February Issue 2015

Rudi Dornbusch, the late German economist, once said, “In economics, things take longer to happen than you think they will, and then happen faster than you thought they could.” This is a well-worn quotation but it so appropriately describes Pakistan’s predicament and potential that we cannot help but use it.

If you walk down the street of any financial centre in the world and ask anyone to name a famous innovative company from Pakistan, you will get a blank stare.  That can and will change. In a few years, there will be many.

The Internet has sparked a series of monumental changes across the world in politics and business. Each week we read about a new billion-dollar Internet startup somewhere in the world, yet another potential paradigm shift.

Many questions then arise about Pakistan’s place in the innovative realm: why has Pakistan not created one yet?  How would society and the economy change if this occurred?  And more importantly, how would Pakistan’s global image change, i.e. will the country ever reverse the conditions acting as barriers to foreign investment and the retention of our best and most productive minds?

The first company we built grew into a large global hedge fund within our first year of starting up. With our second company, we have grown from three to over 100 employees in less than two years and hope to employ over 1,000 more within the next few years. We have a fast-growing user-base approaching 1.5 million monthly users, and most of our users are from the United States.  We compete against top companies in the world for our audience of business and finance readers. In one year, we expect to have more than 10 million monthly users.

Our company works from Pakistan, our first company did as well. There are many reasons not to build in Pakistan just as there were and still are reasons not to do so in many countries.  We must ignore every reason.  We must build and invest.

Pakistan’s economic outlook is in need of a quantum shift.  How else can a country with low and falling productivity, with single digit savings rates compete on a world stage when its primary exports are textiles and rice? Productivity will not magically rise, and without public or private capital spending, something has to change.

The motor of change must come via the creation of fast-moving Internet companies ready to take risks, fail, learn and rebuild with speed and agility. This can be summed up in two words: ‘creative destruction.’ This phrase was coined by Joseph Schumpeter in the early 20th century and is shorthand for natural selection in business, or as he put it, ‘industrial mutation.’ This process of building businesses that fail and that succeed and eventually cause other businesses to fail is how business works in the capitalist system. It is a fact of the new economy that new businesses can be built and destroyed and reborn in the Internet age in rapid succession, and that will be an instrument of change in the near future for Pakistan given its highly educated workforce and strong background in technology despite a crumbling physical infrastructure.

The productivity gains would be rapid due to the sheer scale and access to global markets and the ability to create and replicate business models at such speed. The bricks and mortar mentality needs to be replaced with creative destruction.

The next generation of entrepreneurs in Pakistan must create companies which keep the best and the brightest at home.  It is imperative upon those with the access to capital and abilities to create companies that even Pakistanis who go and study abroad would prefer to return home to work for, instead of staying abroad. We need to create competitive and acceptable substitutes.

Entrepreneurs can change Pakistan and they will change Pakistan. We need entrepreneurs ready to fearlessly build companies both domestic in nature and global in scope.  Companies that can compete internationally must be built with speed.

The Need for a Virtual Virtuous Circle

We have the luxury of extraordinary schools, excellent technology and an extremely attractive cost structure.   But there is a huge gap between the current situation and the country’s potential. The virtual output gap is extraordinarily wide.

The need for a shift is obvious, given the current situation. Economics is the dismal science and it is certainly borne out when applied to Pakistan’s reality: the country exhibits an abysmal savings rate, putrid capital investment, and is financed solely by fiscal excess that crowds out private investment.  World Bank statistics show that Pakistan’s savings and capital expenditures rate as a percent of GDP is less than half of Bangladesh. Pakistan has been dependent on foreign grants and rising government spending funded by commercial banks and monetised by the State Bank of Pakistan. The fiscal expansion has reached its limits and Pakistan must get its fiscal house in order.

Do not look for a silver lining in a private sector that has ignored productive corporate projects, but instead has financed this government spending. This platform is simply not sustainable.

Furthermore, it is hard for an economy to prosper when those with savings are sending most of their money out of the country. The recently released annual report from the Dubai Land Department revealed that in 2014, Pakistani investors accounted for over $2 billion in transactions. According to World Bank statistics, Pakistan’s 2013 GDP was $232 billion. Pakistanis sent out almost one per cent of the country’s GDP value to buy property in Dubai. These are just the official statistics and most likely grossly underestimate the actual numbers. This only represents one example of a city where potential domestic investment funds are vanishing.

Lowering the Tariff of Perception

While many view the above as obstacles, we view them as compelling reasons to build and invest in Pakistan. If the capital goes into projects which can rapidly fix what is broken then productivity gains can generate rapid growth and lower the tariff of perception.

If merely 10 per cent  of the amount invested in property in Dubai — roughly $200 million — had been used to invest in innovative Internet companies in Pakistan catering to domestic and foreign markets, thousands of enterprises and tens of thousands of jobs would have been created, and Pakistan would find itself centrestage in global innovation.

Now what will make 10 per cent of all dollars Pakistanis send abroad stay at home?  We would suggest that as soon as a few Internet entrepreneurs emerge, everything would change. We are doing our part and we hope there will be others who blaze this path with us. As ventures spring up, investment dollars will follow. This would establish an active ecosystem for startups and aspiring entrepreneurs and a veritable platform would be in place for investors to participate with trust and transparency.

If the simple scenario above played out, you could walk down the street in any financial centre around the globe and passers-by would start naming Pakistani Internet companies whose products or services they use and — perhaps in a few years — billion dollar Pakistani companies.

Over time, the dependence of Pakistan’s economy on foreign funding and government spending would decrease, creating a much more self-sustaining economy and bringing in private capital as opposed to beggar bailouts. Pakistan would enter a virtuous circle of increasing highly skilled employment, increasing productivity gains with economies of scale and higher incomes, savings, and investment leading to rapid economic growth. The ripple effect would be felt everywhere and a new generation of entrepreneurs would aspire to save, invest, and build.

This is a very realistic scenario.

If we start now, in the next five years everything will change.  An aggressive push forward in Internet enterprises will mobilise improvements in Pakistan faster than any political movement or political party. Speaking of politics, it has become kitsch thanks to the HBO series Silicon Valley for Internet startups to believe in their ability to change the world. However, there is a chance in Pakistan to effect real change, a dynamic we like to call ‘diplomacy through enterprise.’

Teaching Judgement 

With our first company, we were reminded countless times that we would fail in our endeavour to take unproven Pakistani students and make them analysts to compete against the best and the brightest from London and New York hedge funds. We proved that our young staff had the ability to compete on a world stage and we witnessed the development of highly skilled professionals. We have seen this model work: in this new venture, we can do this on a larger scale and on a broader stage. We are confident that our success will engender a culture of pride, a pride that is well deserved among a group of young Pakistanis who are hard working, well-educated and cultured. If our growth is part of a budding network of Internet entrepreneurs in Pakistan, the change that can occur would be far more powerful than any governmental initiative to improve relations between the West and Pakistan. A group of even 100 such united entrepreneurs would have more influence on the direction of the country than any other group.  Our Gen-Y staff is communicating and teaching our Gen-Y readership. This makes for a lifetime change in perception and a connection that is necessary. This is true information and social integration via an Internet company, and carries out the promise of a one-world partnership in a practical application.

Pakistan may not have billion dollar Internet companies nor be a destination for low risk investment dollars at the moment, but that can happen faster than we all think.

This article was originally published in Newsline’s February 2015 issue.