Unpacking idea of level playing field

Contrary to popular understanding, the level playing field does not mean equal opportunity or the same chance.

Every firm, large or small, features a unique structure, cost, endowment and expectation. Just like each human being is unique, the legal entity that we create is also unique. These differences are “natural” as the entrepreneur behind the firm may or may not be a first-generation business individual; their opportunity costs will also be dissimilar.

The opportunity cost of an entrepreneur with a very high education will be much higher than the opportunity cost of a less educated entrepreneur, even though the latter may prove to be more successful than the former.

While the opportunities to enter in a particular market may be superficially similar, they are not the same for the prospective firms. In fact, therefore, all markets offer unequal opportunities!

If this is accepted – that all markets offer unequal opportunities – then should we worry about it from a policy perspective? Should we hasten to equalise these opportunities, say by quotas or subsidies for smaller firms?

Our answer to this question can lead to a very different outcome for the market, with implications for the direction of a competition agency itself.

In a restrictive sense, the level playing field can be considered equality before law. Thus, the absence of legal discrimination constitutes a level playing field. That in my view is the only possible way to look at the level playing field within the policy landscape.

Does Pakistan’s economy present a level playing field?

Using the above distinction between opportunities and rules, I will rephrase the question as “Does Pakistan’s economy present equal laws and regulations to all firms in a market?” In other words, do we have legal discrimination or practice of discrimination across firms?

Conditions of legal discrimination may include one or many of the following: legal barriers to entry or exit, tax exemptions, discriminatory practices, special privileges, and presence of government as a market player.

For example, let’s take the case of Special Economic Zones. In export processing zones, we allow incumbent firms to import raw materials duty-free, so that they can produce at a lower cost compared to other firms, add value and enhance the nation’s exports. While it may seem to be a good industrial policy, in our case, investing firms have responded to it to maximise their profit, while keeping value addition as a secondary objective only.

In Karachi, where the largest of these export processing zones are established, the leading export firms are in the business of importing second-hand clothing, sorting them, cleaning them, and then re-packaging them for exports. Pakistan has now the world’s leadership position in the category of second-hand clothing trade.

In some cases, tax exemptions available to incumbent firms in a special zone have created an uneven playing field for firms outside the zone. In a country where tax policy and its administration have become one of the most important reasons to exit the business, such exemptions create significant distortions in a market. A couple of weeks ago, the chief minister of Punjab announced that they will set up a tax-free zone for Saudi investors, which is a kind of double discrimination.

Another aspect is the growing incidence of illicit trade – whether counterfeit or smuggled or production without tax stamps where applicable. In all three cases, typically local firms capture the market share of large national and multinational companies through illegal practices. They produce fake copies, smuggle goods or produce locally under their own name, but without a tax stamp. They manage to evolve a highly efficient cost structure and earn super-normal profits.

Public procurement processes offer a window to examine the level playing field. Government agencies may include such terms and conditions which automatically deny a certain class of bidders, thus legally discriminating against them.

There are also special policies that we devise to attract foreign firms and multinational companies including foreign government companies. We do it in the name of FDI, but any such discrimination, tax breaks for example, which we cannot apply equally to local firms, create an uneven playing field.

Pakistan’s trade and tariff policy is also an evident case of uneven playing field. For a long time, in the name of domestic industry development, we have allowed local firms to grow uncompetitively. This has led to the denial of consumer choice and inefficient markets. It is encouraging to see that the current government has taken solid steps to move away from the decades-old import substitution regime and has at least started the journey by liberalisation of tariff policy.

Presence of a government entity in a market is certainly a case of unlevel playing field, even if apparently there is a competition. Government ownership of a business automatically allows the managers of a firm to create such access and links with policymakers which is impossible for a private firm to acquire. Thus, all state-owned enterprises which have commercial operations are necessarily undesirable from this perspective even if they are profitable.

The market, where even one of these conditions is present, which is not difficult to establish, will be considered an example of an uneven playing field. We can never create equal opportunities, however, we can create equal rules.

The writer is the CEO of PRIME Institute, an economic policy think tank based in Islamabad. This article is based on a lecture he recently delivered at the CCP