In the last week of February 2003, two workshops were held, one in Karachi and the other in Islamabad, in which country's well-known economists were invited to listen to SMEDA presentation as well as by ILO and Asian Development Bank, as well as to carry out panel discussions. There were common audiences too, drawn by SMEDA from business community, in which copies of the subject report were distributed.

To compare this report with other ILO reports (Seed Working Papers) I visited the ILO's website. Alas! Due to some website related problems, none of the reports could be downloaded despite many attempts. But before finalizing this critic, I sent it to SMEDA officials in Lahore for their review, who reacted very promptly and enabled me to discard a few observations totally, while modify quite a few others. Here is that final critic, together with SMEDA researchers' response at relevant places.

A. Use Statistical Inference Tools

The research is based primarily on conclusions drawn from surveys and interviews on 333 enterprises by Gallup. Very interesting findings, but I would have preferred a use of Statistical Analysis (SI) tools. For example, when 80% of the respondents say "yes" to a question from a total of 333 respondents, SI tools would enable us to establish something given a certain Level of Confidence. Hypotheses testing could have also been used. In any case, only percentages is not what was desirable.

SMEDA officials responded to this observation by counter asking us what we meant by SI tools. They also clarified that this research was very comprehensive in many respects, but of course my observation remained unexplained.

To me, this difficulty would have been surely overcome if the research team included some applied statistics professionals. These professionals would have insisted that the research design adopted by the researchers should be explained in the report. I would have liked to see the questionnaire used by Gallup for 333 interviews they conducted. Underneath each question's reply parameters there should have been the relevant conclusions, using Statistical Analysis tools.

B. Unsubstantiated Conclusions

This was one of the more serious weaknesses in the report. Throughout the report there are two sets of "conclusions" drawn by the researchers, those based on interview results and those coming apparently from the minds of the researchers as no basis were mentioned in the report. The latter could be easily called "baseless conclusions".

Many of these baseless conclusions are highly generalized statements and rhetoric that did not merit inclusion in an ILO-SMEDA research. Quite a few of these baseless conclusions may be right, but in every research a particular method is identified and adhered to. For example, in chapter 4 of the report, it is mentioned that it requires anywhere from 5 to 12 months for copyrights registrations, while only 30 days are prescribed in the law. In the same breath, it is stated that the prescribed time for patent registration is 18 months, but in practice this can take up to 2 years. In Chapter 6, the researchers have mentioned that average time taken by Pakistani banks for loan approval and disbursements is 10 months. These are just 3 examples from scores available in the report.

Now some of these conclusions may be correct, as pointed out by SMEDA researchers, but my observation was that there was no basis mentioned in the report. SMEDA's clarification was that these conclusions that I thought were unsubstantiated were actually proven through intensive interviews taken from the stakeholders, including the government.

I termed these as unsubstantiated conclusions because these statements are not supported in the report by survey results.

C. Inappropriate & Wrong Statements

Quite a few of the unsubstantiated conclusions I found were factually wrong and hence pretty misleading for a reader who is uninitiated on the subject. Examples of this kind of wrong conclusions drawn in the report, together with my opinions, are as follows:

a. "There are some NBFI's in Pakistan, called Musharakas". There are no NBFI's in Pakistan by the name of Musharakas, but SMEDA officials did not explain this aspect in their reply to my observations.

b. "Financial institutions have gone one step further ahead of Prudential Regulations, asking for collateral that is valued at 120 to 130 percent of the loan size". This statement shows that SMEDA researchers are not too familiar with what is meant by Prudential Regulations relating with collaterals. The State Bank has only specified a minimum and not exact collateral. I know this subject of collaterals hurts most entrepreneurs but I firmly believe that banks should never let go their collateral requirement, but on case to case basis that they are already doing. Entrepreneurs need to learn that collateral requirement of bankers depend on their credibility and strength of their loan proposal. Professional bankers are not fools who will reject a credible loan proposal, otherwise they wont be able to place their rising liquidity.

c. "Banks must adopt a standardized loan request form so that entrepreneurs are not discouraged". This statement shows that in their irrational exuberance, SMEDA researchers have gone too far. Asking for a standardized loan request form from banks is like asking for an impossible.

d. "Pakistan Export Finance Guarantee Agency replaces traditional collateral requirements with a competitively priced PEFG Certificate used as guarantee". The truth is that PEFG also requires collaterals and many of the financial institutions do not accept its guarantee. SMEDA officials responded by acknowledging that the report was drafted at a time when PEFG had just been formed.

e. "Cash flow based lending is absent and that banks are still insisting on collaterals". The researchers seem to be a little unaware of what is meant by cash flow based lending. Cash flows based lending does not mean ignoring collaterals, but means the banks must ensure that the borrower has the capacity to repay from its operating cash flows and not through liquidation of collaterals that may still be taken to cover the exposure's downside. The SMEDA Researchers' response was that they might not have full understanding of the subject.

f. "Within the indirect taxes, the share of import-based taxes has declined and reliance on consumption based taxes increased, which is due to reduction in import tariffs". I meant to highlight to SMEDA researchers that this is not only due to reduction in import tariffs alone, but also the Sales Tax receipts have increased.

g. "The Government is imposing Sales Tax on various stages of an enterprise's activity". I meant to highlight the mistake, but SMEDA researchers' response showed that they disagree. Sales Tax is not imposed on various stages of an enterprise's activity, but is imposed on the enterprise's total value addition over its raw materials and utilities purchases.

h. "On one hand income tax rates for unregistered enterprises is lower that for registered ones, and on the other hand sales tax for the registered firms is lower". Obviously the researchers are confusing between registration under sales tax act and registration under income tax ordinance. SMEDA researchers chose not to respond to this objection.

i. "SRO 818 (I) 89 pertains to No Duty No Drawback facility as well as rebates". When we pointed it to SMEDA researchers that this SRO does not pertain to No Duty No Drawback, they disagreed, but the fact is that SRO 818 is not about NDND.

j. "a fixed percentage of the total export value of products is reimbursed to the direct exporter by the Government". This cannot be generalized because many duty drawback rates are specified by CBR on weight basis. This was more or less agreed by SMEDA researcher.

k. "Complete implementation of WTO in 2003 would result in closure of vendors of the auto-assemblers". I don't think this is a correct conclusion. I also believe that it is not 2003 but 2006 after which deletion policy of the Government may not be able to continue but the existing vendors won't be forced out of job, and yes they will have to compete with imports. SMEDA researchers did not quite respond to this observation.

l. "In Export Processing Zones, any industry can be established provided it exports its production". Not correct. Companies can also be established that "export" a part or whole of their production to Pakistan, after paying all import duties on their duty-free imports. SMEDA researchers' did not quite respond to this observation also.

m. "First Women's Bank is a micro-credit scheme". This appears in one of the headings, and again SMEDA researchers avoided responding to this observation.

D. Exaggeration

At quite a few places, the researchers have exaggerated the situation relating with things like worker benefits, taxes, etc. For example, on page 36, Table 5.1 summarizes figures for a company with an annual revenue base of Rs.15m, employing 49 people, out of which as many as 20 are being paid Rs.3000 per month or less. Considering the number of people this business employs, Rs.15m annual revenue is too small, which is why a paltry figure of Rs.241,680 towards workers' welfare is showing up to be as much as 1.6%.

What I am suggesting here is that the example firm that has been chosen is too labor intensive, and hence the findings. You can't just assume something important so skewed, and then when this important and skewed figure distorts the findings, you say Eureka! For example, what is my monthly car fuel bill? Assuming that my car is a gas guzzler, it is Rs.30,000 per month, which is too much, don't you think so? Yes it will be too much if the assumption is a gas-guzzling car. I am forgetting the name of this common mistake that researchers are often warned against.

Figure 10.1 on page 82 is an outrageous example of exaggeration, and seems like a depiction of imagination of a very angry Pakistani who is about to migrate to Canada or Australia.

E. No Mention of DTRE Rules

The research fails to take into account that NDND scheme previously in vogue has been replaced by Duty & Tax Remission Rules for Exporters. This change was brought about in the year 2000, but there is no mention in the report.

In DTRE Rules, even the indirect exporters are adequately covered. There do exist some flaws in these rules but CBR is making all its efforts to make suitable amendments.

If we consider the above, a very substantial portion of Chapter 8, Trade Policy, in the report would be uncalled-for.

There is a lot of mention in the subject report about Duty Drawback feature. The CBR is making it known to all that Duty Drawback regime is perhaps going to be discontinued shortly and replaced with DTRE Rules, because this regime still carried the undesired elements of rebate. If the exporters think that they are not getting the right amount of duty drawback, they are always welcome to join the DTRE system in which there is no import duties and hence no duty drawbacks.

F. MSME Specific Advantages

SMEDA researchers could not hide their fondness for small businesses, but the readers would look for more objectivity. Often it is repeated in the report that the CBR and other regulators do not offer any extra incentives for small businesses.

Ok, granted. There should be some small business specific incentives also, but the researchers should have produced some evidence of comparable incentives in other countries. I firmly believe that Pakistan is far ahead of many other countries in providing specific incentives to small businesses. These incentives emanate from the feature that our economy is mostly undocumented and smaller the business greater the opportunities to evade direct and indirect taxes.

Sales Tax people from CBR are openly saying these days that sales tax receipts can go up more than 3 times, if CBR's economy documentation strategy stays. I am of the opinion that small businesses in Pakistan are the prime source of sales tax evasion. What more does SMEDA Researcher want?

Another biggest incentive for small businesses in Pakistan is that financial institutions generally avoid exposure on them. Surprised? Yes, small entrepreneurs are able to avoid debt leverage risk, and hence do not generally go out of business like it happens in other countries.

In the report, commercial exporters are described very distastefully, as they "reap" all benefits instead of the real manufacturers. For the kind information of SMEDA researchers, commercial exporters are also small businesses and many export regulations include their names as benefactors of several incentives, so that more and more commercial exporters, called export houses could come into being in Pakistan, linking manufacturers with international markets.

Nothing stops small manufacturers from becoming direct exporters. On the other hand Government encourages exporters. How can anyone ask for similar encouragement to everybody in the economy? Won't the exporters then ask for more? So where would this end?

Conclusion:

The above is not intended to discourage SMEDA in its efforts to promote new and existing small businesses in Pakistan, and hence the above criticism should be taken as constructive only.

Government is doing a lot to promote small businesses and many fiscal and monetary policy measures are in place, but a lot still needs to be done.

Seed Working Paper No. 29 is a good effort indeed to profile all the areas impacting small businesses, and only about 10% more is needed to remove the weaknesses in the contents. I also extend my appreciation for ILO and Dutch Government for taking interest in Pakistani business environment in such substantial manner.