pdf by guest on 08 Septembre 2023

Philip Auerswald, Elmira Bayrasli, and Sara Shroff

5) noted, “Development depends not so much on finding optimal combinations for given
resources and factors of production as on calling forth and enlisting for development purposes
resources and abilities that are hidden, scattered, or poorly utilized.”

24. Baumol (1990). Productive entrepreneurship corresponds to the creation and expansion of new
firms; unproductive entrepreneurship corresponds to rent-seeking activities; destructive entre-
preneurship corresponds to trafficking in illicit goods. All these forms of entrepreneurship cre-
ate economic activity. Cependant, institutions advances and societies progress only when the
returns to productive entrepreneurship exceed those to unproductive and destructive entrepre-
neurship. Within the category of “productive entrepreneurship,” it is possible to differentiate fur-
ther between “opportunity entrepreneurship” and “necessity entrepreneurship.”

25. Baumol (1990, p. 893).
26. Auerswald (2008).
27. Baumol (2010, p. 153).
28. Microfinance institutions (MFIs) today provide services to over 150 million clients across the
globe, with wide variation in models used and outcomes achieved. Assessments of micro-lend-
ing have tended to focus on high repayment rates rather than on promoting borrower welfare.
Voir, par exemple., Banerjee et al. (2009), and Zinman and Karlan (2009).

29. In low-income countries, the contributions to economic output and employment made by for-
mally registered small and midsized enterprises (SMEs) are less than one-third those made by
their counterparts in high-income countries. This disparity is evidence of impediments that
exist in poor places to the development of high-growth enterprises.

30. Data available from the Statistics Division, Government of Pakistan. Available at

http://www.statpak.gov.pk/. See also Asian Development Bank (2005) and Rauf (1994).

31. Stangler (2010).

Les références

Acs, Zoltan. (2006). “How Is Entrepreneurship Good for Economic Growth?” Innovations:

Technologie, Governance, Globalization 1, Non. 1: 97-107.

Aga Khan Rural Support Program. (2004). “Solar Power for Communities, Farmers and Market

Traders across India.” Available at http://www.ashdenawards.org/winners.

Ashden Awards for Sustainable Energy. (2010). “Micro-Hydro.” Available at http://www.ashde-

nawards.org/micro-hydro.

Auerswald, Philip E. (2008, May). “Entrepreneurship, Opportunity, and Growth,” paper presented at
the OECD Kansas City Workshop on High-Growth SMEs, Innovation, and Intellectual Assets.
Available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1376427

Auerswald, Philip E., and Zoltan Acs. (2009). “Defining Prosperity.” The American Interest May-

Juin: 4-13.

Baumol, William J. (1990). “Entrepreneurship: Productive, Unproductive, and Destructive.” The

Journal of Political Economy 98, Non. 5, part 1: 893-921.

Baumol, William J. (2010). A Microtheory of Innovative Entrepreneurship. Princeton, New Jersey: Princeton

Presse universitaire.

Banerjee, UN., E. Duflo, R.. Glennerster, and C. Kinnan. (2009, May). The Miracle of Microfinance?

Washington, CC: Consultative Group to Assist the Poor.

Bloom, David E., and Richard B. Freeman. (1986). “Population Growth, Labor Supply, et
Employment in Developing Countries,” NBER working papers 1937. Cambridge, MA: National
Bureau of Economic Research.

Chattha, Javed A., Mohammad S. Khan, and Anwar ul-Haque. (2009). “Micro-Hydro Power

Systems: Current Status and Future Research in Pakistan.” In ASME 2009 Power Conference
(pp. 629-636). Albuquerque, NM: Available at

132

nouveautés / Entrepreneurial Ecosystems

Téléchargé depuis http://direct.mit.edu/itgg/article-pdf/7/2/107/704911/inov_a_00131.pdf by guest on 08 Septembre 2023

Creating a Place for the Future

http://link.aip.org/link/ASMECP/v2009/i43505/p629/s1&Agg=doi.

Competition Commission of Pakistan. (2009un). “State of Competition in Pakistan.” Islamabad,

Pakistan.

Competition Commission of Pakistan. (2009b). “Competition Assessment Study of the Fertilizer

Sector in Pakistan.” Islamabad, Pakistan.

Competition Commission of Pakistan. (2010un, Juillet). “Analysis of Competition in the Automobile

Sector” (brouillon). Islamabad, Pakistan.

Competition Commission of Pakistan. (2010b, Juillet). “Competition Assessment Study on the Sugar

Sector in Pakistan” (brouillon). Islamabad, Pakistan.

Competition Commission of Pakistan. (2010c, Juillet). “The Analysis of Competition and Economic

Development in the Power Sector” (brouillon). Islamabad, Pakistan.

Development Alternatives Inc. (2010). “Afghan Villages Bolstered by Micro-Hydro Power Plant.”

Available at http://www.dai.com/work/success_stories_detail.php?stid=60.

Easterly, William E. (2002). The Elusive Quest for Growth. Cambridge, MA: AVEC Presse.

Fukuyama, Francis (1995). Trust: The Social Virtues and the Creation of Prosperity. New York (Etats-Unis):

Free Press.

Ghazanfar, Agha, and Nayyar Almas Kazmi. (2009b). “State of Competition in Pakistan.” Islamabad:

Competition Commission of Pakistan.

Haque, Nadeem Ul. (2007). “Entrepreneurship in Pakistan,” working paper 2007:29. Islamabad,

Pakistan: Pakistan Institute of Development Economics.

Haque, Nadeem Ul. (2010). “Towards a New Development Approach.” Planning Commission blog.
at http://115.186.133.2/pcportal2.0/Blogs/tabid/56/EntryId/9/Towards-a-New-

Available
Development-Approach.aspx .

Hirschman, Albert O. (1958). The Strategy of Economic Development. New Haven, CT: Yale

Presse universitaire.

Hirschman, Albert O. (1970). Exit, Voice, and Loyalty: Responses to Decline in Firms, Organizations,

and States. Cambridge, MA: Presse universitaire de Harvard.

Klapper, Leora, Raphael Amit, and Mauro F. Guillén. (2008, Février). “Entrepreneurship and Firm

Formation across Countries,” unpublished mimeograph.

Moreire, J.. R., and A. D. Poole. (1993). “Hydropower and Its Constraints.” In Renewable Energy:

Sources for Fuels and Electricity. Londres: Earthscan, and Washington, CC: Island Press.

Murphy, Kevin, Andrei Shleifer, and Robert W. Vishny. (1991). “Allocation of Talent: Implications

for Growth.” Quarterly Journal of Economics: 503-530.

Nayab, Durre. (2008). “Demographic Dividend or Demographic Threat in Pakistan?” The Pakistan

Development Review 47, Non. 1: 1-26.

Newland, Kathleen and Hiroyuki Tanaka. (2010, Octobre). “Mobilizing Diaspora Entrepreneurship

for Development,” report from USAID and the Migration Policy Institute.

Olson, Mancus. (2000). Power and Prosperity. New York: Livres de base.

Planning Commission. (2010un, Septembre 29). “Productivity, Markets, & Communities: A New

Development Approach,” PowerPoint presentation.

Planning Commission. (2010b, Octobre 11). “New Development Approach: Springboards for

Développement,” PowerPoint presentation.

Qayyum, Abdul, Idrees Khawaja, and Asma Hyder. (2008). “Growth Diagnostics in Pakistan,” work-

ing paper 2008:47. Islamabad, Pakistan: Pakistan Institute of Development Economics.

Quadir, Iqbal. (2009, Janvier 30). “Foreign Aid and Bad Government.” Wall Street Journal.

nouveautés / volume 7, number 2

133

Téléchargé depuis http://direct.mit.edu/itgg/article-pdf/7/2/107/704911/inov_a_00131.pdf by guest on 08 Septembre 2023

Philip Auerswald, Elmira Bayrasli, and Sara Shroff

Available at http://online.wsj.com/article/SB123327734124831471.html

Schumpeter, Joseph A.. (1911). Theorie der witschaftlichen Entwicklung. Leipzig, Allemagne: Duncker
& Humblot. Revised English translation by Redvers Opie, La théorie du développement économique.
Oxford, England: Presse universitaire d'Oxford, 1934.

Schumpeter, Joseph A.. (1942). Capitalism, Socialism and Democracy. New York: Harper and Row.

Shahbaz, Muhammad, Khalil Ahmad, and A. R.. Chaudhary. (2008). “Economic Growth and Its

Determinants in Pakistan.” The Pakistan Development Review 47, Non. 4: 471-486.

Stangler, Dane. (2010, Mars). “High-Growth Firms and the Future of the American Economy.”

Kauffman Foundation Research Series: Firm Formation and Economic Growth.

University of Nottingham. (n.d.). What Is Pico Hydro? Available at http://www.picohydro.org.uk/.

Volkmann, Christine, Karen E. Wilson, Steve Mariotti, Daniel Rabuzzi, Shailendra Vyakarnam, et
Ana Sepulveda. (2009, Avril). “Educating the Next Wave of Entrepreneurs: Unlocking
Entrepreneurial Capabilities to Meet the Global Challenges of the 21st Century,” Geneva,
Suisse: World Economic Forum (Global Education Initiative).

Zinman, J., and D. Karlan. (2009). “Expanding Microenterprise Credit Access: Using Randomized

Supply Decisions to Estimate the Impacts in Manila,” working paper.

134

nouveautés / Entrepreneurial Ecosystems

Téléchargé depuis http://direct.mit.edu/itgg/article-pdf/7/2/107/704911/inov_a_00131.pdf by guest on 08 Septembre 2023
Télécharger le PDF